20 November 2023
Canada Governance Updates: Glass Lewis Benchmark Policy Changes for 2024
NOVEMBER 20, 2023
On November 16, 2023, proxy advisor Glass, Lewis & Co., LLC (“Glass Lewis”) released its 2024 Benchmark Policy Guidelines for several key markets including the Canadian market. These changes are effective for shareholder meetings taking place after January 1, 2024, unless otherwise stated.
In this Morrow Sodali client update, we outline the key changes and clarify amendments affecting Canadian issuers for the upcoming proxy season:
■ Board Accountability for Climate-Related Issues: Beginning in 2023, Glass Lewis included a new discussion on director accountability for climate-related issues. In particular, Glass Lewis believes that clear and comprehensive disclosure regarding climate risks, including how they are being mitigated and overseen, should be provided by those companies with GHG emissions that represent a financially material risk. Beginning in 2024, Glass Lewis will apply this policy to TSX 60 companies operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that companies’ GHG emissions represent a financially material risk. Glass Lewis will assess whether these companies have disclosed explicit and clearly defined board-level oversight responsibilities for climate-related issues. In instances where Glass Lewis finds disclosure to be absent or significantly lacking, Glass Lewis may recommend voting against the chair of the committee (or board) charged with oversight of climate related issues. If no committee has been charged with such oversight, Glass Lewis may recommend voting against the chair of the governance committee. Furthermore, Glass Lewis may extend the negative recommendation to additional members of the applicable committee in cases where the committee chair is not standing for re-election, or where other factors such as the company’s size, industry, and its overall governance profile warrant a critical response.
■ Human Capital Management: Glass Lewis has updated the guidelines to state that, in egregious cases where a board has failed to respond to legitimate shareholder concerns regarding a company’s human capital management practices, Glass Lewis may recommend some combination of against voting directed towards the chair of the committee tasked with E&S oversight or the chair of the governance committee or the chair of the board, as it deems appropriate.
■ Cyber Risk Oversight: Glass Lewis has updated its cyber risk oversight policy to specifically highlight that, in instances where a company has been materially impacted by a cyber-attack, Glass Lewis may recommend against appropriate directors should Glass Lewis find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or not clearly outlined to shareholders.
■ Interlocking Directorships: Glass Lewis has expanded on the interlocking directorships policy to specify that Glass Lewis considers both public and private companies. Further, Glass Lewis has specified that it evaluates other types of interlocking relationships on a case-by-case basis and reviews multiple board interlocks among non-insiders for evidence of a pattern of poor oversight.
■ Audit Financial Expert Designation: Glass Lewis has revised its criteria on designating a director as an “audit financial expert”. Companies should define a director’s financial expertise with one or more of the following confirmations: (i) a chartered accountant; (ii) a certified public accountant; (iii) a former or current CFO of a public company or corporate controller of similar experience; (iv) a current or former partner of an audit company; or (v) having similar demonstrably meaningful audit experience. By focusing on audit/financial accreditation, Glass Lewis has tightened perceived loopholes that allowed companies to claim individuals had audit financial expertise even though they lacked formal education and/or hands on responsibility for preparing and signing off on financial statements.
■ Clawback Provisions: Glass Lewis has updated the policy on the utility of clawback provisions to reflect that the negative impacts of excessive risk-taking do not always result in financial restatements but may nonetheless prove harmful to shareholder value. Glass Lewis believes effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure regardless of whether such behavior has already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive was terminated with or without cause. In these circumstances, the company should disclose its rationale should it refrain from recouping compensation as well as disclose alternative measures such as the exercise of negative discretion on future payments.
■ Executive Ownership Guidelines: Glass Lewis has now formally outlined the approach to executive ownership guidelines. Glass Lewis believes that companies should provide clear disclosure in the Compensation Discussion and Analysis section of the proxy statement of their executive share ownership requirements and how various outstanding equity awards are treated when determining an executive’s level of ownership. Importantly, unearned, unvested and unexercised awards don’t meet Glass Lewis’ ownership test and thus the company must provide a cogent rationale on why such awards should be included when assessing executive ownership.
