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Tuesday, March 5, 2019

In leading up to the 2019 proxy season, both investors and issuers should be aware of numerous developments in the areas of corporate governance and securities laws. To prepare for the upcoming proxy season, issuers and investors should be aware of the Canadian proxy voting guidelines issued by proxy advisory firms Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”) as well as the various developments initiated by the Toronto Stock Exchange (“TSX”), the Ontario Securities Commission (the “OSC”) and the Canadian Securities Administrators (the “CSA”). To assist in this preparation, below is a summary of several significant developments to keep in mind for the 2019 proxy season.

Board Diversity

Once again, overall diversity in corporate boardrooms is one of the most heavily discussed areas in corporate governance. On May 1, 2018, Bill C-25, which proposed to amend the Canada Business Corporations Act (the “CBCA”) with respect to gender diversity disclosure, among other things, received Royal Assent. The amendments to the CBCA pursuant to Bill C-25 (the “Amendments”) include similar reporting requirements as found in National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”) which require that all TSX-listed issuers make certain disclosures regarding their gender diversity policy. However, the Amendments expand the required disclosure beyond gender to also apply to members of “designate groups” (as per the Employment Equity Act) including aboriginal peoples, persons with disabilities, members of visible minorities and potentially others.

Even though Bill C-25 has received Royal Assent, the provisions will only come into force once the corresponding regulations have been adopted. The corresponding regulations are in draft form and are expected to be finalized approximately 18-24 months from the date of receiving Royal Assent meaning that CBCA corporations will likely not be required to comply with the diversity disclosure requirements until the 2020 or 2021 proxy season.

Issuers should continue to anticipate that their diversity disclosure will be reviewed and scrutinized by the OSC and CSA in 2019. Despite the focus on increasing gender diversity on boards and the mandatory disclosure requirements, the representation of women in boardrooms has increased only minimally. On September 27, 2018, the CSA published Multilateral Staff Notice 58-310 – Report on Fourth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (the “Gender Diversity Review”), which reviewed TSX-listed issuers’ compliance with the gender diversity disclosure requirements under NI 58-101. This was the fourth annual review conducted by the CSA on this issue and, similar to the third annual review discussed in our prior update, the Gender Diversity Review revealed that there again has been an increase in the percentage of women on corporate boards this past year, but this increase has been relatively modest. Of the 648 TSX-listed issuers reviewed by the CSA, only 66 percent had at least one woman on their board as compared to 61 percent last year. In total, women only occupied 15 percent of all board seats of these issuers as compared to 14 percent last year.

In keeping with the focus of increasing gender diversity on boards, ISS and Glass Lewis have further revised their gender diversity policies. ISS has expanded its gender diversity policy to not only apply to S&P/TSX Composite Index companies but also to apply to all “widely held” TSX-listed companies, being other TSX-listed companies designated as such by ISS based on the number of ISS clients holding securities in the company. ISS generally will recommend a “withhold” vote for the chair of the nominating committee or the equivalent committee (or the chair of the board if no such individual or committee has been identified) if a company has not adopted a formal written gender diversity policy and no female directors serve on its board. Comparatively, Glass Lewis generally will recommend a “withhold” vote if a company does not have at least one woman on the board but may also recommend a vote “against” the chair of the nominating committee if the board has not adopted a formal written diversity policy. However, these recommendations may be limited to issuers in the S&P/TSX Composite Index and may not apply if boards have provided a sufficient rationale for not having any female directors or have disclosed a plan to address this issue.

