Institutional Shareholder Services (ISS) and Glass Lewis Canadian company updates for the 2023 proxy season continue to focus on board diversity and oversight of climate risk. Other issues considered include overboarding, non-employee director deferred share unit plans, long-term incentive awards and cyber risk.

Regarding diversity, highlights include the following expectations for favourable recommendations:

  • Companies on the S&P/TSX Composite Index (Composite Index Constituents) will have a board of directors at least 30% of whose members are women;
  • Non-Composite Index Constituents will have at least one woman on the board; and
  • For meetings after February 1, 2024, Composite Index Constituents will have at least one ethnically or racially diverse director (as mandated by ISS, specifically).

ISS Updates for 2023

On November 30, 2022, proxy advisory firm ISS officially published its updated policy changes for 2023. Most of these changes are effective for shareholder meetings on or after February 1, 2023, with the exception of a new policy on racial and ethnic board diversity commencing on February 1, 2024.

Board Gender Diversity (Updated)

For Composite Index Constituents, ISS will generally vote withhold for the relevant committee chair (or board chair if there is none) where women comprise less than 30% of the board of directors.

If, however, the company discloses a written commitment to achieve 30% representation of women on the board at or prior to the subsequent annual general meeting (AGM), an exception will be made for companies which:

  • joined the S&P/TSX Composite Index and have not previously been subject to a 30% representation of women on the board requirement as a Composite Index Constituent; or
  • have fallen below 30% representation of women on the board due to an extraordinary circumstance after achieving such level of representation at the preceding AGM.

Under current ISS policy guidance, a "withhold" vote would generally only be recommended where women comprised less than 30% of the board and the company had not adopted a formal, publicly-disclosed commitment to achieve at least 30% prior to the next AGM.

For all other TSX companies, ISS will generally vote withhold for the relevant committee chair (or board chair if there is none) where there are zero women on the board of directors, regardless of whether the company has a formal, written gender diversity policy. This policy will not, however, apply to: newly publicly-listed companies within the current or prior fiscal year or companies that have transitioned from the TSXV within the current or prior fiscal year; or companies with four or fewer directors. Exceptions will also be made for those which temporarily have no women on the board due to an extraordinary circumstance after having had at least one woman on the board at the preceding AGM, provided that the company has publicly disclosed a written commitment to add at least one woman to the board at or prior to the subsequent AGM.

ISS will also continue to evaluate on a case-by-case basis whether "withhold" recommendations are warranted for additional directors at companies that fail to meet the above policy that would apply to their respective constituent group over two years or more.

Board Racial/Ethnic Diversity (New)

For shareholder meetings held on or after February 1, 2024, ISS has introduced a new policy that is intended to encourage Composite Index Constituents to evaluate the racial and ethnic diversity of their corporate boards. Under this new policy, ISS will generally vote against or withhold for the relevant committee chair (or board chair if there is none) where the board does not have any apparent racially or ethnically diverse member.

Racial or ethnic diversity includes people who are either Aboriginal or a visible minority (non-Caucasian and non-White), as per the definition in Canada's federal Employment Equity Act.

An exemption from this policy will be granted if a board that, at the previous year's AGM, included a racially or ethnically diverse member, but no longer does, makes a firm public commitment to appoint at least one such member at or prior to the next AGM. Furthermore, ISS will determine on a case-by-case basis whether "against" or "withhold" recommendations will apply to companies that fail to meet the policy at least two years in a row.

Climate Accountability (New)

For companies deemed to be significant greenhouse gas (GHG) emitters, as per the list provided by the Climate Action 100+ Focus Group, ISS has announced a new voting recommendation policy to increase corporate accountability on climate matters. ISS will now generally recommend shareholders vote against or withhold votes from the incumbent chair of the responsible committee, or other directors in certain circumstances, if the company fails to take the minimum steps required to understand, assess and mitigate risks related to climate change to the company and the larger economy.

ISS divides the minimum steps into two main categories:

  • detailed disclosure of climate-related risks (adopted from the Task Force on Climate-related Financial Disclosures (TCFD) framework), including:
    • board governance measures;
    • corporate strategy;
    • risk management analyses; and
    • metrics and targets; and
  • appropriate GHG emissions reduction targets.

