Preparing for the 2020 Proxy Season – Noteworthy Developments in Canadian Public Issuer Governance and Disclosure

In preparation for the upcoming proxy season, we have once again rounded up the key developments in corporate governance and disclosure requirements impacting Canadian public issuers. The following are some of the noteworthy developments that issuers should familiarize themselves with, which we discuss in more detail below:

  1. Proxy Advisory Firm Guidance (including recent changes to voting guidelines on auditor ratification, meeting attendance, overboarded directors, board skills, majority-owned companies and CEO/CFOs on the audit/compensation committees);
  2. Say on Pay;
  3. Recovery of Benefits of Directors and Senior Management;
  4. Diversity;
  5. Advancement on the Regulators’ Stated Priority of Reducing the Regulatory Burden for Issuers;
  6. Environmental, Social and Governance (“ESG”) and Climate Change;
  7. Cyber Security;
  8. New Audit Report Standards;
  9. Directors’ Duties;
  10. Regulation of Cannabis Issuers; and
  11. Majority Voting.


  1. Proxy Advisory Firm Guidance

Each year the proxy advisory firms, such as Institutional Shareholder Services (“ISS”) and Glass Lewis & Co., LLC (“Glass Lewis”) release proxy voting guidelines. These guidelines are not binding; however, they can influence how institutional shareholders vote. Issuers should familiarize themselves with the current voting guidelines, which are linked below:

We discuss some of the key updates to these guidelines in this section as well as under the topic headings below.

Auditor Ratification

Both ISS and Glass Lewis have updated their voting guidelines on auditor ratification. Glass Lewis may recommend voting against all audit committee members if the company’s audit fees are less than 50% of total fees paid to their auditors for two consecutive years. Consistent with prior years, ISS will recommend voting for proposals to ratify the auditors unless the non-audit (“other”) fees paid to the auditor are greater than the sum of (i) audit fees, (ii) audit-related fees, and (iii) tax compliance/preparation fees. The prior ISS policy explicitly limited what was included as “other fees”, whereas under the 2020 policy, the language has been broadened and can include expenses beyond those enumerated in the voting guidelines.

Meeting Attendance

ISS and Glass Lewis have introduced changes to requirements for director meeting attendance disclosure. As part of its assessment of the governance committee, Glass Lewis will generally recommend voting against the chair of the governance committee where (i) board and committee meeting attendance is not disclosed (starting in 2020) and (ii) if the number of audit committee meetings held in the most recent year is not disclosed (starting in 2021). Also beginning in 2021, Glass Lewis will recommend voting against the chair of the audit committee if the audit committee does not meet at least four times per year. 

ISS will recommend a withhold vote for individual directors who do not meet certain attendance thresholds (75% of meetings for companies who do not have a majority voting policy or 75% of meetings AND a pattern of low attendance for companies with a majority voting policy). In its new policy guidelines, ISS has created an exception from the director attendance requirements for directors who only served for part of the fiscal year, newly public companies or companies newly graduated to the TSX.

Overboarded Directors

ISS clarified its overboarding policy in its most recent guidance. ISS will generally not count a board for the purposes of the voting guidelines when it is publicly disclosed that the director will be stepping off that board at its next annual meeting.

Board Skills

Glass Lewis has noted in previous guidance that it will include board matrices as part of its overall analysis of director elections at S&P/TSX 60 Index Companies. In its 2020 guidelines, Glass Lewis has clarified that companies should provide meaningful disclosure in line with developing best practice standards.

Majority-Owned Companies

ISS has clarified in its most recent voting guidelines that its majority owned companies policy only applies to non-management director nominees. 

CEO/CFO on Audit/Compensation Committee

ISS will recommend shareholders vote withhold for directors who are the CEO or CFO of the company or its affiliates and who serve on the company’s audit or compensation committees. ISS also deems directors who were formerly either the company’s CEO within the last five years, or the CFO in the last three years, to be non-independent and will recommend shareholders vote withhold against these former CEOs and CFOs. The rationale for these changes was to align them with the ISS definition of independence.

