Stephen Erlichman says he doesn’t understand the controversy, but he fully recognizes it is there nonetheless.
In May, the Canadian Coalition for Good Governance, a lobby group that Erlichman leads as executive director, published a report [pdf] insisting shareholders should have more say in the directors appointed to public company boards. The report by the CCGG, which represents large institutional Canadian shareholders like Ontario Teachers’ Pension Plan, CIBC Asset Management, Ontario Municipal Employees Retirement Board and numerous others, promoted the notion of “proxy access.” Essentially the CCGG, on its members’ behalf, urged for changes in corporate governance provisions of the Canada Business Corporations Act to provide “meaningful input into the director nomination process” by shareholders.
To Erlichman’s way of thinking, this isn’t shocking or revelatory news. Shareholders, he feels, should be able to readily nominate directors for the boards of public companies without having to navigate Byzantine rules and a restricted process.
“Part of this is just fundamental,” he says. “Who are we as shareholders voting for? Our realization was that we are voting for the existing people the board and the CEO of a company is telling us to vote for. And you have no say in who those people are.”
It didn’t take long for critics of the proposal to come out firing. Newspaper pundit Terence Corcoran loudly criticized the CCGG’s proxy access initiative. “Like Marxism and 3D TV, bad ideas never die,” he wrote.
Corcoran wasn’t alone. Many issuers and others regard proxy access as a power grab by institutional shareholders and a process that could be exploited by activist shareholders to gain control over Canadian public companies. Stan Magidson, chief executive of the Institute of Corporate Directors in Toronto, came out swinging against the concept. “I believe if we are going to do something for Canada, we need to make sure it makes sense in our environment,” he explains. “People are jumping on this before they understand what we already have.”
While the CCGG’s move upped the ante and caught many off guard, proxy access has been a big topic in recent years in Europe and the U.S., with the battle lines between boards and shareholders similarly drawn. In the U.S., in fact, many predicted it would be the governance issue of 2015—a forecast that’s proved mostly accurate, with scores of proxy access proposals submitted at company AGMs, some passing successfully, and a handful of major firms, such as Hewlett-Packard, Western Union and Verizon Communications, adopting the practice unilaterally.
The form of proxy access under discussion there is similar to what the CCGG is proposing. It wants shareholders with 5% of a company’s stock with a market cap of less than $1 billion or 3% of businesses more than $1 billion, to be able to nominate up to 20% of the directors. It also wants to eliminate a hold period where only longer-term shareholders have proxy access, and full disclosure in the proxy circular equal to that of the company. Finally it wants reasonable solicitation costs paid by the company.
At its foundation, Erlichman says, proxy access is about giving the owners of a company—the shareholders—the right to influence who runs their investments. “If you are going to let the boards run the companies, you need to have conviction and confidence in who those directors are,” he says.
PROXY ACCESS IS a relatively new priority for the CCGG. The group was formed in 2002 to deal with the corporate governance concerns of its members, who control $2.5 trillion in assets. The organization’s board devised a list of priorities and began tackling what it felt were key issues facing corporate Canada—majority voting, dual share structures and executive compensation in particular. It also began active discussions with boards on topics like board consistency and other issues. In 2013, proxy access became a focus. It took 18 months for the CCGG to develop a policy on the subject.
“We had a long list and we prioritized that list,” Erlichman says from his downtown Toronto office. “Why did this get so high up? It is the view of the board—which is 14 people—and most are CEO or CIO of members, that this was important. They are knowledgeable people and it is 14 people saying, ‘This is what we should be doing.’”
The policy the CCGG issued in May addresses proxy access in an aggressive and exhaustive fashion. It looks at possible objections—that it could be used by activist investors, that Canadians already have the ability to nominate directors, the notion that special interests could gain a foothold on boards, and how the policy has worked in other countries.
Globally, support for proxy access really took hold in the U.S. in 2010 when, under the Dodd-Frank legislation, the U.S. Securities and Exchange Commission passed a proxy access rule. However, that plan didn’t survive a court challenge and the SEC chose not to try again. More recently, however, Scott Stringer, the comptroller for New York City, who oversees five public pension funds worth $160 billion, asked a number of large industry leaders, like General Electric, to voluntarily adopt a bylaw allowing shareholders who have owned 3% of a company’s stock for more than three years to nominate directors. That effort’s impact is reflected in the 2015 results noted above.
