How to Make the Most of Your Proxy Circular as a Key Messaging Tool

Now is the time in the calendar year for many public companies to prepare their annual meeting proxy circulars. They do so against a backdrop of increasing shareholder focus on Environmental, Social and Governance practices.

With circulars acting as the primary information source for corporate governance, director qualifications, executive compensation plans and more, company executives need to think carefully about how to best use content to communicate, influence and persuade their owners to accept Board proposals. Given that we are coming up on proxy season, IR focus decided to check in on best practices.

The basics

This article does not attempt to provide a summary of securities rules that dictate the information that must be disclosed in a proxy. For Canadian-domiciled readers, Forms 51-102F5, 51-102F6 and 58-101F1 compiled by the Canadian Securities Administrators (CSA) are particularly valuable resources that should be consulted by senior issuers to ensure compliance. Suffice it to say that subject to certain exemptions, when a company solicits proxies, it must also prepare and circulate an information circular. In certain cases (such as when shareholder approval is sought for a significant acquisition or restructuring transaction under which securities are to be exchanged), a circular must include prospectus-level disclosure.

Rules around corporate conduct also change periodically and those changes must be reflected in proxy circulars. For example, on August 31, 2022 companies incorporated under the Canada Business Corporations Act (CBCA) became subject to new Majority Voting Rules. Accordingly, in an uncontested election of directors when there is only one candidate nominated for each available Board position, shareholders in CBCA-incorporated companies now have new choices: to vote ‘For’ or ‘Against’ (formerly, ‘Withhold’). In the past, there was no option to vote ‘Against’ a director. This year’s circulars and forms of proxies must show that CBCA-incorporated company Boards are compliant. On January 31, 2023, the CSA issued CSA Staff Notice - CSA Coordinated Blanket Order 51-930 - Exemption From the Director Election Form of Proxy Requirement, implementing relief through local blanket orders that temporarily exempt CBCA-incorporated reporting issuers from the securities law requirement to specify that securities be voted ‘For’ or ‘Withheld’ from voting in respect of the election of directors.

As well, amendments to the CBCA introduced in 2020 apply additional disclosure obligations around organizational diversity by broadening the meaning of diversity beyond gender to include Aboriginal persons, members of visible minorities, and persons with disabilities (each as defined in the Employment Equity Act (Canada)).

Plain language, please

What’s particularly relevant for the purpose of this article is that the CSA requires circulars to be written so that readers understand the information provided. Plain language principles found in CSA Companion Policy 51-102CP are worthy of note and include:

• using short sentences;
• using everyday language, avoiding jargon and boilerplate wording;
• using the active voice (i.e. not passive verbs);
• avoiding superfluous words;
• organizing the document in clear, concise sections, paragraphs and sentences;
• using personal pronouns to speak directly to the reader (‘we’ versus ‘the company’);
• avoiding reliance on glossaries and defined terms unless doing so facilitates understanding;
• offering concrete terms or examples to make abstract terms understandable;
• avoiding multiple negatives;
• using technical terms only when necessary and explaining those terms; and
• using charts, tables and examples to make disclosure easier to understand.

Following these principles is sometimes easier said than done. For companies unsure of whether their circulars hit the plain language mark, IROs we spoke to noted that their companies will sometimes form an internal reading group to carry out a user test. IROs are ideally suited to participate in such a group as they have plain language communications expertise.  

Indecipherable language will ensure you make the least of your proxy circular; so how do you make the most of it? This is where best practices enter the picture.

Best practices

IROs and corporate secretaries we spoke to all agreed that given the importance of the proxy circular to shareholders and their proxy advisors, it is imperative to treat each filing as a cornerstone of investor communication.

In that context, what constitutes best practice in proxy circular preparation?

Below are some of the ideas we heard, and we supplemented the list using examples found in various sources, including the 2022 Best Practices for Proxy Disclosure curated by the Canadian Coalition for Good Governance (CCGG). The CCGG has published its best practice guide since 2004 and it is considered a must-read for IROs.

Take note of annual voting guidelines produced by proxy advisors

Proxy advisory firms, including Glass Lewis and Institutional Shareholder Services (ISS), provide proxy voting recommendations to institutional investors. Accordingly, it is considered best practice to review the annual guidelines published by these two firms before preparing any proxy circular. Understanding what these advisors want to see in your proxy will help to shape disclosure and, more fundamentally, may cause your Board to adjust its actual governance policies.