  1. Say on Pay

Under the current corporate and securities laws in Canada, a Say on Pay resolution is not required, however many Canadian issuers have voluntarily adopted one. In April 2019, the Shareholder Association for Research and Education (SHARE) published an article noting that more than 71% of companies on the TSX Composite Index and 52 of the TSX60 Index Companies have adopted the practice.

On June 21, 2019, the Federal government amended the Canada Business Corporations Act (“CBCA”) through Bill C-97 to require public companies incorporated under the CBCA to have a Say on Pay vote at each annual meeting. These amendments are not yet in force. See further discussion on these amendments in our previous post

Issuers with Say on Pay practices should familiarize themselves with the proxy advisory firm guidance in this area. In terms of new developments in 2020, Glass Lewis has clarified its approach to excessive compensation practices in employment agreements. Glass Lewis generally disfavours contractual agreements that are excessively restrictive in favour of the executive and expects issuers to address any contractual arrangements providing for problematic pay practices if employers are materially amending employment agreements. Problematic pay practices include excessive severance payments, single-trigger change in control payments and multi-year guaranteed awards. Problematic pay practices may cause Glass Lewis to recommend against a Say on Pay vote. Glass Lewis has also noted in its current guidelines that it has expanded what it considers to be an appropriate response following low shareholder support for a Say on Pay proposal. Glass Lewis expects a robust disclosure of engagement activities and specific changes made in response to shareholder feedback. If such disclosure is not provided, Glass Lewis may recommend against the upcoming Say on Pay proposal.

In December 2019, the Ontario Teachers’ Pension Plan published its five-year review of discretionary compensation and noted that “discretionary awards fall outside the regular compensation program and may not be captured in a say-on-pay analysis.” The review found that not only are the amounts of discretionary compensation substantial, but aproximately 80% of the discretionary compensation is not based on performance, which is contrary to the pay-for-performance objective.

  1. Recovery of Benefits of Directors and Senior Management

The adoption of clawback policies is becoming increasingly common in Canada in recent years, and disclosure regarding clawback policies will soon be a requirement for CBCA corporations. In addition to the Say on Pay requirement, Bill C-97 also requires “prescribed corporations” (to be defined by regulation, likely to include venture issuers) to disclose information regarding the recovery of incentive benefits or other benefits paid to directors and employees of the corporation who are members of senior management. Specific information required to be disclosed will be prescribed by regulation which has not yet been published. Currently, public companies other than venture issuers are required to disclose “policies and decisions about the adjustment or recovery of awards, earnings, payments, or payables if the performance goal or similar condition on which they are based are restated or adjusted to reduce the award, earning, payment, or payable” in their annual proxy circular under Form 51-102F6 Statement of Executive Compensation.

In 2018, Glass Lewis updated its clawback policy statement to indicate its preference for more expansive policies which “allow for the recoupment of both short and long-term incentive awards in cases of financial restatement or misconduct that results in reputational or other types of harm to the company.”

  1. Diversity

Diversity continues to be an area of focus for shareholders, institutional investors and regulators. Public companies governed by the CBCA (including venture issuers, as well as companies listed on a foreign stock exchange) are required to provide additional diversity disclosure in the materials for any annual meeting of shareholders to be held on or after January 1, 2020. The amendments to the CBCA will broaden the current “comply-or- explain” regime under National Instrument 58-101 Disclosure of Corporate Governance Practices to include disclosure related to women, aboriginal peoples, persons with disabilities and members of visible minorities (referred to as the “designated groups”). The information required to be disclosed under the CBCA is the same as currently provided under the securities regulations for gender diversity, such information includes:

  • whether the corporation has adopted a written policy relating to the identification and nomination of members of designated groups for election as directors and if it has not adopted a written policy, the reasons why it has not adopted the policy;
  • if such a written policy has been adopted, provide a short summary of the policy’s objectives and key provisions, a description of the measures taken to ensure that the policy is effectively implemented, a description of the annual and cumulative progress by the corporation in achieving the objectives of the policy, and whether or not the board of directors or its nominating committee measures the effectiveness of the policy and, if so, a description of how it is measured;
  • whether the level of representation of designated groups has been considered in identifying and nominating candidates for the board and senior management, how that level is considered or the reasons why it is not considered;
  • whether the corporation has adopted a target number or percentage or a range of target numbers or percentages for the representation of each designated group on the board and in management positions by a specified date, what those targets are or why targets have not been adopted for each group for which a target has not been adopted; and
  • for each designated group, the number and proportion, expressed as a percentage, of members of each group who hold positions on the board and the number and proportion, expressed as a percentage, of members of each group who are members of senior management, including all its major subsidiaries.

