Written By Brent Kraus, John Piasta, Angela Blake and Eric Wiebe
Institutional Shareholder Services (ISS) has released proposed updates for comment to certain of its Canadian benchmark proxy voting policies (each, a Proposed Policy) for the 2022 proxy season. The Proposed Policies are open for comment until November 16, 2021 and, if approved in their current form, will govern ISS voting recommendations for shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2022.
Recommendations from proxy advisory firms such as ISS can have a significant impact on the outcome of business conducted at shareholder meetings, especially if institutional investors comprise a significant portion of a company's shareholder base. Canadian public companies should review the proposed updates with their legal counsel to determine the potential impact on their disclosure and governance practices, and what steps may be taken to mitigate against adverse voting recommendations from ISS if the Proposed Policies are approved.
Say on Climate Management & Shareholder Proposals
As noted by ISS, there have been 25 management-initiated Say on Climate (SoC) proposals globally in 2021, including one in Canada. Perhaps signaling ISS's expectation that SoC proposals are likely to increase in frequency in light of ESG trends in proxy matters, the Proposed Policy would codify the framework ISS has employed over the last year for analyzing management SoC proposals, and set out ISS's approach for addressing shareholder SoC proposals.
Say on Climate Management Proposals
ISS proposes to assess management-initiated SoC proposals relating to shareholder approval of a company's climate transition plan on a case-by-case basis, taking into account the completeness and rigor of the plan based on factors including:
- the extent to which the company's climate-related disclosures are in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and meet other market standards;
- disclosure of its operational and supply chain GHG emissions (Scopes 1, 2 and 3);
- the completeness and rigor of the company's short, medium and long-term targets for reducing operational and supply chain GHG emissions in line with Paris Agreement goals (Scopes 1, 2 and 3, if relevant);
- whether the company has sought and received third-party approval that its targets are science-based;
- whether the company has made a commitment to be "net-zero emissions" for operational and supply chain emissions (Scopes 1, 2 and 3) by 2050;
- whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
- whether the company's climate data has received third-party assurance;
- disclosure of how the company's lobbying activities and its capital expenditures align with company strategy;
- whether there are specific industry decarbonization challenges; and
- the company's related commitment, disclosure and performance compared to its industry peers.
Although the publication of the ISS review framework provides some additional transparency, the subjective nature of many of the criteria will continue to make it challenging for companies to predict what ISS's voting recommendation will be with respect to a particular management SoC proposal. As a result, issuers may still wish to consider soliciting ISS review prior to launch of an SoC proposal.
Say on Climate Shareholder Proposals
The Proposed Policy addresses the criteria by which ISS will recommend voting, on a case-by-case basis, in respect of shareholder SoC proposals (including those requesting that a company disclose a report on its GHG emissions and reduction targets, or in respect of its climate transition action plan). The Proposed Policy indicates that ISS will take into account information such as:
- the completeness and rigor of the company's climate-related disclosure;
- the company's actual GHG emissions performance;
- whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and
- whether the proposal's request is unduly burdensome (in scope or timeframe) or overly prescriptive.
As with ISS's proposed framework for management SoC proposals, the proposed framework for shareholder SoC proposals is subjective, and will presumably be further developed through market practice.
The Proposed Policy further enhances gender diversity requirements for all issuers in the TSX-listed universe.
It provides that ISS will recommend withholding votes for (i.e., voting against) the chair of the nominating committee (or equivalent) of S&P/TSX Composite Index companies if:
- women comprise less than 30 percent of the board of directors; and
- the company has not provided a formal, publicly-disclosed written commitment to achieve at least 30 percent women on the board at or prior to the next AGM.
The Proposed Policy solidifies the need for S&P/TSX Composite Index companies to either meet the 30 percent representation requirement, or to disclose a written commitment to do so prior to their next AGM.
In respect of TSX companies that are not part of the S&P/TSX Composite Index, the Proposed Policy provides that ISS will recommend withholding votes for the chair of the nominating committee (or equivalent) if:
- the company has not disclosed a formal written gender diversity policy; and
- there are no women on the board.
If adopted, the above will apply to all TSX companies, other than non-S&P/TSX Composite Index companies that: (i) were newly publicly listed, or that uplisted from the TSXV, within the current or prior fiscal year, or (ii) have four or fewer directors, rather than just those designated as "widely held" by ISS (based on the number of ISS clients holding securities of the company) as provided under current ISS policy.
ISS will also evaluate, on a case-by-case basis, whether withhold recommendations are warranted for additional directors, other than the chair of the nominating committee (or equivalent), of companies that fail to comply with the Proposed Policy over two years or more.
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals
The Proposed Policy recommends raising the support threshold that triggers a responsiveness analysis on a company's management Say-on-Pay proposal from the current threshold of 70 percent to 80 percent. In this regard, the Proposed Policy follows the recent recommendation of the Canadian Coalition for Good Governance (CCGG) that, where a Say-on-Pay vote receives low shareholder support (typically less than 80 percent), the board should report back within a reasonable time on its engagement efforts to understand shareholder concerns.
ISS notes that say-on-pay resolutions in Canada generally receive very strong support, with the average support level in the last five years being over 90 percent. As such, the Proposed Policy, if approved, is not expected to be material for most issuers.