■ Proposals for Equity Awards for Shareholders: Regarding proposals seeking approval for individual equity awards, Glass Lewis has expanded the section on frontloaded awards to include discussion on provisions requiring the non-vote or vote of abstention from a shareholder if the shareholder is also the recipient of the proposed grant. Such provisions help to address potential conflict of interest issues and provide disinterested shareholders with more equal say over the proposal. The inclusion of such provisions will be viewed positively during Glass Lewis’ holistic analysis, especially when a vote from the recipient of the proposed grant would materially influence the passage of the proposal.
■ Nominating and/or Corporate Governance Committees: To clearly delineate the expectations for each committee in cases where they are not combined, Glass Lewis has separated the previous “Nominating and Corporate Governance Committee Performance” section into individual sections for “Nominating Committee Performance” and “Corporate Governance Committee Performance”.
■ Governance Following an IPO, Spin-Off or Direct Listing: Glass Lewis has expanded the section on how to examine governance following an IPO, spin-off or direct listing to note that, while Glass Lewis generally refrains from issuing voting recommendations on the basis of corporate governance best practices in such cases, where Glass Lewis determines that the board has approved overly restrictive governing documents, Glass Lewis may recommend voting against members of the governance committee (or the board chair, in the absence of this committee). Moreover, Glass Lewis has clarified in the section that in the case of a board that adopts a multi-class share structure in connection with an IPO, spin-off, or direct listing within the past year, Glass Lewis will generally recommend against the chair of the governance committee or most senior representative of the major shareholder up for election if the board: (i) did not also commit to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of the multi-class structure (generally seven years or less).
■ Non-GAAP to GAAP Reconciliation: Glass Lewis has expanded the discussion of the approach to the use of non-GAAP measures in incentive programs to emphasize the need for thorough and transparent disclosure in the proxy statement that will assist shareholders in reconciling the difference between non-GAAP results used for incentive payout determinations and reported GAAP results. Particularly in situations where significant adjustments were applied, the lack of such disclosure will impact Glass Lewis’ assessment of the quality of executive pay disclosure and may be a factor in the recommendation for the say-on-pay.
The Morrow Sodali Canadian team will continue to monitor market developments and provide necessary updates in a timely manner.
Contact our experts to find out what influence Glass Lewis has on your shareholder base and what these changes mean for your organization.
Issuers and clients who wish to discuss the above-mentioned changes can also contact our expert team directly to explore ways in which we can help you prepare for your next AGM.
On November 16, 2023, proxy advisor Glass, Lewis & Co., LLC (“Glass Lewis”) released its 2024 Benchmark Policy Guidelines for several key markets including the Canadian market. These changes are effective for shareholder meetings taking place after January 1, 2024, unless otherwise stated.
In this Morrow Sodali client update, we outline the key changes and clarify amendments affecting Canadian issuers for the upcoming proxy season:
■ Board Accountability for Climate-Related Issues: Beginning in 2023, Glass Lewis included a new discussion on director accountability for climate-related issues. In particular, Glass Lewis believes that clear and comprehensive disclosure regarding climate risks, including how they are being mitigated and overseen, should be provided by those companies with GHG emissions that represent a financially material risk. Beginning in 2024, Glass Lewis will apply this policy to TSX 60 companies operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that companies’ GHG emissions represent a financially material risk. Glass Lewis will assess whether these companies have disclosed explicit and clearly defined board-level oversight responsibilities for climate-related issues. In instances where Glass Lewis finds disclosure to be absent or significantly lacking, Glass Lewis may recommend voting against the chair of the committee (or board) charged with oversight of climate related issues. If no committee has been charged with such oversight, Glass Lewis may recommend voting against the chair of the governance committee. Furthermore, Glass Lewis may extend the negative recommendation to additional members of the applicable committee in cases where the committee chair is not standing for re-election, or where other factors such as the company’s size, industry, and its overall governance profile warrant a critical response.
■ Human Capital Management: Glass Lewis has updated the guidelines to state that, in egregious cases where a board has failed to respond to legitimate shareholder concerns regarding a company’s human capital management practices, Glass Lewis may recommend some combination of against voting directed towards the chair of the committee tasked with E&S oversight or the chair of the governance committee or the chair of the board, as it deems appropriate.
■ Cyber Risk Oversight: Glass Lewis has updated its cyber risk oversight policy to specifically highlight that, in instances where a company has been materially impacted by a cyber-attack, Glass Lewis may recommend against appropriate directors should Glass Lewis find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or not clearly outlined to shareholders.