Neither ISS nor Glass Lewis have adopted additional diversity requirements in response to the CBCA amendments. Issuers are reminded that both ISS and Glass Lewis have guidance on gender diversity disclosure and policies. For a more detailed discussion on their guidance, see our previous post.

On October 2, 2019 the CSA issued CSA Multilateral Staff Notice 58-311 Report on Fifth Staff Review of Disclosure Regarding Women on Boards and in Executive Officer Positions. Some of the key trends noted in this review include:

  • Since 2015, the total number of board seats occupied by women has increased from 11% to 17%;
  • The number of boards with at least one woman on their board has seen the most dramatic increase, with 73% of issuers having at least one woman (up from 49% in 2015); and
  • Half of issuers adopted a policy addressing the representation of women on their board of directors, which the CSA noted was a significant increase from 2015.

Another important development to note is that the first shareholder proposal in Canada regarding gender diversity was passed in 2019. A proposal filed by the British Columbia Teachers Federation received over 60% of shareholder votes at Waste Connections Inc.’s annual meeting held on May 17, 2019. The success of this proposal demonstrates the continued importance of diversity for certain shareholders and investors.

  1. Advancement on the Regulators’ Stated Priority of Reducing the Regulatory Burden for Issuers

Both the OSC and CSA have identified reducing the regulatory burden for reporting issuers as a priority. The OSC has been actively taking steps to streamline regulatory requirements, including the creation of a Regulatory Burden Task Force in November 2018 and by holding three roundtable discussions with stakeholders in 2019. The following are some recent developments:

  • At-the-market (“ATM”) shelf distributions: On May 9, 2019 the CSA published proposed amendments to National Instrument 44-102 Shelf Distributions. Issuers wanting to put in place an ATM program typically must seek exemptive relief from certain prospectus requirements. The proposed amendments will codify existing exemptions such that issuers would no longer need to seek exemptive relief for ATM distributions. The comment period closed on August 7, 2019 and no further update has been provided to date.
  • Business Acquisition Report (“BAR”) criteria: On September 5, 2019, the CSA published proposed amendments to the BAR requirements, which aim to narrow the circumstances under which a BAR must be filed. Under the current rules, a reporting issuer that is not a venture issuer must file a BAR after a significant acquisition if one of the three significance tests set out in National Instrument 51-102 Continuous Disclosure Obligations exceeds 20%. The proposed amendments introduce a double trigger requirement where two of the three existing significance tests must be met and increases the significance threshold from 20% to 30%. The comment period closed on December 4, 2019 and issuers should be on the watch for updates.
  • Investment Funds: On September 12, 2019, the CSA published proposed rule amendments related to eight initiatives to reduce the regulatory burden for investment funds. These initiatives are aimed at eliminating duplicative requirements, streamlining regulatory processes, codifying frequently-granted exemptions, and eliminating the need for certain regulatory approvals. The comment period closed on December 11, 2019, so issuers should be on the watch for updates.
  • Electronic Delivery of Documents: On January 9, 2020 the CSA published CSA Consultation Paper 51-405 Consideration of an Access Equals Delivery Model for Non-Investment Fund Reporting Issuers. In this consultation paper, the CSA considers whether electronic access should be expanded to reduce the use of paper delivery requirements. The model being considered would allow delivery of a document to be effected by the issuer alerting investors (via news release) that the document is publicly available on the System for Electronic Document Analysis and Retrieval (SEDAR) and the issuer's website. The CSA is considering prioritizing this initiative for prospectuses and certain continuous disclosure documents. The CSA is seeking comments until March 9, 2020 on the consultation paper.

See our previous post on the OSC and CSA’s priorities for the current year and more details on other areas currently under review for potential regulatory changes.

