Glass Lewis 2021 Canadian Policy Updates
On November 24, 2020 Glass Lewis released its annual policy updates for the upcoming proxy year. Below is a summary of these changes as they apply directly to the Canadian market. The full text of Glass Lewis’ 2021 proxy voting policy guidelines can be found here; and the full text of all other global regions can be found here.
Primary Updates
1) Board Gender Diversity
Glass Lewis’ current voting policy for Board Gender Diversity only applies to TSX-listed issuers. Glass Lewis generally recommends against the chair of the nominating committee if the board does not have at least one woman on the board or has not provided sufficient explanation or disclosed a plan to address the lack of diversity on the board.
For meetings held after January 1, 2021, Glass Lewis will note as a concern boards consisting of fewer than two female directors but continue to apply the existing policy regarding at least one woman on the board.
For meetings held after January 1, 2022, companies with more than six directors that do not have at least two women on the board will generally receive a negative recommendation. For companies with six or fewer directors, Glass Lewis will continue to apply the current policy which only requires at least one woman on the board to avoid a negative recommendation. In either case, Glass Lewis may refrain from making negative recommendations if the company has provided sufficient explanation or disclosed a plan to address the lack of diversity on the board.
2) Board Skills
Glass Lewis has codified its guidelines to include instances where the board has failed to address major board composition issues, including the composition, mix of skills, and experience of the non-executive element of the board. If major board composition issues are identified, Glass Lewis may recommend against the nomination committee chair. Glass Lewis has provided a link to their Board Skills methodology which is based on the target company’s industry.
3) Board Refreshment
Starting in 2021, Glass Lewis will begin noting as a concern in their reports “instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years.” Glass Lewis will not make negative recommendations solely on this basis; however, issues surrounding board refreshment could potentially factor into adverse recommendations if additional board-related concerns are identified.
4) Environmental and Social Risk Oversight
Starting in 2021, for S&P/TSX 60 index companies, Glass Lewis will note as a concern when boards have not provided clear disclosure concerning the board-level oversight afforded to environmental and/or social issues.
For meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the governance chair of an S&P/TSX 60 company that fails to provide explicit disclosure concerning the board’s role in overseeing environmental and/or social issues.
5) Financial Expertise
Starting in 2021 for TSX companies, Glass Lewis will flag as a concern any audit committees that do not have at least one member who is a “financial expert”, defined as being a person with experience as a certified public accountant, CFO or corporate controller of similar experience, or demonstrably meaningful experience overseeing such functions as senior executive officers. Glass Lewis will generally refrain from making recommendations solely on this basis, except where there are other concerns with the performance of the audit committee.
6) Director Attendance/Committee Meeting Disclosures
Starting in 2021, Glass Lewis will begin recommending against the governance committee chair when: (i) records for board and committee meeting attendance are not disclosed, and; (ii) the number of audit committee meetings that took place during the most recent year is not disclosed. Glass Lewis will also recommend against the audit committee chair if the audit committee did not meet at least four times during the year.
7) Exclusive Forum Provisions
Starting in 2021, Glass Lewis will generally recommend that shareholders vote against any amendments to the bylaws or articles seeking to adopt an exclusive forum provision unless the company:
provides a compelling argument on why the provision would directly benefit shareholders;
provides evidence of abuse of legal process in other, non-favored jurisdictions;
narrowly tailors such provision to the risks involved; and
maintains a strong record of good corporate governance practices.
8) Change of Continuance
Glass Lewis has enhanced its guidelines as they apply to proposals requesting a change of continuance. These proposals will be evaluated on a case-by-case basis to determine if they are in the best interests of the company and its shareholders.
9) Poor Disclosure
Additional scrutiny will be given to companies with disclosure standards that are unclear, poor, contradictory, or outdated. In addition to assessing the quality of disclosure generally, the quality and clarity of the diversity disclosure of “Designated Groups” as it pertains to the board and management will be assessed for CBCA companies. If poor disclosure standards are identified, Glass Lewis will direct this mismanagement at the chair of the governance committee.
Clarifying Amendments
Independence Classification
For Glass Lewis’ director independence classification, they have made the following clarification: “We consider employees of significant shareholders and explicit designees of such shareholders to be affiliated. We will consider all employees of a company’s ongoing major beneficial shareholder or party of interest through a material financial relationship (related party transaction) to be affiliated for three years after they cease to be employed by such party, so long as the party continues to have a relationship with the company in question.”
Compensation Committee Performance
Glass Lewis has stated they will pay extra close attention to the re-election of compensation committee members in cases where the company has not provided shareholders with an advisory vote on executive compensation. It appears that Glass Lewis is not going to make negative recommendations on this factor alone, but may cite this factor in a negative recommendation when several negative factors exist for members of the compensation committee.
Short-term Incentives
Glass Lewis has provided additional factors they will use to evaluate a company’s short-term incentive plan. These factors include: clearly disclosed justification for significant changes to the structure of a company’s short-term plan, which includes the lowering of performance goals from the year before. Also, Glass Lewis now recognizes instances of retroactively prorated performance periods within its description of the application of upward discretion.
Long-term Incentives
Glass Lewis has also provided additional factors for the evaluation of long-term incentive plans. Negative recommendations may arise from the following two practices when other major concerns have been identified: inappropriate performance-based award allocation, and any decision to significantly roll back performance-based award allocation. Also, Glass Lewis expects to see clear disclosure and explanations for long-term incentive equity grants, significant structural program changes, or any use of upward discretion.
Option Exchanges and Repricing
Additional language has been added to Glass Lewis’ guidelines regarding the examination of option exchanges and repricing proposals. To avoid adverse recommendations from Glass Lewis, programs much exclude board members and officers, and be value-neutral or value-creative.
Peer Group Methodology
In 2019 Glass Lewis announced the change of its peer group data provider from Equilar to CGLytics. In this year’s update, Glass Lewis has described how it uses this new proprietary methodology for developing these peer groups. “Glass Lewis considers both country-based and sector-based peers, along with each company’s network of self-disclosed peers. Each component is considered on a weighted basis and is subject to size-based ranking and screening.”
Additional Updates
Laurel Hill’s 6th Annual Trends in Corporate Governance
Additional updates on governance can be found in Laurel Hill’s 6th annual Trends in Corporate Governance report which can be found here.