Shareholder and stakeholder pressure may already be a way of life for listed companies. But over the summer, the Ontario Securities Commission got a taste of the same medicine when it came to setting its line-up of priority issues and projects for the fiscal year ahead.
As a result, two major, potentially game-changing board governance and voting issues have moved to the top of the OSC’s to-do list for 2013-2014: namely, shareholder democracy (fixing proxy voting and advancing majority voting) and boardroom diversity.
Last April, it was a slightly different story. That’s when the OSC released a draft statement of its priorities for the financial year ahead, and asked for input from stakeholders. Missing from the draft was a mention of shareholder democracy, despite the fact that it had been listed as a priority in 2012.
The OSC received 26 responses in all. One was from the Canadian Coalition for Good Governance, which represents Canadian investors that together manage approximately $2 trillion in investments. The CCGG insisted in its letter that majority voting and fixing the proxy plumbing system “should not be allowed to drop off ” the agenda.
“I read [the draft statement] and there was absolutely nothing in the statement in regards to majority voting or fixing proxy plumbing,” CCGG executive director Stephen Erlichman told Listed in an interview. He acknowledges that the OSC and other members of the Canadian Securities Administrators had announced plans to publish a concept paper in the summer of 2013 to seek feedback from stakeholders on issues related to proxy voting, but this was not quite enough. “They didn’t actually drop the ball,” says Erlichman, “They’ve been planning a paper to address it, but the issue was not on the list of priorities, so whether they were doing it or not was not public.”
Erlichman encouraged CCGG members and his board to contact the OSC, asking for shareholder democracy to be added as a 2013 priority. As it turned out, support was forthcoming. A number of pension plans, such as the Ontario Teachers’ Pension Plan, the British Columbia Investment Board and the federal Public Sector Pension Investment Board weighed in, as did lawyer Carol Hansell, a partner at Davies Ward Phillips & Vineberg.
Hansell has a particularly big stake in the shareholder democracy file. She and her team wrote the 2010 report “The Quality of the Shareholder Vote in Canada.” It pointed out that the proxy voting system has been leaking like a sieve for years and really started the ball rolling on reform. Her letter to the OSC said that concerns about the proxy voting system have escalated since last year, and that she was disappointed the vital issue was not reflected in the priorities.
At the end of June, the OSC issued a new statement of priorities, reflecting the voices it had heard. Now included among the priorities—along with reaching out to investors, advancing discussions of mutual fund fees, providing investors with more effective disclosure and identifying white collar crime—is improving shareholder democracy by facilitating the adoption of majority voting and identifying the key proxy voting infrastructure issues.
“It’s the right result that these things are on the priority list,” says Erlichman. “They are wading into this area, finally. Once they wade in, we’ll start moving.”
The next step Erlichman refers to came in mid-August, when the CSA published the promised consultation report on the proxy voting infrastructure. That kicked off another 90-day comment period which will end in mid-November. In its report, the CSA identified two key top line issues for examination: the accuracy of vote reconciliation within the proxy voting infrastructure as well as the need for an end-to-end vote confirmation system.
Hansell, who spoke to Listed before the CSA report was released, says she is pleased that proxy voting is now a priority. “The system has been so broken for so long, with everyone limping along. Now it has risen as a critical issue to regulators.”
Proxy plumbing leaks
The flaws in the current proxy voting system are many, point out Hansel and Erlichman. First of all, the system is perplexing to almost everyone, because of the layers of middlemen. As Hansell’s 2010 report stated, transfer agents and proxy solicitors act on behalf of issuers, proxy agents act on behalf of intermediaries and proxy advisers act on behalf of investors. “Service providers are doing the best job they can in a system that doesn’t work very well,” she says.
Secondly, the OBO/NOBO system adds a layer of complexity: Objecting beneficial owners (OBOs) remain anonymous as investors. Unlike the votes of non-objecting beneficial owners (NOBOs), which can be traced, OBOs’ votes are managed through an intermediary.
Thirdly, securities lending and use of derivatives can result in over-voting. A situation could arise where there are 100 million shares outstanding and 120 million shares voting, for instance. Red flags only show up in the system if the total number of votes received goes over 100%.
Fourthly, empty voting can occur because of a six- to seven-week gap between the record date and the AGM. Shareholders who have voted as of the record date may sell their shares and no longer have an economic interest in the company as of the meeting.
A fifth problem, highlighted by the CSA, is lack of confirmation of votes. “At the moment,” says Hansel, “mechanical problems can occur that no one even knows about. When you vote in a political election at the municipal, provincial or federal level, you are pretty confident your vote is being counted. You vote on a piece of paper, with 15 people watching. In this system, a vote is cast by computer. There is no confirmation.”
The pressure for action on board diversity came from a different source: Ontario premier Kathleen Wynne. In late spring, her government asked the OSC to develop new guidelines to improve the proportion of women on Canadian corporate boards—which now sits at a stubbornly low 10%. At the end of July, after it published its revised priorities, the OSC unveiled a separate consultation paper on the subject. While some were wondering if quotas might be proposed, the OSC instead is recommending only that issuers be required to provide disclosure regarding female representation on boards and in senior management and whether they have formal plans to improve diversity at those levels. Those who do not would have to justify their decision.
While this doesn’t have the teeth that actual quotas would have, it could be an important first step in changing the landscape. The deadline for comments on the OSC consultation paper is late September. The commission will host a roundtable in mid-October to discuss the board diversity issue further.