Doing such a review this year will highlight changes in several areas. For 2023 annual meetings, Glass Lewis said it intends to pay attention to disclosure of the role of Boards in overseeing issues related to cybersecurity, since it believes “cyber risk is material for all companies.” It also intends to recommend that shareholders vote ‘No’ to the election of a nominating committee chair of any TSX company Board that is not at least 30% gender diverse, as well as all members of the nominating committee of a Board with no gender-diverse directors.

In an important heads up for those S&P/TSX Composite Index constituents whose annual meetings occur on or after Feb. 1, 2024, ISS reports that it will recommend that shareholders vote against or withhold from the Chair of a Nominating Committee if a Board has no “apparent racially or ethnically diverse members,” which it defines as Aboriginal peoples and persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour. An exception will be made if there is “racial and/or ethnic diversity on the Board at the preceding annual meeting and the Board makes a firm public commitment to appoint at least one racial and/or ethnic diverse member at or prior to the next AGM.”

Of course, the best best practice of all is to listen to your own company’s shareholders directly on issues of importance to them.

The outcomes of such engagement will influence proxy circular disclosure and go a long way to providing evidence that your Board is responsive to shareholder concerns. Both ISS and Glass Lewis take Board responsiveness into account in their proxy voting recommendations, suggesting that the inclusion of a summarized shareholder engagement report is a best practice. In its 2022 circular, GCI Inc. took this a step further to include the results of its Shareholder Satisfaction Survey. The survey asks the company’s owners to rate the firm’s governance practices on a 10-point scale.

Prepare for extra scrutiny of climate risks and related governance practices

Arguably the area that garners the most increasing interest among shareholders and these two proxy advisory firms is climate risk. Glass Lewis has stated that starting in 2023 it may recommend a negative vote in respect of the governance committee chair of any company with increased climate risk exposure that fails to provide explicit disclosure concerning the Board’s role in overseeing climate-related issues.

Additionally, Glass Lewis will zero in on director accountability for climate-related issues, particularly those organizations “whose greenhouse gas emissions represent a financially material risk.” In such cases, Glass Lewis will look for issuers to “provide clear and comprehensive disclosure of their risks, including how they are being mitigated and overseen.”

In a section entitled “Climate Accountability” in its 2023 Proxy Voting Guidelines for TSX-Listed Companies, ISS focuses on companies that are significant greenhouse gas emitters through their operations or supply chain. It intends to generally recommend that shareholders vote ‘Against’ (for CBCA) or ‘Withhold’ (non-CBCA) their votes from the election of the incumbent chair of a responsible committee in cases where ISS determines that the issuer is not taking the “minimum steps” needed to “understand, assess, and mitigate risks related to climate change to the company and the larger economy.” Minimum steps include detailed disclosure of climate-related risks, such as those “according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD)” as well as “appropriate GHG emissions reduction targets.” ISS indicated it would analyze related Board governance measures, corporate strategy, risk management analyses and metrics and targets.

ISS also includes insight into how it will respond to Say on Climate proposals made by both companies themselves and shareholders.

“Forewarned is forearmed,” said one contributor to this story who, like other company executives, is now preparing both his proxy circular and sustainability report.

Integrate and coordinate with ESG Performance Reports

Best-practice proxy circulars add greater disclosure depth than they used to with respect to topics such as equity, diversity and inclusion, employee talent development, annual shareholder engagement and, of course, governance of climate risks. Two questions often arise for those developing proxy circulars: should their circulars integrate environmental and social (E&S) disclosures found in ESG Performance Reports (or Sustainability Reports, if you prefer) and should ESG Performance Reports refer to key governance topics typically found in circulars?

According to those with whom we spoke for this article, the answer is ‘Yes’ to both questions. Why? For the circular, the reason is investors increasingly want to know more about how E&S factors impact the development of corporate strategy. That much is abundantly clear from reviewing Glass Lewis and ISS 2023 voting guides. For the ESG Report, the reason is that investors expect to see a description of the role the Board plays in overseeing ESG strategies and actions as well as climate (and diversity) data and outcomes.

Said one contributor this article: “We treat our sustainability report as the comprehensive source for ESG disclosure, from principles and strategy to data. When it comes to the proxy, we include principles and strategy but we’re selective in what data we include beyond what’s mandated.”

The CCGG 2022 Best Practices guide specifically highlights circulars where issuers have integrated E&S considerations into their disclosures, including ARC Resources Ltd., TELUS Corporation, Enerflex Ltd. and TransAlta Corporation.

