What’s in store for the 2018 proxy season? We asked some of Canada’s leading proxy experts and governance advisers for their help. Below, they identify the issues that are expected to make headlines and to keep board committees up at night. Along with that: some tips on how you should be planning to address them in the run up to (and in the potential aftermath of ) your coming AGM.
Proxy access has arrived
Unless you’re working for one of the Big Five banks, this is still mainly a watch-and-learn exercise. But given the way ideas spread once they’ve gained a foothold, that’s enough to make it a pivotal issue for the upcoming proxy season.
Briefly, to recap, at last spring’s annual meetings of Royal Bank of Canada (TSX:RY) and Toronto-Dominion Bank (TSX:TD), shareholders voted on shareholder proposals requesting that both companies’ boards of directors take steps to adopt a proxy access bylaw giving qualified shareholders the right to have director nominees included in the company’s proxy circular. The proposals were approved by 52.2% of the votes cast at the TD meeting and narrowly rejected (46.8% in favour) by RBC shareholders.
Specific vote numbers aside, however, both proposals were a resounding success. A message was sent. And in September the two banks responded with a first for Canada—unveiling identical proxy access policies that allow one or more nominating shareholders (to a maximum of 20 shareholders) to nominate directors for inclusion in the bank’s proxy circular and form of proxy and ballot for any annual shareholders’ meeting. The bylaws includes a number of other important details: nominating shareholders must collectively own 5% or more of outstanding common shares; shares must have been held continuously more than three years; nominating shareholders must have full voting and economic rights of the common shares; the number of director nominees can’t be more than two directors or 20% of the board. Also, nominating shareholders may include 500-word statements supporting their nominees.
As with any first, it’s a very significant development, says Paul Gryglewicz, senior partner at Global Governance Advisors. “You have two cornerstone major TSX/60 companies taking the lead on proxy access,” he says.
Did we say two? Make that five. Within weeks of these first announcements, Bank of Montreal (TSX:BMO), CIBC (TSX:CM) and Scotiabank (TSX:BNS) came out with their own, essentially identical proxy access policies.
Most critical analysis of these policies has so far centred on the 5% ownership threshold. When you’re dealing with banks, that’s a big chunk of change—approximately $7 billion worth of shares in RBC’s case. So this is clearly a provision only open to large institutional shareholders. In the U.S., where proxy access is much more widespread, the standard threshold is 3%. When TD and RBC unveiled their policies, they stated that current Bank Act rules prevent them for having a threshold below 5% and that they’d already submitted a request to the federal Finance Department for changes to the act that would permit them to drop it to 3%. Whether, or when, that might happen, is still unclear.
The other big question is whether or not proxy access will spread beyond the banks. Experts are divided. Other companies could follow the banks’ lead; or shareholders in other sectors could up the pressure. In either case, no company should be caught unaware by what comes next.
Shareholder activism has changed
Changes around things like proxy access play into the broader evolution of shareholder activism writ large, of course. The number of formal proxy battles for board control has fallen steadily in Canada since a high of 21 in 2008 to just seven in 2016 (and six in 2017 as of early November). The falling numbers can be explained by a rise in issuer preparedness and shareholder engagement, the adoption of advance proxy policies, the high costs to fight (win or lose) and more openness to negotiate and settle rather than fight it out publicly.
That final point, the increased willingness to hammer out an agreement behind closed doors means that the number of public proxy battles is just a hint of the activity around proxy season. “There are a lot more proxy fights happening that people do not even know of because it is settled before it becomes public,” says Dexter John, executive vice-president of proxy services firm D.F. King Canada in Toronto. “At the end of the day these are very expensive ventures and because of that you start negotiating.”
Such activity underscores the traditional advice companies receive in this area to be proactive with their shareholder engagement and communications. If you wait for shareholders to come at you unilaterally with their concerns when you publish your proxy, you’re in trouble before you know it.
Paying too much attention to the raw number of board battles with shareholders also means overlooking other trends, says David Salmon, president of proxy solicitation firm Laurel Hill Advisory Group in Vancouver. “M&A activism has been on the rise,” he says, by way of example. “There has been significant opposition to board-supported M&A transactions.” He chalks it up to the growth of shareholder democracy (the requirement of two-thirds approval for most transactions) and the ease of opposition by shareholders (simply putting out a statement containing their disapproval without stating a reason is good enough). “They realize that they have the ability to kill these transactions.” He identifies five instances of transactional opposition in 2017.
As well, there is “bump-atrage,” the situation in which the third-party bidder is forced to raise its offer because investor support is not sufficient. “Nobody wants a failed bid, it is embarrassing for all parties.”
M&A-related activism may not be directly linked to the regular proxy season, but disputes and conflict in one arena can easily spill over into the other.
Gender diversity a flash point
Elsewhere in this issue, we report on the apparently limited effectiveness of the current comply-or-explain regime in boosting gender diversity on boards and in the C-suite—and the likely coming call for stronger measures to speed things up. But it isn’t just regulators that are driving the issue of greater gender diversity on Canadian public boards. In the U.S., activism by large shareholders has resulted in several shareholder proposals aimed at greater gender diversity that have prompted some positive change, and that’s spilling over into Canada as well. Expect more in 2018.
