Glass, Lewis & Co (Glass Lewis) and Institutional Shareholder Services (ISS) have each released updates to their Canadian proxy voting guidelines for the 2024 proxy season. The Glass Lewis updates apply to shareholder meetings of publicly traded Canadian companies held after January 1, 2024 and the ISS updates are effective for shareholder meetings occurring on or after February 1, 2024.

Recommendations from proxy advisory firms such as Glass Lewis and ISS can have a significant impact on the outcome of business conducted at shareholder meetings, especially if institutional investors comprise a significant portion of the company's shareholder base. Canadian public companies should review the updates with their legal counsel to determine the impact on disclosure and governance practices and take steps to mitigate any potential adverse voting recommendations from Glass Lewis or ISS.

In addition to general house-keeping amendments and policy clarifications, Glass Lewis announced a number of updates to its policy guidelines for 2024 related to executive compensation matters and cyber risk oversight. In contrast, ISS has only announced one update to its Canadian proxy voting policies related to the implementation of its previously announced board diversity policy. These changes are summarized below.

Director Considerations (ISS)

Board Diversity

As was announced in 2022, and following the end of a one-year grace period, ISS will implement its new Canadian policy on diversity which includes racial and/or ethnic diversity¹ requirements.

Beginning in 2024, ISS will generally recommend voting against the nominating committee chair (or its equivalent) at S&P/TSX Composite Index companies that have no apparent racially or ethnically diverse members on the board. ISS will make an exception if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm public commitment to appoint at least one racial and/or ethnically diverse member at or before the next annual meeting.

Board Oversight (Glass Lewis)

Board Accountability for Climate-Related Issues

Glass Lewis added new sections in 2023 pertaining specifically to climate risk and related disclosure.

In Glass Lewis' view, companies whose material exposure to climate risk stems from their own operations should provide shareholders thorough climate-related disclosure that aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and that the boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues. Where disclosures related to either climate risk or oversight, or both, are found to be absent or significantly lacking, Glass Lewis will recommend voting against the chair of the committee (or board) charged with oversight of climate related issues or the chair of the governance committee. Glass Lewis encourages companies whose GHG emissions represent a financially material risk to provide clear and comprehensive disclosure regarding climate risks, and how those risks are being overseen and mitigated.

While this policy was only applied to the largest, most significant emitters in 2023, in 2024, Glass Lewis is extending the policy to companies in the TSX 60 that operate in industries identified by the Sustainability Accounting Standards Board (SASB) where a company's GHG emissions represent a financially material risk.

Glass Lewis may also extend its recommendation to additional members of the responsible committee in certain circumstances.

Human Capital Management

Glass Lewis has updated its policy related to board accountability for oversight of human capital management. 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 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

In the absence of material cyber incidents, Glass Lewis will generally not make voting recommendations on the basis of a company's oversight or disclosure concerning cyber-related issues. However, where the shareholders of a company have been materially impacted by a cyber-attack, Glass Lewis believes they should reasonably expect to receive periodic updates regarding the company’s ongoing process towards resolving and remediating the impact of the attack. In line with this view, Glass Lewis may recommend voting against appropriate directors where a company has been materially impacted by a cyber-attack and it finds that the board’s oversight, response or disclosures concerning cybersecurity related issues has been insufficient or not clearly outlined to shareholders.

Interlocking Directorships

Interlocking Directorships are when directors accept positions on multiple boards, thereby potentially creating conflicts of interest. Beginning in 2024, Glass Lewis will consider both public and private companies in its evaluation of interlocking relationships. Further, they will evaluate other types of interlocking relationships, such as interlocks with close family members of executives or within group companies, on a case-by-case basis and will review multiple board interlocks among non-insiders for evidence of a pattern of poor oversight.

Audit Financial Expert Designation

Glass Lewis has revised their criteria by which they designate a director as an "audit financial expert". They generally expect a company disclosure of such a director's experience as one or more of the following: (i) a chartered accountant; (ii) a certified public accountant; (iii) a former or current CFO of a public company or corporate controller of similar experience; (iv) a current or former partner of an audit company; or (v) having similar demonstrably meaningful audit experience.

