Institutional Shareholder Services (ISS), one of the world’s most influential proxy advisory firms, recently released its draft proposed voting policies for 2016. ISS is currently requesting feedback on new or potential changes to three voting policies in Canada covering the following areas: director overboarding, compensation-related votes at externally-managed issuers and the introduction of an equity plan scoreboard.
ISS has recognized the risk in directors sitting on an excessive number of boards, such that directors become over-committed and unable to dedicate the required time and energy to each board necessary to effectively represent shareholders’ interests.
Currently, ISS’ Canadian policy defines an overboarded director as:
- non-CEO directors who they sit on more than six public company boards; and
- CEO directors who sit on more than two outside public company boards (in addition to the company he or she is the CEO of).
ISS’ proposed policy changes (slated to take effect on February 1, 2017) would define an overboarded director as:
- non-CEO directors who sit on more than four public company boards; and
- CEO directors who sit on more than one public company board (in addition to the company he or she is the CEO of).
Importantly, ISS’ Canadian overboarding policy is linked to attendance: a “withhold” voting recommendation will only be issued where an overboarded director also has a poor attendance record (designated as less than 75% attendance at meetings).
In response to issues around cost transparency and best practices in equity-based compensation, ISS has proposed an update to its Canadian equity plans policy by introducing a “scoreboard” approach. Currently, ISS’ policy consists of a series of pass / fail tests relating to plan cost, non-employee director participation, plan amendment provisions and re-pricing without shareholder approval.
The proposed scorecard approach would continue to account for the current factors, but, instead of the current pass / fail system, would instead tally all positive and negative factors for a total score to form the basis of ISS’ ultimate recommendation. The factors are proposed to fall within the following broad categories: Plan Cost, Plan Features, and Grant Practices. ISS describes the proposal as introducing a more holistic approach to vote recommendations, with the ultimate goal of providing shareholders greater depth of insight into risk governance concerns.
ISS’ proposed policy update in this category relates to the often inadequate disclosure of compensation arrangements with Externally-Managed Issuers (EMIs), who typically pay fees to outside firms for management services. In many cases, some or all of an EMI’s executives are directly compensated by the external management firm, rendering a meaningful review of incentive compensation not possible.
In response, ISS proposes case by case recommendations on say-on-pay resolutions, individual directors, committee members, or the entire board as appropriate, where EMIs provide limited disclosure about their management services agreements and compensation. ISS has identified a number of factors to consider in each case, including: the size and scope of the management services agreement, overall performance, related party transactions and board and committee independence.
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The author would like to thank Kira Misiewicz, articling student, for her assistance in preparing this legal update.