Majority Voting

Bill C-25 will also result in certain amendments to the majority voting regime for public CBCA companies not already listed on the TSX. As a result of the Amendments, rather than giving shareholders the option to vote “for” or to “withhold” their vote in director elections, shareholders would have the option to vote “for” or “against” a director nominee in director elections. Pursuant to the Amendments, if a director nominee fails to receive more “for” votes than “against” votes, he or she will not be elected and will be ineligible to be appointed to any vacancies on the board before the next meeting of shareholders, which is consistent with the TSX Company Manual requirements. To help mitigate business disruption while an issuer is seeking a replacement, the Amendments provide a 90-day grace period for the incumbent director during which he or she can continue to serve until replaced. Once again, even though Bill C-25 has received Royal Assent, these provisions can only come into force once the corresponding regulations have been adopted meaning that CBCA corporations will likely not be required to comply with the majority voting requirements until the 2020 or 2021 proxy season.

On this issue, Glass Lewis believes that once a director nominee fails to obtain the majority of votes cast at a meeting, there should be no further actions needed by the board or committees to have the nominee removed from the board.

Environmental and Social Risk Oversight

Regulators and investors are increasingly focused on how issuers are overseeing environmental and social issues and are seeking enhanced disclosure on environmental, social and governance matters. Issuers should anticipate increased scrutiny and review by the OSC and CSA of their environmental and social disclosure in the 2019 proxy season. Both Glass Lewis and ISS have amended their respective voting recommendations relating to social and environmental matters for the 2019 proxy season.

Glass Lewis believes that companies should have in place appropriate board-level oversight of material risks (including those that are social or environmental in nature) to ensure the company is adequately mitigating such risks and capitalizing on related opportunities. Consequently, where it is clear that environmental or social risks have not properly been managed or mitigated to the detriment, or potential detriment, of shareholder value, Glass Lewis may consider recommending a vote “against” members of the board who are responsible for oversight of environmental and social risks. If there is an absence of explicit board oversight, Glass Lewis may recommend a vote “against” members of the audit committee or any other committee responsible for risk oversight. However, in making these determinations, Glass Lewis will review the situation on a case-by-case basis looking at its effect on shareholder value and any response made or corrective action taken by the company.

In determining whether a shareholder proposal will protect or enhance shareholder value, ISS will consider certain prescribed factors such as: whether the environmental or social issues presented should be more appropriately dealt with through government regulation or legislation; whether the company has already appropriately responded to the issues raised; whether the proposal is unduly burdensome on the company; and whether there are significant controversies, fines, penalties or litigation associated with the company’s environmental or social practices. ISS will review shareholder proposals and continue to make voting recommendations on a case-by-case basis.

Virtual-Only Shareholder Meetings

As noted in our previous update, virtual shareholder meetings are slowly becoming more popular as technology can enable more shareholders to participate in shareholder meetings. Pursuant to Glass Lewis’ policy regarding virtual-only shareholder meetings, Glass Lewis may recommend a vote “against” members of the governance committee where the board is planning to hold a virtual-only shareholder meeting if the company does not provide adequate disclosure confirming that shareholders will be given the same rights and opportunities to participate as they would at an in-person meeting. Examples of adequate disclosure include addressing the ability of shareholders to ask questions during the meeting and the procedures, if any, for posting appropriate questions received during the meeting, as well as addressing technical and logistical issues related to accessing the virtual meeting and procedures for accessing technical support.

Executive Compensation

With respect to executive compensation, Glass Lewis has expanded its policy in the following areas: (i) contractual payments and arrangements; (ii) grants of front-loaded awards; and (iii) recoupment or “clawback” provisions.

(i) In terms of contractual payments and arrangements, Glass Lewis has indicated that there should be clear disclosure and a meaningful explanation of the payments made and the process by which the amounts were reached; however, excessive sign-on awards may support or drive a negative recommendation. In its expanded policy, Glass Lewis stated that it would consider Canadian market practice and the size and design of entitlements when evaluating severance and sign-on arrangements, but multiyear guarantees for a minimum payout level under an incentive arrangement may drive “against” recommendations.

