Glass Lewis and Institutional Shareholder Services (“ISS”) recently published their Canadian benchmark policy guidelines and updates for the 2024 proxy season. Key updates focus on board accountability for climate-related issues, human capital management practices, cyber risk oversight, board interlocks, audit financial expert designations, clawback provisions, executive ownership guidelines, proposals for equity awards for shareholders and board diversity.
Glass Lewis Updates for 2024
In addition to certain clarifying amendments, Glass Lewis has made the following changes to its benchmark policy guidelines for 2024.
Board accountability for climate-related issues
In 2023, Glass Lewis introduced a new policy relating to board accountability for climate-related issues. The policy provides that Glass Lewis may recommend voting against responsible directors where companies with material exposure to climate risk do not provide thorough climate-related disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) or where oversight responsibilities for climate-related issues are not explicit and clearly defined. While this policy was applied to the largest, most significant emitters in 2023, beginning in 2024, Glass Lewis will apply this policy to TSX 60 companies operating in industries where the Sustainability Accounting Standards Board (“SASB”) has determined that their greenhouse gas emissions represent a financially material risk.
Human capital management
In egregious cases, where a board has failed to respond to legitimate concerns with a company’s human capital management practices, Glass Lewis may recommend voting against the election of the chair of the committee tasked with oversight of the company’s environmental and/or social issues, the chair of the governance committee or the chair of the board, as applicable.
Cyber risk oversight
Glass Lewis has expanded its policy on cyber risk oversight to provide that where a company has been materially impacted by a cyber-attack, it may recommend voting against the election of the appropriate directors should it find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or not clearly outlined to shareholders.
Interlocking directorships
Glass Lewis believes that a board should be free of directors who have identifiable conflicts of interest and will generally recommend that shareholders withhold votes from directors who have interlocking relationships. The policy on interlocking directorships has been expanded to include both public and private companies. Other types of interlocking relationships are evaluated on a case-by-case basis, and multiple board interlocks among non-insiders are reviewed for evidence of a pattern of poor oversight.
Audit financial expert designation
Glass Lewis may recommend withholding votes from the audit committee chair if there is not at least one member of the audit committee who can reasonably be considered to be an “audit financial expert”. Glass Lewis has revised the criteria by which it designates a director as an “audit financial expert”, which includes experience as: (i) a chartered accountant; (ii) a certified public accountant; (iii) a former or current CFO of a public company or corporate controller with similar experience; (iv) a current or former partner of an audit firm; or (v) having similar demonstrably meaningful audit experience. Glass Lewis will consider this distinctly from “financial skills” in the skills matrix, which encompasses more generalized financial professional experience beyond accounting or audit experience.
Clawback provisions
Glass Lewis believes that clawback provisions play an important role in mitigating excessive risk-taking behaviour that may be encouraged in certain variable incentive programs. Clawback policies should allow recovery from current and former executive officers in the event of a restatement of financial results or similar revision of performance indicators upon which the awards were based. Glass Lewis has updated its guidelines to provide that effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive was terminated with or without cause.
Where a company does not follow through with recovery, Glass Lewis will assess the appropriateness of the determination on a case-by-case basis. Detailed disclosure of the rationale for the company’s decision, including any alternative measures that were pursued, should be provided and may play a role in Glass Lewis’ overall recommendation for the advisory vote on executive compensation.
Executive ownership guidelines
Glass Lewis has added a new section to its policies to formalize its approach to executive ownership guidelines. Companies should adopt and enforce minimum share ownership rules for their named executive officers and provide clear disclosure in the Compensation Discussion and Analysis section of the circular of such requirements and how outstanding equity awards are treated when determining the level of ownership. Inclusion of unearned performance-based full value awards and/or unvested/unexercised stock options when determining ownership levels without cogent disclosure may be considered problematic.
Proposals for equity awards for shareholders
Where a recipient of an equity award is also a large shareholder of the company whose vote can affect the approval of the proposal (where shareholder approval is required), Glass Lewis believes a company should strongly consider the level of approval from disinterested shareholders before proceeding with the grant. Among other things, requiring the non-vote or vote of abstention from the recipient shareholder may help avoid potential conflicts of interest and will be viewed positively during Glass Lewis’ analysis of the proposal.
ISS Updates for 2024
There are fewer changes to ISS' voting guidelines for the 2024 proxy season than in past years.
Board diversity
As we discussed in a previous post, ISS announced a new board diversity policy for S&P/TSX Composite Index constituents in 2022 that would apply to shareholder meetings on or after February 1, 2024. ISS has removed the transition language that provided a one-year grace period and has modified the exception to provide that an issuer will be in compliance with the policy to the extent that it has provided a formal, publicly disclosed written commitment to add at least one racially or ethnically diverse director at or prior to the next annual general meeting (“AGM”).
Compensation
ISS has updated its policy relating to individual grants to non-executive directors (“NEDs”) for companies listed on the Toronto Stock Exchange (“TSX”). ISS has removed the percentage limit on NED option grants as this no longer reflects market practice. The policy now provides that the maximum annual individual NED limit should not exceed C$150,000 across all equity compensation plans in aggregate, of which no more than C$100,000 of value may comprise stock options. ISS will vote against individual grants to NEDs that exceed the above limit. Consistent with past policy positions, shares taken in lieu of cash fees and a one-time initial equity grant upon a director jointing the board will not be counted towards the foregoing NED limit.
Similarly, ISS has also removed the percentage limit from its policy relating to NED participation in equity-based compensation plans for TSX-listed companies. The updated policy provides that ISS will vote against an equity compensation plan proposal where the plan does not specify an annual individual NED grant limit with a maximum value of: (i) C$100,000 worth of stock options; or (ii) C$150,000 worth of shares.
Companies listed on the Canadian Securities Exchange (“CSE”) are required to obtain shareholder approval within three years of the implementation of a rolling equity plan and every three years thereafter. As a result, such plans may not appear on a ballot for shareholder approval at the AGM following adoption, raising governance concerns. ISS has therefore revised its policy relating to venture companies’ equity-based compensation plans to add that ISS will generally vote withhold for the continuing compensation committee members (or where no compensation committee has been identified, the board chair or full board) if the company adopted an equity-based compensation plan without seeking shareholder approval at the AGM following its adoption.
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