The Role of Proxy Advisory Firms in Canada

Nicholas J Price
To keep a pulse on what is going on in the greater marketplace, many shareholders check in with proxy advisory firms as the proxy season draws near. Proxy advisors make a career of knowing what is best for marketplace conditions, so they're considered experts. Every year, in Canada and in other countries, proxy advisory firms make recommendations for boards. Proxy advisory firms are highly influential in shareholder voting. While proxy advisory firms may make similar recommendations for Canadian companies as for other countries, the criteria they use are different based on the current corporate climate in each country.

Proxy advisory firms make changes in their recommendations every year. In 2019, the hot-button issues for Canada are gender diversity, overboarding, ESG (Environmental, Social and Governance), and virtual-only meetings.

The Role of the Proxy Advisory Firm in Canada

Proxy advisory firms fill a specific purpose. Their sole job is to review and analyze matters that shareholders will be expected to vote on during proxy season. Board members are often too busy to do the careful analysis that making wise decisions requires. Proxy advisory firms rose to fill the need to be the industry experts in major corporate governance issues. The clients of proxy advisors are typically institutional investors. Clients of the firms are usually highly influenced by the decisions and recommendations of the proxy advisory firms.

In making their recommendations, proxy advisory firms will look at such items as routine matters, the appointment of auditors, proxy contests, complex business acquisition deals that involve voting, management initiatives, shareholder proposals and any other emerging issues.

Proxy advisory firms study and analyze issues all year long and then make voting recommendations based on how well companies abide by the standards and practices that are in keeping with the advisory firm's guidelines for the current proxy season.

A Look at Policy Changes for the 2019 Proxy Season in Canada

Gender Diversity

Gender diversity has been a hot topic all over the world, and Canada is no exception. Proxy advisory firms strongly favor increasing the number of women on boards and in executive positions. In 2019, Canadian companies can expect recommendations for them to disclose detailed policies for how they recruit and appoint women board directors.

In 2018, proxy advisors recommended a withhold vote for the chair of the committee that was responsible for nominating candidates to the board if the board could not supply a formal written disclosure about their search for women board nominees. This was the recommendation for Standard and Poor's and TSX Composite Index issuers.

The main proxy advisory firms are Institutional Shareholder Services (ISS) and Glass Lewis. Both firms changed their gender diversity policies for the 2019 proxy season. They made it clear that they wanted corporations to make a clear commitment to increase board gender diversity and to do it in a reasonable time frame. Advisory firms want to see measurable goals and targets without using boilerplate or contradictory language. Corporations should be prepared to explain why they lack women on the board if they want to avoid a recommendation for withhold on votes. Proxy advisory firms have the same recommendation for women executives in 2019.

The strength of the recommendation for adding women to boards is evident in the 2019 proxy recommendations, as proxy advisors expanded the scope to include other issuers that they consider to be “widely held.”

Glass Lewis updated its board gender diversity policy this year to recommend a vote of withhold for the chair of the nominating committee when there are no women on the board director slate. The exception is if the board has adopted a written diversity policy that affirms that the board had pursued women candidates. Glass Lewis doesn't require the written policy in cases where there are already women on the board.

Glass Lewis also notes that they will consider such issues as the size of the issuer, the type of industry and the governance profile of the issuer before they make their final recommendations. In cases where an issuer can reasonably explain the absence of women on the board, or where issuers are outside the Standard and Poor's or TSX Composite Index, they don't intend to recommend a withhold vote.

Overboarding Directors

Another prominent issue for boards is overboarding, which means that many board directors are serving on too many boards and cannot commit the proper amount of time to each board.

Proxy advisory firms are likely to recommend votes of withhold when placing a vote for a board director that also serves as CEO and where the director sits on more than two outside public boards in addition to the one where he or she is the CEO. When the vote pertains to the CEO of a public issuer, the recommendation to withhold a vote would only pertain to outside boards.

Proxy firms also recommend that when a CEO sits on boards of subsidiaries, subsidiary boards will be counted separately for the purpose of overboarding guidelines. The won't recommend the withhold vote for the CEO at the parent company or any of the controlled subsidiaries. They may recommend a withhold vote when the CEO sits on a board that is less than 50% controlled and at outside boards from the parent/subsidiary relationship.

These recommendations for overboarding closely mirror the proxy advisors' recommendations in the United States.

In both countries, ISS intends to recommend a vote of withhold for directors who have poor meeting attendance, whether they serve on multiple boards or not. Glass Lewis hasn't made any substantial changes to their past overboarding guidelines. The perspective of Glass Lewis continues to recommend that shareholders withhold their votes in connection with a board director who is an officer of any public issuer who serves on more than two public issuer boards or any other director who serves on more than five public issuer boards.

Diligent Corporation is another company that stays in the loop on governance issues. Diligent developed Diligent Boards, a board management software program, along with Governance Cloud, a suite of fully integrated board governance management tools, so that boards can be as prepared for proxy season as the shareholders. As an industry leader in enterprise governance management, you can count on Diligent to innovate the next generation of board management software solutions.
Related Insights
Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.