Further, on November 19, 2019 the OSC released a report on the various initiatives it is currently undertaking, in coordination with the Ontario Ministry of Finance, to reduce the regulatory burden for issuers and make Ontario’s capital markets more competitive. Based on feedback gathered by the Regulatory Burden Task Force, the report outlines 107 specific decisions and recommendations that the OSC is considering to alleviate the regulatory burden for individuals and businesses.

  1. ESG and Climate Change

Disclosure of ESG and climate change continues to be a hot topic and area of focus for regulators. On August 1, 2019, the CSA published CSA Staff Notice 51-358 Reporting of Climate Change-related Risks with the purpose of assisting companies with identifying and improving their disclosure of material risks posed by climate change. The notice does not create any new requirements, but rather clarifies and expands on previous guidance. The United States has also seen an increase in the number of shareholder proposals related to social and environmental issues. As of March 2019, in an article published by the Harvard Law School Forum on Corporate Governance and Financial Regulation, shareholder proposals in the United States related to ESG and climate change were three of the top ten shareholder resolution types filed in 2019.

  1. Cyber Security

Cyber security continues to be an area of concern for companies and their boards of directors. In a recent report published by Ernst & Young LLP, directors of many public companies expressed their concern with cyber threats and noted the important role that a board has in setting the tone at the top of an organization that cyber security is a critical issue through its governance and focus. It has also been suggested by various outlets that the board of directors should contain cyber skills and prioritize cyber security.[1] In the United States, the audit committee’s role in the oversight of cyber risk has been growing in interest and increasing in disclosure. Deloitte published in a recent report that more than 50 percent of the S&P 100 companies disclosed the role of the audit committee in overseeing cyber risk, which was a double digit increase from 43% in 2018 to 58% in 2019. In terms of Canadian legal developments, as of March 31, 2019 all regulated financial institutions must report any cyber security incidents to the Office of the Superintendent of Financial Institutions. Given the increased focus on this area, issuers should analyze their current board compositions and governance to ensure an appropriate level of cyber security governance.

  1. Auditor Report

For periods on or after December 15, 2020 new auditing standards will require additional disclosure in audit reports for public companies of “key audit matters” (“KAMs”). KAMs are matters that, in the auditor’s professional judgment, were the most significant in the audit of a company’s financial statements and are meant to be company-specific. The KAMs will be disclosed in a separate section of the audit report and the auditor is required to describe the issue. Issuers should be cognizant of this additional qualitative information that will now be included in the audit report and how it aligns with their other public disclosure (i.e. the MD&A). For further information, the Chartered Professional Accountants of Canada have published a guide on these new requirements.

  1. Directors’ Duties

In 2019, amendments were made to the CBCA that expand directors’ duties by setting forth factors that directors may consider when acting in the “best interests of the corporation”. These amendments codify the law from BCE v. 1976 Debentureholders. Under the new amendments, directors may consider, without limitation, the interests of various enumerated stakeholders (which would include not only shareholders, but also employees, retirees and pensioners, creditors, consumers, and governments), the environment, and the long-term interests of the corporation when discharging their fiduciary duty. See our previous post for additional information on these amendments. 

  1. Regulation of Cannabis Issuers

The cannabis industry continues to be an area of focus for regulators. On November 12, 2019, the CSA released additional guidance to help cannabis issuers strengthen their corporate governance disclosure (CSA Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry). This notice focusses on disclosure of financial interests in M&A transactions and potential conflicts of interest as the regulators have noted that many cannabis issuers and their directors and officers have participated in the financing of other cannabis issuers. The CSA also notes that this guidance is applicable to other issuers operating in emerging growth industries.

  1. Majority Voting

In an earlier post, we discussed the CBCA amendments under Bill C-25, which includes amendments providing for a majority voting requirement for directors of public companies. Under these amendments, director nominees can only be elected in uncontested elections if the number of votes cast in their favour represents a majority of votes cast for or against them. Shareholders will be allowed to vote “against” the election of a direction instead of simply “withhold” a vote. This requirement differs from the existing TSX requirement since there is no need for directors to resign if they did not receive a majority vote at an election. If a director nominee does not receive the required majority vote, they may continue in office until the earlier of (i) 90 days, and (ii) the date on which their successor is appointed or elected. Bill C-25 received Royal Assent on May 1, 2018, however these amendments have not yet come into effect.



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