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Outlook for 2021 proxy season

Andrew Burke and Divya Subramanian

The year 2020 was nothing short of unusual.  With COVID-19 impacting every aspect of business and life, shareholder meetings also transitioned to a virtual medium. For more on how the events of 2020 affected shareholder meetings, please review our thought leadership piece here.

In preparing for the 2021 proxy season, you should be aware of some of the regulatory developments and institutional investor guidance that are likely to impact disclosure to, and interactions with, shareholders. This update highlights what is new in the 2021 proxy season and on the horizon for 2022.

What’s new in institutional investor commentary?

Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”), two companies that provide guidance to institutional investors on how to vote at shareholders’ meetings of publicly-traded companies, have each released updates to their Canadian guidelines for the 2021 proxy season. ISS’s updates apply for shareholders’ meetings held on or after February 1, 2021 and Glass Lewis’ updates apply to all meetings held in 2021.

Both sets of guidelines focus on several key areas including board diversity, environmental and social governance (“ESG”) disclosures, compensation policies, director accountability, audit committee considerations and related matters. Companies, especially those with a significant percentage of their shares held by institutional shareholders, should review and consider these updates as they plan for their upcoming annual general meetings.

Board diversity

Both ISS and Glass Lewis recommend that votes be withheld from the chair of the nominating committee at companies where female director representation is deemed too low. Beginning February 2022, for S&P/ TSX Composite index companies, ISS will recommend withholding votes where (i) the board is not comprised of at least 30% women and (ii) the company has not disclosed a formal gender diversity policy, or where such policy does not reflect their commitment to achieve at least 30% women on the board over a reasonable timeframe.

In respect of companies that are not on the S&P/TSX Composite index, but are otherwise designated as “widely held” by ISS, beginning February 2022, ISS will recommend withholding votes from the chair of the nominating committee if the company has not disclosed a formal written gender diversity policy and there are no women on the board.

Newly public companies, companies that have transitioned from the TSXV within the past year, and companies with fewer than five directors, will be exempt from this policy.

For 2021, Glass Lewis will continue to recommend that votes be withheld for the chair of the nominating committee if there are no female directors. Boards with fewer than two female directors will be flagged as a concern. Starting in 2022, Glass Lewis will recommend voting “against” the chair of the nominating committee if there are fewer than two female directors on the board.  For boards with six or fewer directors, the existing voting policy of at least one female director will remain in place.

Glass Lewis confirms that it will continue to review disclosure of diversity considerations, targets, and timelines when determining recommendations, and may refrain from recommending that shareholders withhold votes if there is sufficient rationale or disclosure on plans to address lack of diversity.

Environmental and social governance and egregious actions

Beginning in 2021, Glass Lewis will note as a concern when S&P/TSX60 index companies do not provide clear disclosure concerning the board’s oversight on environmental and/or social issues. Beginning in 2022, Glass Lewis will generally recommend that votes be withheld against the chair of the governance committee of companies in the S&P/TSX60 index who fail to provide explicit disclosure concerning the board’s role in overseeing environmental and/or social issues.

In assessing failure of risk oversight, ISS shall include factors such as demonstrably poor risk oversight of environmental or social issues, adverse legal judgments or settlement, and large or serial fines or sanctions from regulatory bodies.

In addition, ISS will recommend withholding votes from directors under extra ordinary situations arising due to material failures of governance, stewardship, risk oversight or fiduciary responsibilities, failure to replace management as appropriate and egregious actions related to a director’s service on other boards that raise doubt about his or her ability to serve on the company’s board.

Compensation policies

With respect short-term incentive plans, Glass Lewis has clarified that clear justifications must be disclosed for any significant changes to a company’s plan structure, including disclosure of any instances in which performance goals have been lowered from the previous years. Glass Lewis has clarified that instances of retroactively-prorated performance periods will be viewed as an application of upward discretion.

With respect long-term incentive plans, Glass Lewis will, outside of exceptional circumstances, view any decision to significantly roll-back the allocation of performance-based awards as a regression from best practice; this may lead to a negative recommendation. Glass Lewis has also said that clear explanations must accompany long-term incentive equity granting practices, especially for any structural changes to the program and any use of upward discretion.

Glass Lewis has also expressed that it is opposed to any option exchanges or repricing and that they shall evaluate each proposal on a case-by-case basis.

Director attendance & committee meeting disclosures

In line with the recommendation last year, Glass Lewis will continue its recommendation to withhold votes from the chair of the governance committee when records for board and committee meeting attendance are not disclosed, the number of audit committee meetings that took place during the year is not disclosed and will recommend withholding votes from the chair of the audit committee if the committee did not meet at least four times during the year.

Director tenure & independence

Glass Lewis will, beginning in 2021, flag as a concern where the average tenure of non-executive directors is 10 years or over and new independent directors have not been included on the board in the last five years.  Such board tenure concerns will be considered by Glass Lewis in making recommendations, particularly where other board-related concerns are indicated. In instances where a board has not addressed major issues of board composition (such as the skills and experience matrix for non-executive board members), Glass Lewis may recommend voting against the chair of a nominating committee.

