The integrity of the shareholder vote is a cornerstone of shareholder democracy for public companies. Shareholders’ ability to “have their say” is exercised at shareholder meetings largely through proxy voting, which is a fundamental feature in our capital markets. The layers of depositaries and intermediaries for beneficial ownership are viewed by many as a necessary evil. To facilitate the complexities and the sheer number of market participants involved in proxy voting, an accurate, reliable and accountable infrastructure must be in place for a fair and efficient capital market.
The Canadian Securities Administrators (CSA) have recently published CSA Staff Notice 54-303 Progress Report on Review of the Proxy Voting Infrastructure (the Progress Report) to report on the progress made in its review of the Canadian proxy voting infrastructure since the initial publication in August 2013 by the CSA of Consultation Paper 54-401 Review of the Proxy Voting Infrastructure (the Consultation Paper). (See our August 2013 Blakes Bulletin: Regulators Consult on Concerns About Canada's Proxy Voting Infrastructure describing the Consultation Paper.)
Based on the public’s responses to the Consultation Paper and a series of roundtable discussions with provincial securities commissions and key market participants, the CSA have determined that securities regulators must assume a leadership role in breaking the silo nature of the existing vote reconciliation process. This has resulted in critical information about proxy votes and vote entitlements not being shared among issuers, investors and other key market participants, such as depositories, intermediaries, Broadridge and meeting tabulators. Moreover, there was consensus that over-voting was occurring, but no consensus as to cause. It was unclear whether the issue was caused by over-allocation of vote entitlements to individual investors or problems with the vote reconciliation process at shareholder meetings, or other causes.
Subsequently, in 2014, the CSA conducted a qualitative sampling review of six uncontested shareholder meetings (the Shareholder Meeting Review). The six sample shareholder meetings were selected by the CSA for variety. They included reporting issuers in different provinces, exchanges and industries that were widely and closely held, and had conducted meeting solicitation with different methods and tabulators.
The CSA also formed a technical working group comprised of a cross-section of key market participants, including representatives from issuers, investors, intermediaries, Broadridge, transfer agents and the Canadian depository.
These initiatives confirmed that, among other things, the existing proxy voting infrastructure is “antiquated and fragmented and needs to be improved.” In the Progress Report, the CSA outlined its findings on the meeting reconciliation process and the steps it intends to take in the 2015 and 2016 proxy seasons to move towards a more accurate, reliable and accountable voting system.
KEY FINDINGS AND CONCLUSIONS
The following are summaries of the CSA’s five key findings to date based on the Shareholder Meeting Review and its work with the Technical Working Group:
- Apparent and Widespread Over-Reporting and Over-Voting
There is apparent and widespread over-reporting (where there is a discrepancy between the voting entitlements calculated by an intermediary and the meeting tabulator) and over-voting (where a meeting tabulator receives proxy votes from an intermediary in excess of its official vote entitlement). However, the amount involved in the six uncontested shareholder meetings reviewed did not appear to be material nor affect the outcome of a shareholder meeting. The Progress Report also noted that according to statistics compiled by the Securities Transfer Association of Canada (STAC), over-voting occurred in 51% of shareholder meetings. These findings offer support to the long-standing complaint by market participants that voting results often appear to be inaccurate.
- Missing and Incorrect Omnibus Proxies
Over-reporting and over-voting appear to be linked to missing or incorrect vote entitlement information from meeting tabulators rather than double voting by intermediaries. In the six shareholder meetings reviewed, the causes of missing or incorrect information included paper omnibus proxies sent but not received by the tabulator, coding errors and outdated intermediary names on an omnibus proxy. The CSA has also raised other potential sources of errors, including service providers not having the necessary information from an intermediary to generate an omnibus proxy and missing omnibus proxies from U.S. shareholders who are holding shares through the U.S. depositary DTC. The CSA concluded that improvements must be made to modernize how meeting tabulators receive omnibus proxies and to ensure the accuracy and completeness of vote entitlement information in omnibus proxies.
- Intermediaries Left in the Dark Regarding Their Voting Entitlements
There is an increased risk of over-reporting and over-voting due to intermediaries not knowing their vote entitlement as calculated by meeting tabulators based on information provided by depositories and intermediaries. As a result, intermediaries are unable to reconcile any discrepancies before the shareholder meeting. Although Broadridge offers a vote entitlement report to subscribing intermediaries, the report is based purely on data feeds and not the information actually used by the meeting tabulators. Sometimes The Depository Trust Company (DTC) holdings through The Canadian Depository for Securities (CDS) were included in both DTC and CDS counts. The CSA concluded that steps must be made to enable intermediaries to find out their vote entitlement prior to a meeting from meeting tabulators.
- Inconsistent Vote Reconciliation Methods
Meeting tabulators are using different methods to reconcile proxy votes, causing inconsistency in the ultimate vote count. The CSA concluded that there should be a single, industry-wide protocol to perform the reconciliation.
- Errors Made by Meeting Tabulators Go Undetected
The CSA observed that human errors are sometimes made by meeting tabulators resulting in valid proxy votes from intermediaries not being counted. These errors are not detected by the intermediaries because there is no communication with the meeting tabulators concerning the outcome of individual proxy votes. The CSA concluded that improvements must be made to establish communication between meeting tabulators and intermediaries about whether proxy votes are accepted, rejected or prorated.
The CSA has also investigated whether securities lending has led to double voting. It was found that custodians such as CIBC Mellon, RBC Investor Services, State Street and Northern Trust have back-office systems that track lent shares per client account that would eliminate the possibility of double voting. Investment dealers, on the other hand, often do not have this system capability for retail margin accounts because there is no linkage between the systems that track lent shares and the ones that track individual margin accounts. However, the CSA’s review to date shows that the likelihood of a share actually being lent and voted concurrently by investment dealers is relatively low.
From its review to date, the CSA has found that the current proxy voting infrastructure is “antiquated and fragmented and needs to be improved.” In its conclusions, the CSA has made some helpful recommendations to improve the gaps by encouraging the development of standards in vote reconciliation and communication among the key market participants. Although the Progress Report is helpful in advancing the discussion from hypotheticals to problems observed in actual shareholder meetings, some market participants have expressed concern that the findings are based on only six shareholder meetings, which may not fully and accurately represent the root of the problems.
For the 2015 proxy season, the CSA intends to expand the review to contested meetings where there are typically higher volumes of proxy votes and revocation, and other procedural differences such as the use of a dissident form of proxy. In 2016, the CSA plans to direct key entities involved in vote reconciliation to develop industry protocols that would, at a minimum, address the five key findings discussed above and any additional areas of concern identified through the planned review of proxy contests this year. The CSA also intends to continue gathering information on client account vote reconciliation practices.
There is skepticism that market participants can by themselves break the silos in the existing infrastructure and arrive at a common, permanent solution. As the CSA pointed out, the proxy voting infrastructure is meant to operate for the benefit of investors and issuers. They, and even other market participants, may be pleased to see that the CSA is assuming a leadership role in the development of industry-wide protocols. The CSA has gone further to indicate that it will consider mandating aspects of protocols and/or regulating entities if necessary or appropriate.
A full copy of the Progress Report can be found here.