Institutional Shareholder Services (“ISS”) has published its 2018 updates to its proxy voting guidelines for Canadian public companies. As it had indicated earlier this fall in the summary of its 2018 Global Policy Survey, ISS has implemented a gender diversity policy, to be phased in for certain issuers starting in the 2018 proxy season, and a revised “overboarding” policy that will be effective for the 2019 proxy season. The update also introduces an additional element to the quantitative screen used by ISS, alongside its qualitative assessment, to determine whether, in its view, there is any misalignment between CEO pay and company performance.
Gender Diversity Policy
In 2015, amendments to National Instrument 58-101 (“NI 58-101”) came into force requiring reporting issuers to disclose certain information relating to gender diversity, including the number and percentage of women on boards and in executive officer positions and the existence of policies, targets and processes relating to the appointment of women to boards and executive officer positions. As described in our October 12, 2017 update, the Canadian Securities Administrators have published their reviews of the newly required disclosure each year since, while at the same time the federal government has proposed amendments to the Canada Business Corporations Act that, once in force, would create similar disclosure requirements for public companies incorporated under the CBCA. Further, supported by research that suggests a positive correlation between gender diversity on boards and improved financial performance, institutional investors have also been calling for greater representation of women on boards.
Adding a layer to these legislative, regulatory and investor-driven developments, ISS has indicated that it will recommend a “withhold” vote for the chair of the nominating committee (or chair of the board if there is no nominating committee) where (i) the company has not disclosed a formal written gender diversity policy of the type referenced in NI 58-101; and (ii) there are no female directors on the board.
This ISS policy will be in effect for the 2018 proxy season for S&P/TSX Composite Index companies, and will come into effect for all TSX-listed companies for the 2019 proxy season, though companies that graduate to or subsequently list on the TSX will be given a year to transition, and the policy will not apply to companies with four or fewer directors.
The roles and responsibilities of directors have expanded in recent years, and investors expect a meaningful commitment from those they elect to public company boards. As a result, directors who serve on too many boards to devote what ISS views as sufficient time and energy to prepare for, attend and participate in all board and committee meetings will be deemed “overboarded”, and will be subject to a “withhold” recommendation from ISS.
Currently, and for the 2018 proxy season, ISS will recommend a “withhold” vote (i) for a non-CEO director who serves on more than four public company boards, and (ii) for a CEO who serves on more than one other public company board where, in either case, that director has attended less than 75% of board and committee meetings held within the past year, without a valid reason.
For the 2019 proxy season, in order to align it with policies in the U.S. and the thresholds recommended by the Canadian Coalition for Good Governance, ISS’s policy will be updated such that the attendance component of the test will be removed, but the number of boards permitted will be increased. As a result, ISS will recommend a “withhold” vote (i) for a non-CEO director who serves on more than five public company boards and (ii) for a CEO who serves on more than two other public company boards (though the withhold recommendation will only apply to the companies at which the director is not the CEO), regardless of the director’s attendance record.
While the revised proxy guidelines include a number of smaller updates, including to the quantitative screen for CEO pay mentioned above, the gender diversity and overboarding policies stand out as the markers of key governance trends this year. The entrance of ISS into the debate over gender diversity on public company boards is a meaningful development in a highly scrutinized area. Reporting issuers, particularly those that do not yet have adequate representation of women on their boards, should consider adopting policies that are compliant with ISS’s requirements.
Stuart is the head of the Corporate Finance and Securities Group at Lawson Lundell. His practice focuses on corporate and commercial law, with an emphasis on corporate finance and securities and mergers and acquisitions.
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