SECURITIES REGULATION AND IR

There are few things that a director of a public company dislikes more than seeing a large number of withheld votes beside his or her name in the voting results of an annual meeting at which such director is being nominated for election or re-election. In 2014, the Toronto Stock Exchange (“TSX”) made it mandatory for listed issuers to adopt a majority voting policy. This has increased the pressure on directors to ensure that the number of withheld votes they receive is minimized.

Proxy advisory firms such as Institutional Shareholder Services Inc. (“ISS”) publish annual guidelines, which describe the circumstances under which they will advise shareholders to withhold their votes on director elections. The discussion below relates to uncontested director elections of TSX-listed issuers.

• ISS will generally recommend that shareholders withhold their votes for any insider or affiliated outside director where the Board is comprised of less than a majority of independent directors or the Board lacks a separate compensation or nominating committee.

• ISS will generally recommend that shareholders withhold their votes for individual directors who are insiders on the audit, compensation or nominating committee.

• ISS will generally recommend that shareholders withhold their votes for any director who has served as the CEO of the issuer within the past five years and is a member of the audit or compensation committee. ISS will evaluate on a case-by-case basis whether support is warranted for any former CEO on the audit or compensation committee after the five year cooling off period. ISS will generally recommend that shareholders withhold their votes for any director who has served as the CFO of the issuer within the past three years and is a member of the audit or compensation committee.

• ISS will generally recommend that shareholders withhold their votes for continuing individual directors, committee members or the continuing members of the entire Board of Directors if (i) at the previous annual meeting, any director received, of the votes cast, more than 50% withheld votes under a majority voting policy and the nominating committee did not require that the director leave the Board after 90 days or did not provide another form of acceptable response to the shareholder vote; (ii) at the previous annual meeting, any director received, of the votes cast, more than 50% withheld votes under a plurality voting standard and the issuer failed to address the issue that caused the majority withheld vote; or (iii) the Board failed to act on a shareholder proposal that received the support of a majority of the votes cast (excluding abstentions) at the previous shareholders’ meeting.

• ISS will generally recommend that shareholders withhold their votes for the directors who are members of the audit committee if no audit fee information is disclosed by the issuer within a reasonable period of time prior to a shareholders’ meeting at which the ratification of auditors is considered.

• ISS will generally recommend that shareholders withhold their votes for directors who are members of the audit committee if the non-audit fees paid to the external audit firm exceed audit and audit-related fees.

• Under extraordinary circumstances, ISS will recommend that shareholders withhold their vote for individual directors, one or more committee members, or the entire Board due to (i) material failures of governance, stewardship, risk oversight or fiduciary responsibilities at the issuer; (ii) failure to replace management, as appropriate; or (iii) egregious actions related to a director’s service on other Boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any issuer.

• ISS will make recommendations with respect to voting on a case by case basis for members of the audit committee and potentially the full Board if adverse accounting practices are identified that rise to a level of serious concern, such as (i) accounting fraud; (ii) misapplication of applicable accounting standards; or (iii) material weaknesses identified in the internal control process.

• ISS will generally recommend that shareholders withhold their votes for individual director nominees if the issuer has not adopted a majority voting policy and the individual director has attended less than 75% of the Board and committee meetings held within the past year without a valid reason for these absences or the issuer has adopted a majority voting policy and the individual director has attended less than 75% of the director and committee meetings held within the past year without a valid reason for these absences and a pattern of low attendance exists based on prior years' meeting attendance.

• ISS will generally recommend that shareholders withhold their votes for individual director nominees if, irrespective of whether the issuer has adopted a majority voting policy, the director is over-boarded[1] and the individual director has attended less than 75% of his or her respective board and committee meetings held within the past year without a valid reason for these absences.

ISS’ guidelines have been criticized by many as a rather blunt instrument for promoting good corporate governance of public companies. But blunt or not, while proxy advisory firms such as ISS are influential in affecting shareholder voting practices, it is likely that directors of public companies will continue to carefully scrutinize ISS’ guidelines with a view to minimizing the withheld votes on director elections.

Hellen Siwanowicz is a Partner at McMillan LLP.