ISS Proposes Amendments to its Proxy Voting Guidelines 

publication 

October 2013

Securities Bulletin

Institutional Shareholder Services Inc. ("ISS") has published for comment proposed updates to its proxy voting guidelines. The proposed guidelines are to take effect for shareholder meetings held on or after February 1, 2014, subject to any changes that arise from comments received from financial market participants.

The proposed changes that affect Canadian proxy voting policies concern three areas: director over-boarding; problematic audit-related issues; and quantitative pay for performance.

Director Over-Boarding for TSX Listed Issuers

Directors often sit on more than one board. While a director may gain valuable experience sitting on a number of boards, ISS has stated that it is important that a director be able to devote enough time and attention to the boards he or she sits on. Where a director of a public company is also its CEO, ISS considers the director to be "over-boarded" if he or she sits on more than two additional boards. A director who is not the CEO of a public company is considered over-boarded if the director sits on more than six public company boards.

The current ISS board attendance policy states that if a company has a majority voting policy, ISS will issue a withhold recommendation for a director if that director has attended less than 75% of the board and committee meetings within the past year (without good reason) and has a pattern of low meeting attendance over the prior years.

If the proposed policy is implemented, ISS will recommend to withhold votes on a director that is over-boarded (as described above) AND has attended less than 75% of meetings in the last year without good reason.

ISS data shows that in the first half of 2013 approximately 25% of directors in Canada are over-boarded. While over-boarding itself may not be a problem, in ISS's view over-boarding combined with a pattern of low meeting attendance may indicate that a director's time and attention is stretched too thin for the director to effectively serve on those boards.

Problematic Audit- Related Issues

Where a TSX reporting issuer discloses a material weakness in its internal controls over accounting process and financial reporting, such weaknesses are expected to be remedied in a reasonable period of time. Some issuers still report having weaknesses over more than two annual meetings. ISS has raised concern about the effectiveness of audit committee oversight of internal controls when such a material weakness continues to be reported for an extended period of time.

To address this issue, ISS is considering adopting a "case-by-case" policy when recommending a vote on members of an audit committee and potentially the full board "if adverse accounting practices are identified that rise to a level of serious concern, such as: accounting fraud; misapplication of applicable accounting standards; or persistent material weaknesses identified in the internal control process." Seriousness and duration of the internal control issues and the corrective actions of the issuer to addresses such issues are taken into consideration when ISS is recommending whether shareholders should withhold votes for an audit committee member. If the breaches are so egregious and persistent, ISS will recommend that shareholders withhold votes for the entire board.

Pay for Performance Quantitative Screen

ISS employs certain quantitative "pay-for-performance" measures to determine if a CEO's pay is aligned with the issuer's total shareholder return ("TSR"). ISS is proposing to simplify the methodology for calculating the Relative Degree of Alignment ("RDA") pay for performance screen.

Presently the ISS calculates the RDA as the difference between the issuer's TSR rank and the CEO's total pay rank within a peer group, measured over one-year and three-year weighted average periods. ISS proposes to now calculate the RDA over a three-year period. ISS has stated that the three-year measure smoothes out volatility issues and provides a more accurate view on long-term pay and performance alignment. ISS has noted that issuers who have significant differences in their one-year and three-year pay/performance results will have their RDA number materially affected as a result of this change in policy.

The comment period on the proposed changes to ISS policy is open until November 4, 2013.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013