Gender diversity will also garner more attention—and potentially more controversy and confusion—in the upcoming proxy season given the announcement of a new gender diversity policy by Institutional Shareholder Services (ISS), says Jennifer Longhurst, a partner with Davies Ward Phillips & Vineberg. “We already have corporate and securities regulators actively involved in this area and they to date have developed a comply-or-explain disclosure model that in many ways gives companies the flexibility to take steps that are appropriate for them and within a timeline that is appropriate,” Longhurst explains. “ISS is now proposing to weigh into an area that I frankly think has a lot of very significant implications. There is a lot of complexity baked into this issue [and] I’m not sure any sort of line in the sand that ISS is proposing to draw can adequately account for those complexities.” The ISS policy change could result in automatic withhold votes for issuers’ nominating committees that do not have a gender diversity policy or have no women directors. (The proposed policy would affect about 5% of S&P/TSX Composite Index issuers that do not have a policy or any women on their board, and about half of non-S&P/TSX Composite Index TSX-listed companies covered by ISS.)
As well, ISS intends to “qualitatively assess the robustness” of a gender diversity policy, notes Longhurst. “We have enough people weighing in on this space,” with proposed amendments to the Canada Business Corporations Act and Ontario Business Corporations Act as well as attention of the securities regulators.
Overboarding: evolving scrutiny
Speaking of ISS, it is also making changes to its overboarding policy—and although the move won’t take effect until 2019, the mere signal of its intent is enough to put directors on notice and shape shareholder views on the topic. First, ISS is removing any attendance test and will determine overboarded status solely on the basis of the number of public company boards on which a director serves. Importantly, however, it is also increasing the number of boards a director can serve on before being considered overboarded. The new limits (which have been tweaked to match its U.S. policy) are five boards for non-CEO directors and no more than two other public company boards for a sitting CEO of a public company. Seats on a parent or subsidiary public company will count in determining overboarded status.
Say-on-pay: get out your vote
Given the maturity of say-on-pay, now in its seventh year of adoption, it is not surprising that the number of new adopters fell to just 17 this past spring from 33 in 2016, according to a recent report from Kingsdale Advisors. Even so, the firm advises clients that haven’t yet adopted say-on-pay to do so as a best-in-class practice and as protection for compensation committee members who might otherwise be targeted by proxy advisers and shareholders. At the same, companies where say-on-pay votes are standard practice should pay attention to evolving shareholder expectations on both pay and the vote process itself.
“Average support [in say-on-pay votes] has been trending down since 2010,” says Joshua Duggan, vice-president of operations with Kingsdale. “There is no more rubber-stamping any more. The pension funds, institutions are getting, I don’t want to say confident, but they are more willing to come out, whether in unison with all the pension funds, or on their own, against these companies and say, ‘Enough is enough.’”
A mere passing grade should be seen as a warning to issuers. “Any vote below that 90% level…now looks to open the door for mandatory responses from companies and ongoing communication with shareholders throughout the year to ensure that their voices are being heard,” says Jonathan Foster, vice-president of executive compensation with Accompass.
And it almost goes without saying, there will continue to be issuers that garner attention for proposed executive compensation packages. “I definitely have a client that is going to push the bounds of shareholder acceptance,” says Global Governance Advisors’ Gryglewicz. “I have one doozy in the weeds that is going to be making headlines for sure.”
ESG on the rise
No longer a concern limited to Canada’s extraction companies given today’s interconnected world, the suite of topics under the umbrella of environmental, social and governance (ESG) concern has become has become a focus for institutional investors. ESG has emerged as “a mainstream function of good governance and investment practice, resulting in better, more informed investment decisions,” according to Laurel Hill. A 2016 study by RR Donnelley found that 65% of institutional participants said they “often or always consider environmental and social issues, and 95% often or always consider governance issues for all investments.” The same study found that Canadian investors want to know how ESG issues are related to the company’s strategy, risk management and operations. Bottom line: whatever attention you’re expecting from investors on ESG, there will probably be more.
Virtual meetings: a smart alternative?
If you’re an issuer that’s planning to adopt virtual or hybrid virtual-physical meetings to enhance shareholder participation and potentially reduce the costs of holding meetings, learn as much as you can from those that have paved the way before you.
“If you do a virtual-only meeting, you get for the first time shareholders across the world to actually attend, log in, listen to the board and management’s presentation and actually ask questions,” says Kingsdale’s Duggan.
The number of virtual AGMs in the U.S. has grown about 700% since 2009, he says, citing data from Broadridge. That technology is now available in Canada and should spur acceptance of the format. Cathy Conlon, vice-president of corporate issuer product and strategy at Broadridge, says that the “best of both worlds” hybrid option is rarely used by issuers. Instead, they opt for a physical or virtual-only format.
What kind of company is a good candidate for a virtual meeting? One with an AGM that does not feature proxy battles or contentious issues. “Most meetings that are fairly routine—and that is most annual meetings that are happening today—are probably a good contender,” says Conlon.
Cost savings for a virtual meeting over a physical meeting include the cost for the meeting space and security and eliminating the need to transport executives and directors to the meeting. Broadridge estimates that it will host 250 virtual meetings in 2017 in the U.S. and that number could grow by 30-40% in the coming year.