■ Interlocking Directorships: Glass Lewis has expanded on the interlocking directorships policy to specify that Glass Lewis considers both public and private companies. Further, Glass Lewis has specified that it evaluates other types of interlocking relationships on a case-by-case basis and reviews multiple board interlocks among non-insiders for evidence of a pattern of poor oversight.
■ Audit Financial Expert Designation: Glass Lewis has revised its criteria on designating a director as an “audit financial expert”. Companies should define a director’s financial expertise with one or more of the following confirmations: (i) a chartered accountant; (ii) a certified public accountant; (iii) a former or current CFO of a public company or corporate controller of similar experience; (iv) a current or former partner of an audit company; or (v) having similar demonstrably meaningful audit experience. By focusing on audit/financial accreditation, Glass Lewis has tightened perceived loopholes that allowed companies to claim individuals had audit financial expertise even though they lacked formal education and/or hands on responsibility for preparing and signing off on financial statements.
■ Clawback Provisions: Glass Lewis has updated the policy on the utility of clawback provisions to reflect that the negative impacts of excessive risk-taking do not always result in financial restatements but may nonetheless prove harmful to shareholder value. Glass Lewis believes effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure regardless of whether such behavior has already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive was terminated with or without cause. In these circumstances, the company should disclose its rationale should it refrain from recouping compensation as well as disclose alternative measures such as the exercise of negative discretion on future payments.
■ Executive Ownership Guidelines: Glass Lewis has now formally outlined the approach to executive ownership guidelines. Glass Lewis believes that companies should provide clear disclosure in the Compensation Discussion and Analysis section of the proxy statement of their executive share ownership requirements and how various outstanding equity awards are treated when determining an executive’s level of ownership. Importantly, unearned, unvested and unexercised awards don’t meet Glass Lewis’ ownership test and thus the company must provide a cogent rationale on why such awards should be included when assessing executive ownership.
■ Proposals for Equity Awards for Shareholders: Regarding proposals seeking approval for individual equity awards, Glass Lewis has expanded the section on frontloaded awards to include discussion on provisions requiring the non-vote or vote of abstention from a shareholder if the shareholder is also the recipient of the proposed grant. Such provisions help to address potential conflict of interest issues and provide disinterested shareholders with more equal say over the proposal. The inclusion of such provisions will be viewed positively during Glass Lewis’ holistic analysis, especially when a vote from the recipient of the proposed grant would materially influence the passage of the proposal.
■ Nominating and/or Corporate Governance Committees: To clearly delineate the expectations for each committee in cases where they are not combined, Glass Lewis has separated the previous “Nominating and Corporate Governance Committee Performance” section into individual sections for “Nominating Committee Performance” and “Corporate Governance Committee Performance”.
■ Governance Following an IPO, Spin-Off or Direct Listing: Glass Lewis has expanded the section on how to examine governance following an IPO, spin-off or direct listing to note that, while Glass Lewis generally refrains from issuing voting recommendations on the basis of corporate governance best practices in such cases, where Glass Lewis determines that the board has approved overly restrictive governing documents, Glass Lewis may recommend voting against members of the governance committee (or the board chair, in the absence of this committee). Moreover, Glass Lewis has clarified in the section that in the case of a board that adopts a multi-class share structure in connection with an IPO, spin-off, or direct listing within the past year, Glass Lewis will generally recommend against the chair of the governance committee or most senior representative of the major shareholder up for election if the board: (i) did not also commit to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of the multi-class structure (generally seven years or less).
■ Non-GAAP to GAAP Reconciliation: Glass Lewis has expanded the discussion of the approach to the use of non-GAAP measures in incentive programs to emphasize the need for thorough and transparent disclosure in the proxy statement that will assist shareholders in reconciling the difference between non-GAAP results used for incentive payout determinations and reported GAAP results. Particularly in situations where significant adjustments were applied, the lack of such disclosure will impact Glass Lewis’ assessment of the quality of executive pay disclosure and may be a factor in the recommendation for the say-on-pay.
The Morrow Sodali Canadian team will continue to monitor market developments and provide necessary updates in a timely manner.
Contact our experts to find out what influence Glass Lewis has on your shareholder base and what these changes mean for your organization.
Issuers and clients who wish to discuss the above-mentioned changes can also contact our expert team directly to explore ways in which we can help you prepare for your next AGM.