ARC Resources included a statement of purpose in its 2022 circular that reads, in part: “ARC’s stakeholders and Indigenous communities expect the Company to engage in responsible resource development and prioritize ESG matters. A comprehensive review of our objectives, standards, and performance in the areas of environmental, social and governance is published biennially in our ESG report which is available on our website at www.arcresources.com. To identify these measures and their overall impact, we align to established international guidelines and standards, including, the Global Reporting Initiative Sustainability Reporting Standards, the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosure, among others.” In seven bullet points, it then highlights the Board’s key policies and practices. Notably, ARC Resources did not publish annual data on emissions or emissions targets in its circular. That information is found in its 2022 sustainability report, which also includes greater depth of information (than the proxy) on guiding ESG principles, climate change risks, opportunities and strategies.

TransAlta’s 2022 circular included an informative section on diversity, including reference to its Board and Workforce Diversity Policy, adoption of Board and company-wide gender targets and a detailed table showing male and female representation on its Board, executive leadership, VPs, managers, supervisors and all staff. CAE’s 2022 circular spoke of psychometric assessments used to support its leaders.

Exactly what information to port over to an ESG Report from a circular is largely a matter of choice as there are currently no compliance rules governing the former; however, disclosure required to be included in a circular cannot be satisfied solely by its inclusion in an ESG Report. IROs interviewed for this article felt it was important to use both documents to convey information of key interest to shareholders so as to ensure messages are not missed. Said one IRO: “By all means, be repetitive because it multiples the chance shareholders and their proxy advisors will see your key disclosures. Just don’t go too far with the copy and paste.”

Consider sustainability index rankings in your proxy

Several contributors to this article mentioned the value of including a table or reference to ESG rankings by organizations such as Sustainalytics, MSCI, FTSE and RobecoSAM in both their proxy circulars and ESG Performance Reports. Said one IRO: “Our rankings have improved and it’s important for our shareholders to know that before they cast their votes. We don’t rely solely on shareholders finding that information in our sustainability report or even reading that report cover to cover.”

Coordinating the content for each of the circulars, the ESG Performance Report and for that matter the Annual Information Form and ensuring there is consistency in disclosures across these “platforms”, as one IRO called them, takes time and effort but is necessary and worthwhile.

Include why statements and more than one letter to shareholders

Other advice from proxy circular writers is to ensure readers get the big picture as well as the details. “Start with framework discussions as readers need to understand strategies and principles before they review outcomes,” said one IRO. One best practice way to do this is to include more than one letter to shareholders outlining key principles, priorities and new approaches.

Said another IRO: “A letter from the Chair to open a proxy circular is a great way to summarize key information on annual corporate performance, personnel changes at the Board level and ESG-related highlights. We use our letters to tell shareholders what we think is important and why before they read the rest (of the narrative).”

A second letter, from the head of a Board’s HR (or equivalent) Committee, can also serve as a useful gateway to compensation matters that are included in the Compensation Discussion and Analysis (CD&A) report that forms part of each proxy filing. Inclusion of those CD&A reports is required under National Instrument 51-102 with the intention of enhancing disclosure of compensation policies and practices in a uniform format, as well as providing shareholders with a transparent and comprehensive rationale for executive compensation levels. Best practice sees companies highlight general compensation philosophies as well as their recent compensation plan changes in a cover letter.

Some IROs believe such proxy circular letters are more widely read by shareholders than letters in annual or sustainability reports. Whether that’s true or not, the thinking is, as one IRO put it, to “cover all your bases.” In years past, such letters from the Chair rarely appeared in circulars and, when they did, they served only to invite readers to attend and vote at the shareholder meeting.

Make director profiles meaningful and relevant

Why should shareholders vote for a nominated director? The authors of best practice circulars think about that question in crafting director profiles. They recognize that simply listing the nominee’s past employers and titles may not provide sufficient information for shareholders to vote yes. Describing a candidate’s experience, philosophy and key accomplishments is definitely helpful, as is showing why the nominee’s background is of particular relevance to the company. CCGG shared one example: the description of Linda Cash’s qualifications in CCL Industries 2022 circular. That description stated, in part, that she is “…passionate about the representation and championing of women and minorities in the industry” and included information not just on Cash’s 36-year executive career at Ford Motor Company but her proven bona fides in advocating for “diversity, innovation and sustainability…”.

Similarly, Glass Lewis believes companies should disclose sufficient information to allow shareholders to assess Director skills and competencies. In analyzing large-cap TSX-listed companies, it looks for Board skills matrices to identify any potential skills gaps.

Highlight director independence

It is commonly accepted wisdom that good governance results when the majority of directors are independent of management. CCGG believes proxy circulars should not only disclose which directors are independent but highlight whether independent directors meet in-camera without management present. CCGG’s Best Practice report shows how Stantec fulfills both needs while also being deliberate about the reasons certain directors are not independent. The ISS report has an informative section entitled “ISS Canadian Definition of Independence” that should be consulted by proxy circular writers.