Glass Lewis will consider employees of significant shareholders (20%) and explicit designees (being directors who explicitly serve as executives or director representatives of such significant shareholders) as affiliated and therefore not independent.

Audit committee scrutiny

In its 2021 guidance, Glass Lewis has also specified that it will review the level of professional expertise of audit committees. Glass Lewis will require that at least one member of the audit committee have experience as a certified public accountant, CFO or corporate controller of similar experience overseeing such functions as senior executive officers.

This recommendation effectively elevates the “financial literacy” threshold beyond the requirement under National Instrument 52-110 Audit Committees. That rule states that a person is considered financially literate if s/he has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the issuer’s financial statements. Glass Lewis, however, may not make a recommendation solely on this basis of the audit committee’s professional experience, for the 2021 proxy season.

Exclusive forum provisions

ISS and Glass Lewis both have stated that they will recommend voting against a bylaw or article amendment seeking to adopt exclusive forum provisions unless the company identifies clearly how/why the provision would directly benefit shareholders, gives evidence of abuse of legal process in the non-favoured jurisdictions, tailors the exclusive jurisdiction provision to address the risks involved and maintains a strong record of its corporate governance practices.

What’s new from securities commissions?

CSA disclosure guidance

On October 29, 2020, the Canadian Securities Administrators (“CSA”) published Staff Notice 51-361 on its continuous disclosure review program. The report focuses primarily on guidance for issuers in addressing the impact of COVID-19. The report includes guidance that disclosure addressing liquidity and capital resources in management’s discussion and analysis (“MD&A”) should be tailored to the particular issuer and reflect COVID-19 specific impacts (quantifying the impact is highly recommended where possible). Examples of items that may require disclosure include: government subsidies or funding, risks of accounts receivable collection, potential reduced cash flow, impact of any cost cutting initiatives, delays in capital project plans and changes in dividend policies. Issuers should also consider whether there remains a reasonable basis for previously-disclosed forward looking information and whether developments related to COVID-19 may constitute a “material change” in respect of an issuer.

CSA remains concerned with disclosure of non-generally accepted accounting principles (“GAAP”) financial measures that are given greater prominence than the most directly comparable GAAP measure, use of misleading labels and adjustments or alternative measures described as non-recurring, even when there is limited basis for making such conclusion.

CSA Multilateral Staff Notice 51-361 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019 is available on CSA members’ websites.

Personal information requirements

Securities commissions require that Personal Information Forms (“PIFs”) for directors and executive officers be delivered in certain circumstances, including upon the filing of a prospectus. When filed, commissions have historically required police search consent forms also be delivered to allow the commission in the principal jurisdiction to conduct criminal record searches as part of the commission’s due diligence.

Going forward, some commissions (including the Nova Scotia Securities Commission when it is the principal jurisdiction) may require that criminal record search reports be obtained and submitted by the directors and executive officers with the PIFs rather than a simple consent form. Issuers should plan for the extra time for these searches to be completed if planning a prospectus offering or similar transaction requiring review by securities regulators.

What’s on the horizon?

The Capital Markets Modernization Taskforce (“Taskforce”) was created in Ontario in February 2020 to consult on the challenges that businesses, intermediaries and investors face in Ontario’s capital markets ecosystem. The Taskforce developed a consultation report, which includes a number of policy proposals to modernize capital markets regulation. The Taskforce asked for feedback on the consultation report between July and September 2020.

The final report of the Taskforce to the Ontario Minister of Finance was published in January 2021. Recommendations include, among many others:

  • allow publicly listed reporting issuers with annual revenue of less than $10 million to file semi‑annual reporting rather than quarterly
  • create a “well-known seasoned issuer” (WKSI) system similar to the United States that allows certain very senior issuers to be subject to a less burdensome shelf registration process for public offerings
  • adopt full use of electronic or digital delivery in relation to documents mandated under securities law requirements (i.e., access-equals-delivery model) and reduce duplicative and unnecessary regulatory burden for prospectus offerings, annual and interim financial statements, MD&A, proxy‑related materials and notices for regular and special meetings
  • combine form requirements including Annual Information Form, MD&A and financials to reduce duplication such as risk disclosure
  • introduce a regulatory framework for proxy advisory firms (“PAFs”) such as ISS and Glass Lewis to provide issuers with a right to “rebut” PAF reports, and restrict PAFs from providing consulting services to issuers in respect of which PAFs also provide clients with voting recommendations
  • require annual say-on-pay advisory resolutions
  • require enhanced disclosure of material ESG information including greenhouse gas emissions
  • require standardized granular disclosure of securities grants and option exercises including look-back analysis based on realized and realizable pay information.

Implementation of any of these recommendations would likely be in a harmonized manner across the country, if possible. The consultation process to do so takes time and so these changes are likely not imminent. Stay tuned!

The foregoing is a summary only intended for general information. If you are interested in any of these topics, a more complete analysis will be required. If you have any questions, comments or concerns respecting the upcoming proxy season please contact one of the following members of our securities group listed below, or your other Stewart McKelvey contact:

Andrew Burke
Laurie Jones
Colleen Keyes
David Randell
Tauna Staniland
Gavin Stuttard
Divya Subramanian


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