At RBC Global Asset Management (RBC GAM), we believe that proxy voting is a key part of our engagement process as it provides an important way for us to convey our views to the boards and management of our investee companies. ESG factors may have a material impact on the long-term performance of these companies, and this upcoming proxy season, we will have an opportunity to convey our views on some of these material concerns through our voting decisions.

Each year, our Corporate Governance & Responsible Investment (CGRI) group monitors ongoing developments in corporate governance and, with input from our investment teams, updates our Proxy Voting Guidelines (Guidelines) to ensure they always reflect current best practices and emerging trends. In this article we will provide a summary of some of the key changes we made to our Guidelines this year, and how these changes relate to what we expect in the upcoming voting season.

Executive compensation and COVID-19

The COVID-19 pandemic disrupted the operations of many companies around the world. As discussed in our In the time of COVID-19 thought pieces, companies faced supply chain disruptions due to lockdowns and factory closures, they created new policies and practices to minimize on-the-job exposure that may have led to staff reductions or hours worked, and they faced rapid shifts in consumer behaviour that provided opportunities to capitalize on new services for some, or caused distressed companies to find other strategic options. As a result of some of these impacts, there were companies that may have missed pre-established targets.

Every proxy voting season, shareholders vote on compensation plans and the resulting pay and awards granted to top-line executives based on company performance. The board of directors typically has a dedicated compensation committee that is responsible for setting the pay structure and targets for top executives, which includes incorporating long- and short-term performance targets. This year we expect compensation committees to make adjustments to compensation plans as a result of the economic disruptions of COVID-19; for example, by modifying existing performance metrics, utilizing additional discretion, or forgoing bonus opportunities altogether.

2021 Guidelines updates

We believe that no single best practice has emerged to address executive compensation for 2020. However, we believe that companies that laid off or furloughed employees while increasing or maintaining executive compensation will be heavily scrutinized.

To ensure our investee companies are aware of our views, we have included a temporary guideline recommending that compensation committees provide robust disclosure on the compensation decisions made, the rationale behind those decisions, the level of discretion used, and the approach that will be taken regarding compensation in the future. Further, additional disclosure is particularly warranted in instances where a company made significant cuts to its workforce or furloughed employees due to the pandemic.

Board diversity

This past year we saw a series of global events that highlighted the need for a stronger focus on diversity and inclusion. Investors are increasingly demanding progress on corporate diversity and inclusion policies, especially at the management and board levels. Although more progress is required, 2020 was a record year for the election of racially/ethnically diverse directors to the boards of companies found on the Russell 3000 Index. According to ISS data as of February 16, 2021, the percentage of racially/ethnically diverse directors found on boards of companies in the Russell 3000 Index increased from 10.4% to 13.2%, the largest increase in 12 years. This was attributed to pressure from large institutional investors, states such as California, NASDAQ-proposed regulations on diversity, as well as public attention on the need to increase racial/ethnic diversity on the boards of U.S. companies.¹

This proxy voting season, shareholders will be voting on new director nominees and directors seeking re-election to boards. Before determining whether to vote for a director, shareholders will likely take into consideration the current racial/ethnic and gender diversity of the board, the company’s diversity and inclusion policies, whether the company has plans to increase its racial/ethnic and gender diversity on the board in the future, and any significant controversies related to human capital management over the past year.

We also expect to see more diversity-related shareholder proposals for 2021. The types of shareholder proposals will likely range from those requesting enhanced disclosure on policies and procedures, to those requesting increased diversity targets and metrics. These shareholder proposals are expected at both the employee level, and management and board levels. For example, a number of shareholder proposals are expected at large companies that have not yet disclosed a diversity policy requiring the consideration of women and other racially/ethnically diverse candidates for board directors and chief executive officer positions.²

2021 Guidelines updates

At RBC GAM, we believe that companies with strong diversity and inclusion policies and procedures will perform better over the long term. In many cases, there is inadequate disclosure of ethnic/racial data. Therefore, updated for 2021, our Guidelines state that we encourage companies to publicly disclose information on the diversity of their board of directors, executive and/or senior management teams, and wider workforce. For consistency, we encourage disclosure aligned with companies’ local jurisdictions, such as the EEO-1 Report in the U.S., and as defined in the Canada Business Corporations Act in Canada.

In addition, in pursuit of the intentions of the Canadian 30% Club Investor Group, which targets 30% representation of women on boards and at the executive management level of S&P/TSX Composite Index companies by 2022 and to which we are a signatory, we have increased our threshold requirement for the representation of women on boards of directors from 25% to 30% in all markets where our Guidelines apply.

Climate change

Climate change continues to be one of the leading ESG concerns of investors. As the impacts of climate change continue to be apparent, investors are increasingly requesting enhanced disclosure on how companies are addressing climate-related risks. Momentum continued in 2020 with some of these notable actions from asset managers, proxy advisors, and corporations:

• Asset managers continued to join Climate Action 100+ in 2020, including RBC Global Asset Management. As of November 30, 2020, Climate Action 100+ had 545 signatories around the world, equating to $52 trillion dollars.³ Climate Action 100+ is an investor collaboration focused on active engagement with the world’s largest publicly traded and systemically important carbon emitters, or companies with significant opportunity to drive the transition to a low-carbon economy. Companies are encouraged to be more transparent on climate-related risks and opportunities.
• For the upcoming season, proxy advisors ISS and Glass Lewis are both recommending potentially voting against the re-election of board members in situations where companies have inadequate climate-related disclosures and have failed to sufficiently oversee, manage, or guard against material climate-change related risks.
• The Business Roundtable, a group of CEOs from the largest U.S. corporations, issued a public statement supporting a commitment to reduce net U.S. greenhouse gas (GHG) emissions by at least 80% from 2005 levels by 2050. To achieve this target, the Business Roundtable noted the importance of global engagement, cooperation, and accountability.^<4/sup>

This proxy voting season, we expect to see an increase in shareholder proposals requesting enhanced disclosure on climate-related risks. In particular, a number of large companies around the world have received a “Say on Climate” shareholder proposal. This proposal requests that companies disclose their GHG emission levels in a manner consistent with the Task Force on Climate-related Financial Disclosure (TCFD) as well as any strategy that companies may have adopted or will adopt to reduce GHG emissions in the future. Further, the proposal requests that companies allow shareholders to provide non-binding advisory approval or disapproval of their climate plan.⁵ This shareholder proposal is receiving significant support from management teams and may be a sign that companies are accepting shareholder demands to increase transparency on climate-related disclosures.

2021 Guidelines updates

This year we updated our guidelines on climate-related shareholder proposals we will typically support to reflect the language of proposals we have seen over the past year. For example, we will generally support proposals requesting that companies provide enhanced disclosure on the alignment of their lobbying activities with their climate change initiatives, including memberships in industry associations. In addition, we added language to indicate that we consider whether companies have recently been involved in climate-related controversies (resulting in fines, litigation, penalties, or significant environmental, social, or financial impacts), existing climate-related targets, commitments, and initiatives, and other pre-established criteria, when evaluating climate-related shareholder proposals.