Each of Institutional Shareholder Services (ISS) and Glass Lewis recently published their insights on the impact that COVID-19 will have on corporate governance and provided guidance on what effect the pandemic may have on the application of some of their voting policies for the upcoming 2020 proxy season. Many of the global policy statements in these publications have relevance and implications for Canadian issuers, which we have summarized below.
Glass Lewis’ standard policy for Canadian issuers is to recommend voting against governance committee members where the board is planning to hold a “virtual-only” shareholder meeting and the issuer does not provide certain disclosure regarding procedures and logistics and does not assure shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. In its COVID-19 update, Glass Lewis has indicated that, for companies opting to hold a virtual-only shareholder meeting during the 2020 proxy season (i.e. March 1, 2020 through June 30, 2020), it will ease the application of its standard policy, provided that the company discloses, at a minimum, its rationale for holding a virtual-only meeting, including citing COVID-19.
ISS does not have a policy to recommend votes against boards of issuers that hold virtual-only meetings and its COVID-19 update confirms that there will be no change to that approach for the 2020 proxy season.
Anticipating that the recent drops in markets will incite boards to make changes to performance metrics, goals or targets used in short-term compensation plans, ISS encourages issuers to provide contemporaneous disclosure to shareholders of the rationale for making such changes, even if they will only be analyzed and addressed by shareholders at the 2021 annual meetings. Changes to midstream or in-flight awards under long-term compensation plans, which are generally not supported by ISS, will be examined on a case-by-case basis to determine if directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for changes. On option repricing, ISS indicated that even in the context of COVID-19 it will maintain its standard policy to generally vote against proposals to reprice outstanding options.
For its part, Glass Lewis foresees in the current context a marked increase in shareholder concerns on repricing, dilution, burn rates, hurdle adjustments, changes to vesting periods, caps and cuts on incentives, and the quality of disclosure concerning the limits and exercise of board discretion.
In its COVID-19 update, ISS confirmed that it will bring appropriate discretion and flexibility in the application of its guidelines related to director independence, potential overboarding, board diversity and other attributes, including in situations where boards need to fill vacancies due to the disability or incapacity of a director or the need to urgently add critical expertise in the context of COVID-19.
Private placement issuances
ISS’ Canadian standard voting policy provides for case-by-case analysis of private placement issuances considering a number of factors. In its COVID-19 update, ISS notes that its standard policy is to recommend voting for a private placement issuance if it is expected that the company will file for bankruptcy if the transaction is not approved or the company’s auditor or management has indicated that the company has going concern issues, and that this will continue to be applied in the context of the pandemic.
Glass Lewis, meanwhile, anticipated the need for some issuers to have flexibility in their financing strategies and warned investors against dogmatic application of pre-existing voting standards which could hinder the ability of a company to survive the current crisis.
Importance of disclosure and explanation
In their respective COVID updates, both ISS and Glass Lewis point to the flexibility of their policies and ability to exercise discretion in the context of COVID-19. Effective disclosure should help issuers to benefit from this flexibility where required. Glass Lewis notes that disclosure and rationales provided by issuers will be particularly critical to the exercise of its discretion in making judgements about whether changes made as a result of the crisis are justified and address material shareholder concerns.
By Fraser Bourne, Xin Gao and Hadrien Montagne
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