ISS 2021 Canadian Policy Updates

On November 12, 2020 ISS 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. ISS’ Executive Summary of the Policy Updates can be found here; and the full text of the Benchmark Policy Changes for U.S., Canada, and Latin America can be found here.

1) COVID-19 Guidance

On April 8, 2020, ISS issued policy guidance in response to the impact of the pandemic. This guidance covered a wide array of topics, generally recognizing that increased flexibility would be appropriate in several areas given the impacts and unknowns of the pandemic. The topics included AGM format and timing, poison pills, shareholder rights, director attendance, changes to boards, and changes to compensation, capital structure, dividends and other payouts. Details of the guidance can be found here. In line with strong feedback received from ISS' 2020 global benchmark policy survey, ISS intends to carry this or similar policy guidance into 2021 and update going forward as needed.

2) Election of Directors

Governance Failures: Material Environmental & Social Risk Oversight Failures

Wording has been added to ISS’ voting guidelines for individual directors, committee members, or the entire board in extraordinary circumstances to now include oversight failures relating to environmental and social factors. In ISS’ general recommendation, governance failure examples have expanded to include “demonstrably poor risk oversight of environmental and social issues, including climate change.”

3) Election of Directors (TSX-Listed Companies Only)

Voting on Director Nominees in Uncontested Elections: Board Gender Diversity

ISS made amendments to its board gender diversity policy which will become effective on February 1, 2022.

For TSX Composite Index constituents, ISS will generally recommend that shareholders vote withhold for the chair of the nominating committee or a director fulfilling that role, where women comprise less than 30% of the board of directors, and

• The company has not disclosed a formal written gender diversity policy, or

• The company’s formal written gender diversity policy does not include a commitment to achieve at least 30% women on the board over a reasonable time frame.

ISS’ rationale for this change was: ongoing feedback from its institutional investor clients; recommendations made by Ontario’s Capital Markets Modernization Taskforce; and the fact that many large Canadian institutions are signatories of the 30% Club Statement of Intent, and the 2022 Catalyst Accord. ISS hopes this change will align with the Canadian benchmark policy, prevailing client expectations and the direction in which market participants are heading.

ISS’ policy for TSX-listed, non-TSX Composite Index companies which ISS considers to be “widely held” will remain the same. ISS will generally recommend that shareholders vote withhold for the chair of the nominating committee or a director fulfilling that role, where:

• The company has not disclosed a formal written gender policy, and

• There are no women on the board.

“Widely held” companies are determined by ISS based on the number of ISS clients that hold securities of those companies. There is no way to be certain whether ISS will consider a company to be “widely held” in advance of the research paper being published, although companies with many institutional shareholders (perhaps 20 or more who also subscribe to ISS) will likely be considered “widely held”.

4) Shareholder Rights & Defenses

Exclusive Forum Proposals

Exclusive forum proposals have become common among U.S. issuers, and ISS anticipates that these proposals will also increase in popularity in Canada. Exclusive forum provisions are implemented to allow a designated court to be the sole and exclusive forum for predetermined types of litigation involving the company. While it may be true that generally, judges based in a corporation’s jurisdiction of incorporation are best suited to apply that jurisdiction's law to those companies, there is often more than one proper forum available to shareholder plaintiffs, and exclusive forum proposals curtail the rights of shareholders to select any proper forum of their choosing.

ISS will make recommendations on a case-by-case basis for exclusive forum proposals or by-law/articles amendments which add an exclusive forum provision and take the following into consideration:

• Jurisdiction of incorporation;

• Board rationale for adopting exclusive forum;

• Legal actions subject to the exclusive forum provision;

• Evidence of past harm as a result of shareholder legal action against the company originating outside of the jurisdiction of incorporation;

• Company corporate governance provisions and shareholder rights; and

• Any other problematic provisions that raise concerns regarding shareholder rights.

5) Equity-Based Evergreen Compensation Plans (CSE-Listed Companies Only)

As a reminder, ISS published an update to their proxy voting guidelines for venture-listed companies in 2019 which will come into effect in 2021.

If the company maintains an evergreen equity compensation plan, and the company has not sought shareholder approval in the past two years and is not seeking shareholder approval at the upcoming annual shareholder meeting, then ISS will generally recommend voting against the compensation committee members, or if there isn’t a compensation committee, then ISS will recommend against the board chair. The change only applies to CSE-listed companies since the TSX-V already requires regular shareholder reconfirmation of rolling limit equity plans.

This change was made to address the growing number of CSE-listed companies, particularly cannabis companies, that have adopted rolling equity plans.

Additional Updates

Laurel Hill’s 6th annual Trends in Corporate Governance

These changes by ISS were in-line with the expectations previously set by ISS and summarized in Laurel Hill’s 6th annual Trends in Corporate Governance report which can be found here.

2021 ISS Peer Submission

In addition to the 2021 ISS policy updates, Laure Hill reminds corporate issuers that the ISS Peer Submission window is open from November 16th – December 4th, and the update can be found here.

Deutsche Börse to acquire majority stake in ISS

On November 17, 2020, ISS announced that its owner, Genstar Capital LLC sold approximately 80% ownership interest in ISS to Deutsche Börse AG for about US$1.82 billion. Genstar Capital and current management will continue to hold a stake of approximately 20%. The transaction is expected to close in the first half of 2021. ISS will remain autonomous within the group to ensure independence of its data and research; and current CEO Gary Retelny will continue to lead ISS. The news release from ISS can be found here.