Last week, ISS released its Canadian corporate governance policy updates for 2013. The updates, which reflect changes to its proxy voting policies for the upcoming proxy season, are effective for meetings held on or after February 1, 2013. As we discussed in a post earlier this month, ISS published proposed changes to its guidelines earlier this Fall that focused on pay for performance. While the final policies include the contemplated changes to the methodology to measure pay-for-performance alignment, the guidelines respecting slate voting, majority owned companies and advance notice requirements, among others, have also been updated.
Key changes to ISS policies include an update to its recommendation regarding slate ballots. Specifically, the updated guidelines recommend withholding votes from all directors nominated by slate ballot, regardless of whether additional governance concerns have been identified. Further, the exemptions for companies newly graduated from the venture exchange or that commit to replacing slate director elections within a year have also been removed. The policy, however, does not apply to contested director elections. The main reason cited for this change in policy is the TSX's recently announced amendments that will prohibit single slate ballots (coming into effect on December 31, 2012) and a similar prohibition in the TSX-V's policies.
Majority Owned Companies
Current ISS guidelines make no policy considerations for majority-owned companies. The updated policy on this issue, however, is intended to recognize the interests of shareholders with substantial equity stakes and whose interests are aligned with those of minority shareholders. On this point, ISS cited, among others, the CCGG's 2011 report Governance Differences of Equity Controlled Corporations and 2010's Building High Performance Boards with respect to the need to take into account the "legitimate governance differences" of such majority owned companies.
To that end, director nominees representing a controlling shareholder of a majority owned company, who will be designated as controlling insiders, may now generally be supported under board and committee independence policies so long as the company meets certain criteria respecting independence and governance.
Pay for Performance
The new ISS guidelines also utilize a new methodology to measure potential long-term pay-for-performance alignment based on certain quantitative and qualitative factors. Under the updated policy, factors include the CEO pay-to-total shareholder return alignment over the prior five years, the ratio of performance to time based equity grants and the overall mix of performance-based compensation relative to total compensation, the trend in other financial metrics, and the quality of disclosure and appropriateness of the performance measures and goals utilized. The new policy applies to all S&P/TSX Composite Index companies and for all management say-on-pay resolutions.
Advance Notice Requirements
The new guidelines also seek to establish a Canadian policy on proposals to adopt advance notice requirements. On this issue, ISS recommends a case-by-case vote on proposals to adopt an advance notice board policy or to adopt or amend bylaws containing or adding an advance notice requirement. ISS will generally support proposals that provide a reasonable framework for shareholders to nominate directors by allowing them to submit nominations as close to the meeting date as possible and within the broadest possible window. To be reasonable, a company's deadline for notice of director nominations must be between 30 and 65 days prior to the meeting date. As well, ISS will generally support efforts by companies to ensure full disclosure of a dissident shareholder's economic and voting position as long as the informational requirements are reasonable and aimed at providing shareholders with necessary information to review proposed nominees.
According to ISS, the policy is intended to ensure shareholders are provided with sufficient disclosure and time to make appropriate decisions on the election of board representatives. For more on the treatment of advance notice policies in the courts, see our recent summary of the case of Northern Minerals Investment Corp. v. Mundoro Capital Inc.
Other policy changes
The updated guidelines also include changes to recommendations regarding alternate director provisions and social and environmental proposals.