Following Best Practices in Your Proxy Circular

Once upon a time, the creation of a Management Information Circular (MIC) was left in the hands of a company’s legal department. No offence to the valued lawyer-members of CIRI, but the outcome sometimes looked and mostly read like a legal brief – and not the good kind.

Times have changed as investors and their proxy advisors are now demanding more plain language disclosures and public companies recognize that a poorly constructed MIC can contribute to lower levels of shareholder support during proxy votes.

In this issue of IR focus, timed to coincide with the finalization of MICs for those with a December 31 year end, we examine some best practice formats and approaches to this all-important disclosure document.

The Case for Better Proxies

Proxies do matter. As the Canadian Coalition for Good Governance (CCGG) stated in its 2019 Best Practices for Proxy Circular Disclosure: “The proxy circular is the primary means for a board to communicate its corporate governance practices to the company’s shareholders.” The words “primary means” are notable. As most shareholders do not attend annual meetings, the MIC must speak loudly and clearly for a company’s Board. 

Proxies now serve another role: gaining proxy advisory support for public companies to stage ‘virtual AGMs.’ As Glass Lewis said in its 2020 Proxy Paper™ Guidelines: “When analyzing the governance profile of companies that choose to hold virtual-only meetings, we look for robust disclosure in a company’s proxy statement which assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.” Glass Lewis goes on to offer several examples of disclosure it wants to see, including an explanation of how shareholders can ask questions during the virtual meeting, rules on types of questions that are allowed and procedures for publicizing Q&As after annual meetings.

What Makes a Better Proxy?

Annually, the CCGG’s Governance Gavel awards recognize excellence in proxy disclosure through categories such as Board governance practices and executive compensation discussions. Not every Canadian public company is considered; only those with which CCGG has had a ‘Board engagement’, or that were nominated by a CCGG member, are eligible. That’s still a large universe.

A close read of the MICs that won Governance Gavel awards in 2019, 2018 and 2017 shows one striking similarity: plain language disclosure.

The meaning of plain language disclosure is, ironically, not always clear. Further to guidance provided by the Canadian Securities Administrators in the Companion Policy to National Instrument 51-102, issuers should apply plain language principles when preparing disclosure in, among other documents, MICs, including using: short sentences; everyday language; the active voice; personal pronouns; concrete terms; and charts, tables and examples where this makes disclosure easier to understand.

Accordingly, plain language is itself a complicated concept, requiring that the complex information imparted in the MIC be easy to find, well organized, logically presented, accurate and complete. Complexity in areas such as management compensation programs is common and demands that the MIC’s writers understand the subject to the point that they can make its meaning clear to readers who are not well versed in the topic. When readers have clarity, they make better and more informed voting decisions, particularly on so called “say-on-pay” votes.

The MIC writers to whom IR focus spoke typically set a high standard for their prose. They want readers to grasp the content quickly and easily. As one interviewee stated: “If it takes me three times to read a paragraph to understand what it means, that’s two times too often. We know if shareholders don’t appreciate what we’re saying, they could very well give our proposals a thumbs down.”

Plain language MIC writers make great efforts to provide clarity and stress the need to include context concerning disclosures. Often the easiest way to do this is to incorporate a letter from a Board Chair and/or letters from Committee Chairs. An example of context infused disclosure is a letter in the 2019 Emera Incorporated MIC from the Management Resources and Compensation Committee. This letter improves reader understanding by explaining the Board’s compensation principles and outlining compensation decisions taken during the year. Readers are reminded of the outcome of the most recent shareholder advisory vote on say-on-pay and told that the company directly links a significant portion of executive compensation “to the achievement of objectives that measure whether shareholders are experiencing strong value for their investment.” These principles are likely shared by most companies, if not all, but how many take the time to explain them in simple terms?

Fortis Inc. also included a shareholders’ message in its 2019 MIC describing financial performance, shareholder value creation history, key corporate objectives, pay-for-performance scheme, five-year capital investment plan, executive and Board-level personnel changes, sustainability management highlights and colour on shareholder engagement, including supporting data.

One easily included context building addition is a chart showing how shareholders voted in past years. Although this information is available via news release, including it in the MIC in the following year is recommended.

Forming the MIC Team and Timeline

Many companies use a writing team that includes corporate secretaries, internal and external legal counsel and members of the IR department. This fusion ensures that the MIC meets all disclosure requirements and incorporates good marketing and communications principles.

MIC writers we spoke to recommended starting the process four to five months before the MIC is presented for Board approval. This allows time to: study governance and related disclosure developments for adoption; benchmark last year’s MIC against proxy circulars produced by peers and award winners; consider where points were previously lost in The Globe and Mail’s “Board Games” feature; take inventory of the information to be presented; create an outline to ensure related subjects are grouped in a logical fashion; determine if the MIC will include letters from the Board; assign sections to different writers; develop plain language sections of the report; and bring all sections together in enough time to ensure writing styles are consistent. When a company does not have the luxury of a five-month writing window, a thorough edit can typically be completed within three weeks.

Better from Start to Finish

In reviewing over 30 MICs for this article, we find many are moving to a format that invites readership and enables quick scanning. Although shareholders and proxy advisors will never admit it, text scanning does take place and that’s why the insertion of descriptive headlines, section headings, bullet points, callouts and relevant summary tables and graphs/graphics is important.

Graphs and graphics are used in various ways. For example, the MICs IR focus reviewed include graphs (bars and pie charts) to demonstrate:

• how directors measure up against the skills and experience categories deemed important to a business and its governance;
• the relative weighting of each component of the total Named Executive Officer compensation available, to contextualize the importance of base salary versus various forms of short and long-term at-risk pay;
• the amount of reported versus realized pay given to a CEO: and
• Board diversity by age, tenure, residency and gender.

MIC summary sections are also popping up. In its summary section, Intact Financial Corporation’s 2019 MIC included “highlights of its governance practices” with a checklist of what it does and doesn’t do. Under the ‘doesn’t do’ list are:

• director interlocks (the same directors sit on more than one Board together);
• director overboarding (a situation when a director sits on too many Boards); and
• CEO participation in its HRC Committee.

Tables are another helpful feature. Rather than simply saying that a company’s directors take continuing education seriously, the insertion of a table showing all of the educational conferences/presentations attended by each Director during the year is a much more powerful illustration.

IR focus also found evidence that discussions of sustainability (beyond management succession) and environmental management are slowly starting to make their way into MICs. For responsible investors, the inclusion of this information demonstrates that a company’s Board takes sustainability seriously enough to make it part of its governance practices.

Being Strategic, Getting Noticed

MIC writers interviewed noted that they made conscious choices regarding what to highlight in their disclosures, in part by first reviewing the ‘quality scores’ assigned to their companies by ISS Corporate Solutions. When a company scores poorly in an evaluation on a governance topic, and believes it has a good story to tell that is not being recognized, it will adjust its MIC content to promote its viewpoint.

Developing a plain language MIC is time consuming, but getting it right is important to Directors, executives and the people who own a company’s shares, as well as its proxy advisors.

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