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ISS Proposes Amendments to 2014 Canadian Proxy Voting Policy

October-24-2013

Lawyer Neill May
Area Corporate Finance and Securities, Shareholder Rights and Activism

Summary

On October 22, 2013, proxy advisory firm Institutional Shareholder Services Inc. (ISS) released three proposed amendments to its Canadian proxy voting policy for public comment.  Proxy advisory firms such as ISS make voting recommendations to institutional holders of publicly-traded securities, and in some cases effectively exercise voting rights on behalf of their institutional clients.  They can exercise significant influence on voting outcomes.  Subject to feedback received before 3 p.m. (EST) on November 4, 2013, ISS plans to release its 2014 Canadian proxy voting policy in November, affecting shareholder meetings held on or after February 1, 2014.

The Proposed Amendments

1.  Director Overboarding

The proposed amendments add overboarding (sitting on too many boards) to the existing attendance criteria for TSX-listed issuers.  Under its current policy, ISS issues a withhold recommendation on a director if he or she has attended fewer than 75% of board and committee meetings held within the past year without a valid reason for the absences and has shown a pattern of low attendance at prior years’ committee and board meetings.

ISS expressed concern that an “overboarded” director may be unable to fulfill his or her responsibilities because of excessive time commitments.  ISS considers a director to be overboarded if he or she either sits on more than six boards or serves as the CEO of a public issuer and serves on more than two boards (in addition to the issuer for which he or she is the CEO).  ISS estimated that roughly 25% of directors for all TSX-listed issuers were overboarded in 2012.

Under the proposed amendments, ISS will recommend that shareholders withhold votes from directors that are both overboarded and have attended fewer than 75% of board and committee meetings in the past year (without a valid reason for the absences).  In other words, directors considered to be overboarded will be affected based on low attendance for only one year (without a prior pattern of low attendance from prior years).

2.  Quantitative Pay for Performance Screen

The second proposal simplifies the quantitative pay-for-performance measures used by ISS to measure senior executive compensation relative to issuer performance (used to identify issuers where ISS considers that a more in-depth qualitative analysis of the issuer’s executive compensation is warranted).

ISS’s Relative Degree of Alignment (RDA) measures the difference between an issuer’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group.  Currently, the screen used by ISS measures the two rankings over both one and three year periods, using a weighted average of the two (40% and 60%, respectively).

ISS proposes to simplify the methodology by calculating the difference between the issuer's TSR rank and the CEO's total pay rank only over a three‐year period (or as many full fiscal years that the issuer has been publicly-traded and has disclosed pay data).  The one-year period calculation would be discarded from the analysis.

This change is intended to provide a better view on long-term performance and alignment (by minimizing the effects of short-term volatility). ISS estimated that 7% of listed issuers would be affected by this change.

3.  Problematic Audit-Related Issues

The final proposal is to adopt a policy of case-by-case analysis when recommending a vote on members of the audit committee and potentially the full board if adverse accounting practices are identified that rise to a level of serious concern, such as accounting fraud, misapplication of applicable accounting standards, or persistent material weaknesses identified in the internal control process.

The proposal for a case-by-case analysis is made in recognition, as expressed by ISS, of the need to assess the severity, breadth, chronological sequence and duration of any adverse accounting practices, and the issuer’s disclosed efforts to remediate or correct the issue.

Context

The Canadian Securities Administrators (CSA) are currently engaged in a process to consider potential regulation of proxy advisory firms such as ISS (as described in our recent Update, Canadian Securities Administrators to Regulate Proxy Advisory Firms).  The concerns expressed to date through the CSA process include (i) the need for transparency and disclosure about proxy advisors’ methodologies, and (ii) mistakes and inaccuracies in proxy advisors’ reports.  The fact that the proposed amendments include a proposal to simplify certain analytical tools may reflect a movement to address some of the regulators’ (and other marketplace actors’) concerns.  Proxy advisory firms are also sometimes subject to criticism concerning perceived inflexibility in the application of their policy guidelines; the proposal to take into consideration an issuer’s particular circumstances (where accounting issues occur) may also represent an effort to mitigate concerns expressed.

Please contact any of the lawyers in our Corporate Securities Group to discuss these latest developments.