According to ISS, "appropriate GHG emissions reductions targets" will be Net Zero-by-2050 GHG reduction targets for a company's operations (Scope 1) and electricity use (Scope 2) in the medium-term, and the targets should cover the vast majority of the company's direct emissions.

TSX/TSXV Companies – Non-Employee Director Deferred Share Unit Plans (Updated)

ISS will generally recommend votes for Non-employee Director (NED) deferred compensation plans if the Deferred Share Units (DSUs) may only be granted in lieu of cash fees on a value-for-value basis and no discretionary or other grants are permitted. Where the plan allows for discretionary grants, ISS will only recommend voting in favour where certain conditions are satisfied, including a 10% limit on dilution with all other equity compensation arrangements, limited NED participation and the plan requires shareholder approval for certain amendments. In addition, ISS will consider other elements to assess whether a DSU plan is deemed to be overall beneficial to shareholders' interests when determining vote recommendations.

ISS has also updated its policies on NED participation in DSU plans and overboarding of directors for venture companies.

Glass Lewis Updates for 2023

In November 2022, Glass Lewis also published its updated policy guidance, which will generally apply as of January 1, 2023.

Board Gender Diversity (Updated)

Glass Lewis will transition from mandating a fixed number of gender diverse members to requiring a target percentage of gender diversity on TSX company boards. Under this policy, Glass Lewis will generally recommend voting against the nominating committee chair of any TSX company board that is not at least 30% gender diverse, as well as all members of the nominating committee of a board with no gender diverse directors. Glass Lewis may, however, refrain from recommending that shareholders vote against directors where boards have provided sufficient rationale or a plan to address the lack of diversity on the board.

Environmental and Social Risk Oversight (Updated)

For Composite Index Constituents, Glass Lewis will recommend voting against the governance committee chair unless the company has provided explicit disclosure outlining the board's role in overseeing environmental and social (E&S) issues. Glass Lewis will not, however, mandate a specific structure for this type of oversight. Rather, companies will have the discretion to decide whether to engage the entire board, a separate committee or combine these responsibilities with those of a key committee to govern company-specific E&S matters.

Cyber Risk Oversight (New)

In response to greater regulatory focus and potentially adverse outcomes of cyber attack-related risks, Glass Lewis will introduce a new policy that governs cyber risk. Glass Lewis has not provided specific guidelines related to the oversight or disclosure of these risks. Glass Lewis may, however, recommend voting against certain directors governing companies that have experienced cyber attacks causing significant harm to shareholders if Glass Lewis finds the disclosure or oversight of cyber risks is deficient.

Director Accountability for Climate-Related Issues (New)

Glass Lewis' new policy related to climate risk requires that companies, particularly those whose financial position may be impacted by greenhouse gas emissions, disclose how they are mitigating and overseeing climate risk. Glass Lewis may recommend voting against board members responsible for overseeing climate-related matters under the following circumstances:

  • insufficient alignment with the TCFD framework; and/or
  • board oversight for climate-related issues has not been explicitly and clearly defined.

Director Commitments (Updated)

Updates to Glass Lewis' policy on director commitments, which assesses whether directors have the capacity to sufficiently carry out their board duties, will also take effect in 2023. According to this new policy, Glass Lewis may recommend a vote against directors that hold a position as an executive officer at a public company while also acting as a board member on two or more external public company boards.

Long-Term Incentive Awards (Updated)

Finally, Glass Lewis will enhance its scrutiny of executive pay programs that stipulate less than 50% of an executive's long-term incentive awards that are subject to performance-based vesting conditions. This differs from Glass Lewis' policy last year, whereby the threshold was 33%. Glass Lewis may still refrain from a negative recommendation in the absence of other significant issues with the program's design or operation, but a negative trajectory in the allocation amount may lead to an unfavourable recommendation.

Glass Lewis has also clarified its approach on other policy recommendations, including multi-class structures with unequal voting rights, compensation committee performance, company responsiveness to say-on-pay analysis and one-time awards, among others.

The author would like to acknowledge the support and assistance of Chelsea Angel, articling student at law.

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