Glass Lewis will now consider the audit financial expert designation distinctly from the financial skill in their skills matrix, which encompasses more generalized financial professional experience beyond accounting or audit experience.

Executive Compensation (Glass Lewis)

Clawback Provisions

Glass Lewis supports the use of clawback provisions to safeguard against unwarranted short- and long-term incentive awards, and to similarly encourage executives and senior management to take a comprehensive view of risk when making business decisions. Glass Lewis has expanded their policy on clawback provisions in 2024 to reflect the reality that the negative impacts of excessive risk taking do not always result in financial restatements but may nonetheless prove harmful to shareholder value.

In Glass Lewis' view, 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, where the consequences have not already been reflected in incentive payments and where recovery is warranted.

This power to recoup should be provided whether or not the executive officer's employment was terminated with or without cause. In situations where the company ultimately decides to refrain from recouping compensation, the rationale behind this decision should be provided as well as disclosure of alternative measures that are pursued instead, such as the exercise of negative discretion on future payments.

Glass Lewis will consider the company's rationale and depth of disclosure, or lack thereof, for these decisions when providing voting recommendations.

Executive Ownership Guidelines

Glass Lewis has created a new section of guidelines in 2024 to outline their approach to executive ownership. Glass Lewis believes that minimum share ownership rules for its named executive officers should be adopted and enforced to facilitate alignment between the interests of the executive leadership and those of long-term shareholders. Companies should provide clear disclosure in the Compensation Discussion and Analysis section of their proxy statements of their executive ownership requirements, as well as how various outstanding equity awards are treated when determining an executive's level of ownership.

Glass Lewis considers it inappropriate to count unearned performance based full value awards and/or unvested/unexercised stock options when determining an executive's level of share ownership. If a company counts these awards towards shares held by an executive, they should provide a cogent rationale for doing so.

Proposals for Equity Awards for Shareholders

For proposals seeking approval for individual equity awards, Glass Lewis has expanded their guidance on front-loaded awards to include discussion on provisions requiring the non-vote or vote of abstention from a shareholder if the shareholder is also the recipient of the proposed grant. This new discussion helps to address potential conflict of interest issues and provide disinterested shareholders with a more equal say regarding these types of proposals.

Glass Lewis indicates that it will view these types of provisions positively during their holistic analysis, especially where a vote from the recipient of a proposed grant would materially influence the passage of the proposal.

Clarifying Amendments (Glass Lewis and ISS)

Nominating and/or Corporate Governance Committees

Because nominating and corporate governance responsibilities may be split between two different committees, Glass Lewis has separated the previous “Nominating and Corporate Governance Committee Performance” section into individual sections for “Nominating Committee Performance” and “Corporate Governance Committee Performance” to clearly delineate its expectations for each committee in cases where they are not combined.

Governance Post-IPO, Spin-Off or Direct Listing

For 2024, Glass Lewis has clarified that where a board has adopted a multi-class share structure in connection with an IPO, spin-off, or direct listing within the past year, it will generally recommend against the chair of the governance committee or most senior representative of the major shareholder up for election if the board: (i) has not committed to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) does not provide for a reasonable sunset of the multi-class structure (generally seven years or less). More generally if Glass Lewis determines that the board has approved overly restrictive governing documents, it may recommend voting against members of the governance committee (or the board chair, in the absence of this committee).

Non-GAAP to GAAP Reconciliation

Glass Lewis has expanded the discussion around its approach to the use of non-GAAP measures in incentive programs. In particular, where significant adjustments have been applied, the absence or lack of thorough and transparent disclosure that allows shareholders to reconcile the difference between non-GAAP results used for incentive payout determinations and reported GAAP results will impact Glass Lewis’ assessment of the quality of executive pay disclosure and may be a factor in its recommendation for the say-on-pay.