(ii) For front-loaded awards, Glass Lewis has cautioned shareholders about a company’s choice to award a large grant that is intended to serve as compensation for multiple years rather than granting cash and equity awards annually due to the risk that these front-loaded awards may preclude improvements or changes reflective of evolving business strategies. Consequently, Glass Lewis will consider the rationale, quantum and design of the grants and will expect a company’s commitment not to grant additional awards for a defined period of time.

(iii) With respect to clawback provisions, Glass Lewis is supportive of clawback provisions in order to encourage executives and senior management to take a more comprehensive view of risks when making business decisions and has noted it is becoming more focused on the specific terms of an issuer’s recoupment policy. While the terms of an issuer’s recoupment policy will not directly affect Glass Lewis’ recommendations, including an appropriately robust policy will influence the overall appearance of a company’s compensation program.

As discussed in our prior update, the practice of “say-on-pay” or granting shareholders advisory votes on executive compensation programs is said to enhance board accountability and transparency by linking executive compensation to issuer performance and by more closely aligning the interests of executives to those of the issuer. Approximately 180 companies, as compared to 160 last year, have voluntarily adopted this practice. Both ISS and Glass Lewis generally support this practice and believe each company should design and apply specific compensation policies and practices that are appropriate to the circumstances of the company. However, ISS and Glass Lewis will recommend a vote “against” a say-on-pay proposal if specific policies and practices fail to demonstrate a link between compensation and performance or in instances where there is evidence of a pattern of poor pay-for-performance practices, there is unclear or questionable disclosure regarding the overall compensation structure, or the board exhibits a significant level of poor communication and responsiveness to shareholders. For more information regarding the say-on-pay mechanism, please see our prior update.  

Director Commitments

In order to effectively perform his or her duties, a director must be able to devote sufficient time and energy to the affairs of the board of an issuer. As such, both Glass Lewis and ISS are mindful as to whether an individual director is “overboarded” by serving on too many public company boards. Glass Lewis did not make any changes to its existing policy regarding director commitments and reconfirmed that it will generally recommend a vote “against” an individual director nominee if he or she serves on more than two public company boards in the case of an executive officer and, in all other cases, if he or she serves on more than five public company boards.

As anticipated, ISS has revised its overboarding guidelines for directors of Canadian issuers. An individual director nominee will be considered to be “overboarded”, and ISS will generally issue a recommendation to “withhold” a vote, if such individual is a Chief Executive Officer of a public company who serves on the boards of more than two public companies besides his or her own or where the individual is not a Chief Executive Officer but sits on more than five public boards. As mentioned in our prior update, ISS’ requirement that within the previous year a director must have also attended less than 75 percent of his or her board or committee meetings without a valid reason to be classified as “overboarded” has been removed.

Board Skills

In order to permit a meaningful assessment of a board, Glass Lewis believes issuers should disclose sufficient information relating to a board’s skills and competencies. From 2019, Glass Lewis’ analysis of director elections will include board skills matrices for S&P/TSX 60 Index companies to assess such competencies and identify any potential skills gaps.

Ratification of Auditor

To consider auditor ratification proposals, Glass Lewis codified additional factors it will consider including the auditor’s tenure, a pattern of inaccurate audits and any ongoing litigation or significant controversies that call into question an auditor’s effectiveness. Glass Lewis stated that in limited cases, these factors may contribute to a recommendation “against” auditor ratification.

Director and Officer Indemnification

Glass Lewis did not change its current policy towards director and officer indemnification and maintains its position that directors and officers should be held to the highest standard when carrying out their duties; however, in its 2019 policy, its approach to analyzing indemnification provisions for directors and officers was clarified. Accordingly, Glass Lewis found a reasonable degree of protection to allow for measured risk-taking is in the best interests of shareholders and, as such, it is appropriate for a company to provide indemnification and/or enroll in liability insurance to cover its directors and officers, provided that the terms of such agreements are reasonable.


If you have any questions with respect to this update, please contact Al Wiens (, Mark Wilson (, Troy Pocaluyko (, Patricia Good ( or any other member of our Corporate Governance practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.