Include the results of past shareholder votes

Public companies disclose the results of director elections via news release immediately following annual shareholder meetings. However, a best practice is to include a historical record of those results in the proxy circular as well. Interfor publishes this information in each Director Profile, as does EQB. Said one IRO: “Our Board thinks it’s important for shareholders to be reminded of how they voted in the past even though not all of our directors receive 99% approvals each year. More than anything, it’s a service to our shareholders and a signal by our Board that they take the results of elections seriously.”

Ensure compensation peer benchmarking is clear

For its part, CCGG argues that while Boards commonly benchmark compensation against peers, the practice “should not be overly relied upon at the expense of a robust, independent analysis…the quantum of compensation awarded should be determined within the context of the organization as a whole and should be justified primarily by performance.”

That said, best practice is to disclose: the use of compensation consultants; the independence of such consultants (in cases where management retains the same consultant as the Board); the Board’s use of/reliance on peer group benchmarking; the names of companies that comprise the benchmark and why those companies specifically; and the process for changing benchmark constituents. CCGG praises Precision Drilling Corporation for its disclosure in this area, as well as iA Financial for its analysis regarding the company’s positioning relative to peers included in the comparison group.

Push boilerplate to the back and by all means use a Table of Contents

Forward-looking statement safe harbour disclaimers take up significant space in all disclosure documents and are important. But they do not need to take up valuable space at the front of proxy circulars. Best practice is to include these statements and references to the use of non-IFRS information at the back of circulars under ‘Other information’ with a short reference upfront directing the reader to such a section.

Conversely, tables of contents do have a place at the beginning of proxy circulars. This is particularly true since (a) circulars can be 100 pages long or longer and (b) circulars are often viewed in PDF format and the table of contents is a useful tool for those who wish to scan and jump to specific sections. Writers of proxy circulars should take extra care in providing appropriate detail in tables of contents and if an interactive format appears on your website, readers should be able to access each section with a single mouse click using a hyperlink system.

Make connections

Pay attention to information flow and organization; group all like concepts together wherever possible. Through logical connections of related subjects, readers will gain a better understanding – faster – of key strategies and outcomes. This is considered an extremely important practice given that shareholders and proxy advisors do not have the time or patience to wade through a disorganized circular to find the information they need to make an informed decision. Some issuers incorporate subtables or supplementary tables of contents within major sections of their circulars to aid reader navigation and/or a tab system. Intact Financial used a quick links box on the main table of contents found in its 2022 proxy circular as well as supplementary tables of contents.

Remember good design principles

Proxy circulars can look like the average prospectus: all text with little thought given to design. Or they can employ creative touches such as bolder fonts, text callouts, text boxes, colour photos of directors and schematics to draw attention to key concepts and keep readers engaged.

Many of the circulars cited in the CCGG Best Practices report used one or more of such design principles. iA Financial used simple bar graphs to show how its total assets, market capitalization and earnings performance stacked up against its comparator group. The reason was to illustrate the relevance of using this group for compensation comparison purposes.

ARC Resources included a schematic to highlight key Board priorities. Telus applied its traditional brand colours for its proxy circular, including in callouts that appear in an opening message to shareholders entitled ‘The leading social capitalism company’. Keyera used stick figures to call attention to the gender makeup, age, citizenship and average tenure of its Board members. Although produced in black and white, EQB used a cycle diagram to depict reporting relationships between shareholders, the Board, the Board’s committees and management.

In its Guide to Effective Proxy Circulars 2^nd Edition, DFINsolutions stated: “As disclosure increases, companies are presenting information in ways that are more informative, clear and visually appealing. Good design energizes participation by highlighting calls to action and key information.”

As one IRO said on the topic of design: “My company is not about to transform our circular into the annual report of the 1990s with pages of glossy photos and high production values. But we do consider techniques that augment disclosure and create readability.”

Several contributors to this article said their marketing and/or graphic design departments are tasked with preparing proxy circular graphics, a practice they considered to be best for them with little added production cost.

Companies praised for good design in the DFINsolutions guide include Intact Financial for the use of tabs to quickly identify sections such as Voting Information, as well Aimia, Bank of Nova Scotia and Canadian Tire for charts and graphics.

BMO and Chartwell were also cited by DFINsolutions for printing off-size (read smaller than 8.5x11 inch) circulars, which can “often reduce printing costs,” lead to lower mailing costs and minimize paper and ink.

Final thoughts

With heightened shareholder interest in broader ESG factors, and proxy advisors zeroing in on these factors in their analyses, there is an expanded role for proxy circular disclosure in 2023. By studying best practices, all companies can make the most of their drafts.

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