The notion of a voluntary solution could work in Canada, says Ivey School of Business’ Frank Li, an expert in corporate governance. He contends that if Canada doesn’t follow the U.S., we will be seen as “lagging” behind. “Canada should approve proxy access gradually, first by allowing voluntary participation,” says Li. “I expect the firms with direct competitors in the U.S. market will move first. Investors and firms will benefit from reduced information asymmetry.”
However, the ICD’s Magidson insists that Canada doesn’t need a change to proxy access because it already has it. “We should celebrate what we have and improve what we have,” he says.
Currently, under Canadian law, shareholders can nominate directors on the floor of an AGM and they also have the right to put forward an advance proposal to nominate a director. But the latter comes with the caveat that the individual proposing the director has 5% of the outstanding shares and held them for six months. It also does not mean the shareholder nominee will be included on the same proxy form as the company nominees. The rules also limit shareholders’ solicitation to 15 existing additional shareholders unless they prepare a dissident proxy circular.
Erlichman, not surprisingly, says the existing legislation doesn’t work. Sure, shareholders can make a nomination for a board member from the floor of an AGM, but that is unlikely to stick simply given how many votes are cast in advance. As for the idea that a qualifying shareholder can simply nominate a director, make their case in a 500-word submission, and get them in the circular before the AGM, well that has significant faults as well.
“The company can put the name anywhere they want to,” Erlichman explains. “And they only have 500 words to explain why the person should be on the board—less in some provinces—and the company can use unlimited number of words for their support. And just putting a name in the proxy doesn’t work. You need to be able to talk to other investors and solicit them and you’re not able to solicit more than 15 shareholders without having your own proxy circular. That’s a big negative to what’s going on today.”
In fact, the solicitation element of the proxy access fight is the only part that would need a change to Canadian securities legislation to become law. The other elements are “consistent with the corporate model,” Ontario Teachers’ Pension Fund argued in a June opinion piece, titled “Proxy access is good governance,” [pdf] posted on the organization’s website. The remaining elements of proxy access would simply have to be adopted by companies as part of their corporate bylaws.
However, that still leaves critics’ questions about the impact of having more outsiders join a board and their fears that activist shareholders could use the process to promote their agenda—especially since the CCGG’s proposal has no time limit on how long shareholders would have to hold a stake in a company before putting forward their director nominees.
Interestingly some see the potentially disruptive nature of a company having to accept an outside board member as positive, while others see it as running contrary to how corporate governance is supposed to operating. Andrew MacDougall, a partner at Osler Hoskin Harcourt in Toronto, says that companies create a dynamic on their boards, and proxy access could shake that up.
“Maybe that’s a good thing,” MacDougall says. “Proxy access is clearly made for change and you don’t know how effectively that will play out. But if there’s too much disagreement at the board level—that can be an issue.” And if that new director represents an activist shareholder, then “there’s a concern that there could be people put forward for special interest groups who aren’t focused on the interest of the corporation as a whole, or have a specific interest,” he says.
But Erlichman defends his position. “This isn’t designed for activists,” he says. “This is what our institutional shareholders want. We think it would be rarely used for that. And it still has to be voted on by all the shareholders. It just gets the name on the ballot at the meeting. I think this is being blown out of proportion. That’s our view.”
In the fall, Erlichman and the CCGG will take their message to Canadian companies, urging them to consider proxy access, perhaps following the American model. The CCGG meets with around 50 companies each year, and already raised the issue of proxy access with some before it forwarded its proposal. Erlichman admits the companies in initial discussions met the idea with little enthusiasm.
Moving forward, he is hopeful companies and directors will take a less acrimonious stance. Yes, he admits, there are a lot of board members worried about the possible impact of proxy access. But, in the end, Canadian corporate culture and shareholders should benefit by the change.
Given that the Corporations Act needs little alteration to make proxy access a reality, it shouldn’t be a legal hurdle. Erlichman is hopeful that discussions this year with companies will lead to a general consensus that proxy access can work in Canada. However, if Canadian corporations don’t agree, he admits that legislative change might be necessary, and could take years to accomplish. “There are too many things we do that are perceived as shareholders winning at the expense of directors,” he says. “We see this as a win-win. This is better for the companies as a whole, and therefore it is better for the directors and the shareholders.”
It remains to be seen whether Erlichman can convince proxy access detractors that this is a victory for all.