Proxy advisor Institutional Shareholder Services (ISS) recently updated its Benchmark Proxy Voting Guidelines, which generally apply to shareholder meetings beginning in 2023 or 2024. The updates address a number of pressing issues in the Canadian corporate governance landscape, including climate accountability and racial, ethnic and gender diversity on corporate boards.
In 2022, ISS announced that, for companies that are significant greenhouse gas (GHG) emitters through their operations or value chain,1 it would generally recommend shareholders vote against or withhold for the incumbent chair of the responsible committee (or other directors on a case-by-case basis) where ISS determines the company is not taking the minimum steps needed to understand, assess and mitigate climate-related risks to the company and the larger economy. These minimum steps include, among other things, detailed disclosure of climate-related risks such as those according to the framework established by the Task Force on Climate-related Financial Disclosures and appropriate GHG emissions reduction targets. For 2022, this policy was only in force in selected markets, including the United States, but excluding Canada.
For 2023, ISS is extending its climate accountability policy globally and is clarifying the factors considered under the policy. Going forward, in cases where a high-emitting company is not considered by ISS to be adequately disclosing climate risk information and does not have either (i) medium-term GHG emission reductions targets or (ii) a goal to be a net-zero GHG emitter by 2050 for at least its operations and electricity use, ISS will generally recommend against the directors or other voting items it deems appropriate. Emission reduction targets should also cover the vast majority (e.g., 95%) of the company’s operational emissions.
Racial and Ethnic Diversity
Historically, ISS has not maintained a policy concerning racial and/or ethnic diversity on boards. However, for meetings on or after February 1, 2024, ISS will generally recommend shareholders vote against or withhold in respect of the chair of the nominating committee (or directors responsible for board nominations) of a S&P/TSX Composite Index company where the board has no apparent racially or ethnically diverse members.1 In addition, ISS will evaluate on a case-by-case basis whether a recommendation to vote against or withhold is warranted for additional directors at S&P/TSX Composite Index companies that fail to meet this policy over two or more years. ISS will except companies whose board was racially or ethnically diverse at the last annual general meeting (AGM) and where the board has firmly and publicly committed to appoint at least one racially or ethnically diverse member at or before its next AGM.
While corporations incorporated under the Canada Business Corporations Act are already required to make disclosure concerning board diversity in their proxy circulars, this change is being implemented to address the views of ISS’s investor clients that company boards should aim to achieve racial and ethnic diversity to reflect the company’s customer base and the broader society, as well as to disclose this information to the fullest extent possible.
As we highlighted in an earlier Client Update, beginning in 2022 ISS strengthened its policies on board gender diversity by recommending against the chair of the nominating committee (or directors responsible for board nominations) of S&P/TSX Composite Index companies where females comprise less than 30% of the board and the issuer has not disclosed a formal written gender diversity policy that includes a commitment to achieve at least 30% female representation on the board over a reasonable timeframe.
For 2023, ISS has updated its policy to recommend against the chair of the nominating committee (or directors responsible for board nominations) where females comprise less than 30% of the board of a S&P/TSX Composite Index company, regardless of whether the company has publicly disclosed a written commitment to achieve such representation. ISS expressed that a higher standard of representation by women is expected in Canada, with S&P/TSX Composite Index companies playing a vital role in this process by ensuring there is meaningful gender diversity on their boards to obtain ISS’s support for management’s slate, rather than simply disclosing that they intend to ensure such representation in the future.
This update to the ISS gender diversity policy does not apply to companies that recently joined the S&P/TSX Composite Index and were not previously subject to ISS’s guidance, companies that fall below the 30% representation threshold due to extraordinary circumstances after meeting that standard at their last AGM, companies that recently graduated from the TSXV to the TSX, or companies with four or fewer directors.
ISS made a number of other updates to its Benchmark Proxy Voting Guidelines related to corporate governance in Canada, including:
- Overboarded Directors – In respect of TSXV issuers, ISS confirmed its existing guidance introduced in February 2022 that, for meetings on or after February 1, 2023, ISS will generally recommend shareholders vote withhold for individual directors who are non-CEO directors and serve on more than five (5) public company boards, or are CEOs of public companies who serve on the boards of more than two (2) public companies besides their own.3
- Director Compensation – ISS updated its guidance concerning non-employee director (NED) deferred share unit (DSU) plans to (i) note that ISS will consider various elements to assess whether a DSU plan is deemed to be beneficial overall to shareholder interests; (ii) recommend that shareholders vote for an NED deferred compensation plan if DSUs may only be granted in lieu of cash fees on a value-for-value basis; and (iii) recommend that shareholders vote for a NED deferred compensation plan that permits discretionary grants (not only in lieu of cash fees) if certain criteria are met.
To discuss these updates and how they may impact your company, please contact any member of our Capital Markets Group.
1 Companies defined as "significant GHG emitters" under ISS's policy are those listed in the Climate Action 100+ Focus Group.
2 Racial and/or ethnic diversity is defined as Aboriginal peoples (meaning persons who are Indigenous, Inuit or Métis) and members of visible minorities (meaning persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour).
3 ISS will only recommend that shareholders vote withhold at the companies where the executive does not serve as CEO (i.e., only at the CEO's outside boards).
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