ISS Adopts Updates To Canadian Corporate Governance Policy For 2014


Institutional Shareholder Services (“ISS”) has adopted updates to its Canadian Corporate Governance Policy (“CCGP”), which will take effect for shareholder meetings held on or after February 1, 2014. ISS is a leading and influential proxy advisory firm that provides voting recommendations, primarily to institutional shareholders.

Most changes to the existing policy apply to both TSX and TSX Venture-listed companies, while others apply only to TSX-listed companies.

The changes applicable to both TSX and TSX Venture-listed companies are as follows:

  • Voting on Directors for Egregious Actions.  The CCGP provides that in extraordinary circumstances ISS will recommend a “Withhold” vote for directors individually, committee members or the entire board, due to material failures of governance, stewardship, risk oversight or fiduciary responsibilities, failure to replace management as appropriate or egregious actions related to director(s)’ service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders.  The revised policy provides examples of risk oversight failures and specifically points out that companies must comply with applicable laws and regulations, including anti-bribery laws, and avoid actions that may result in companies being sanctioned or fined by regulators or a court.  Furthermore, the revised policy specifically provides that any amount of hedging the company’s stock by a director or executive officer will be considered a material risk oversight failure, because it severs the alignment of directors’ or executive officers’ interests with the interests of shareholders.
  • Board Responsiveness.  The revised policy makes it clear that ISS will recommend a “Withhold” vote for individual directors, committee members or the entire board of directors if at the previous board election, any director received more than 50% Withhold votes and the nominating committee has not required that the director leave the board after 90 days, or has not provided another form of acceptable response to the shareholder vote.  The revised policy also provides for such “Withhold” votes if the board of directors failed to act on a shareholder proposal that received the majority of votes cast in favour at the previous shareholders meeting.
  • Advance Notice Requirements.  The CCGP states that ISS will review proposals to adopt Advance Notice Policies on a case-by-case basis, supporting Policies that provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible.  Efforts to ensure full disclosure of dissident shareholder’s economic and voting position in the company will be supported.  The revised policy requires the board of directors to have the authority to waive any provisions of the Advance Notice Policy that may provide nominating shareholders with legal recourse if denied access to the ballot.  Under the revised policy, ISS will recommend voting against an Advance Notice Policy if such Policy only permits the board to waive a portion of the advance notice provisions in its sole discretion or if the company requires any proposed nominee to deliver a written agreement that requires the proposed nominee to comply with all policies and guidelines of the company that are applicable to directors, which may impede the ability of such nominees, if elected, to affect positive change in respect of the board of directors and corporate governance of the company.
  • Re-pricing Stock Options and Extending Option Terms.  The CCGP states that ISS will generally recommend voting against proposals to re-price outstanding stock options.  The revised policy removes current exceptions to this general policy.  The revised policy also states that ISS will recommend voting against proposals to extend option terms.
  • Enhanced Shareholder Meeting Quorum for Contested Director Elections.  The revised policy states that ISS will generally recommend against new by-laws or amended by-laws that would establish two different quorum levels for electing directors, where a higher quorum level is required for shareholder meetings in which shareholders seek to replace the majority of the current board of directors.
  • Independence of Directors.  The definition of “independence” in respect of nominees for director has been clarified.  An “Inside Director” now specifically includes any current interim executive on the board of directors and any beneficial shareholder holding more than 50% of the outstanding voting rights, which may be aggregated to account for shares held by more than one member of a group, such as a family.  Changes to the definition of an “Affiliated Outside Director” now differentiates between a former or interim CEO, who would not be subject to a cooling off period, and other Non-CEO executives, who would be subject to a three year cooling off period under certain circumstances.  The revised definition of “Affiliated Outside Director” also clarifies that a former interim executive on the board of directors, other than a former interim CEO, may be deemed an “Affiliated Outside Director” in certain circumstances, and provides for additional criteria relating to participation or ownership of firms that provide professional services to the company and could therefore affect the independence of a director associated with such firms.

The changes applicable only to TSX-listed companies are as follows: 

  • Persistent Problematic Audit Related Practices.  The revised policy codifies ISS’ analytical approach, which would require members of the Audit Committee (and potentially the full board) to vote on a case-by-case basis if adverse accounting practices are identified that raise to a level of serious concern, such as accounting fraud, misapplication of applicable accounting standards, or material weaknesses identified in the internal control process.
  • Director Attendance and Overboarding.  Under the CCGP, ISS will provide cautionary language in its voting recommendations if (a) the director is a CEO and sits on more than two outside public boards in addition to his or her own company, or (b) if the director is an outside professional director and sits on more than six public company boards in total.  Under the revised policy, ISS will recommend “Withhold” votes for individual directors who are “overboarded” and have attended less than 75% of his or her respective board and committee meetings held within the past year without a valid reason for these absences.  In addition, ISS will recommend “Withhold” votes for individual directors who have attended less than 75% of board and committee meetings held within the past year without a valid reason for those absences and the company has not adopted a majority voting policy.  If the company has adopted a majority voting policy, ISS will recommend “Withhold” votes for individual directors who have attended less than 75% of board and committee meetings held within the past year without a valid reason for those absences and the pattern of low attendance existed in the prior year.
  • Executive Pay Evaluation.  In the revised policy, ISS has revised its methodology for comparing compensation against the peer group to better reflect long-term pay for performance alignment.  The revised policy also provides that ISS will evaluate issues related to executive pay on a case-by-case basis by considering poor disclosure practices and the board’s responsiveness to investor input on compensation issues.
  • Equity Compensation Plans.  The CCGP provides that ISS will recommend voting against discretionary non-employee director participation in management equity compensation plans, and this position will not change under the revised policy.  Under the CCGP and the revised policy, ISS will not recommend voting against a stock option plan that provides for non-employee director participation, provided that the plan stipulates that the number of stock options that may be granted to non-employee directors in the aggregate does not exceed 0.25 percent (for larger companies) to 1 percent (for smaller companies) of outstanding shares of the company and option grants to non-employee directors does not exceed $100,000 per director per year.  Recognizing that the role of non-employee directors has expanded substantially as a result of regulatory updates and shareholder engagement activity, the revised policy provides for different maximum limits on option-based and share-based (non option) equity compensation award grants to non employee directors.  Although the above noted limit on stock options continues to apply, the revised policy includes a new maximum of $150,000 per year in shares in the case of an equity plan that does not grant stock options.  Shares taken in lieu of cash director’s fees and a one-time initial equity grant upon a director joining the board will not be included in the maximum award limit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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