Fulfillment of the promise of one proxy, one vote remains elusive as the Canadian Securities Administrators (“CSA”) continue their review of the integrity and reliability of proxy voting in Canada. In August, 2013, the CSA first outlined its concerns by publishing CSA Consultation Paper 54-401 Review of the Proxy Voting Infrastructure which addressed the integrity and reliability of proxy voting in Canada. The CSA recently provided an update on this initiative in the form of CSA Staff Notice 54-303 Progress Report on Review of the Proxy Voting Infrastructure (the “Notice”) that summarized the comments it received, the results from a review of shareholder meetings, insights from a working group and the outcomes of targeted consultations with industry representatives. The Notice concluded with a list of proposed reforms as well suggested improvements for the 2015 proxy season.
Proxy Voting Infrastructure
The CSA refers to proxy voting infrastructure as the network of organizations, systems, legal rules and market practices that support the solicitation, collection, submission and tabulation of proxy votes for a shareholder meeting. The CSA notes that it is not only important that this system be reliable, accurate and transparent but that, as a matter of market confidence, it is perceived as such by both issuers and investors. To that end, the CSA has focused its review on the process by which proxy votes from registered shareholders and voting instructions from beneficial owners of shares are reconciled against the securities entitlements in the intermediated holding system, a process known as vote reconciliation.
Feedback from Market Participants
The following were key themes from the comment letters and roundtable discussions:
- Securities regulators need to take a leadership role in reviewing the accuracy of vote reconciliation because no single market participant is able to access all the information necessary for such a review; and
- Over-voting is occurring, indicating that vote reconciliation is not always being performed accurately.
Key Findings to Date
The CSA listed five key findings from their review of shareholder meetings and consultations with a technical working group featuring industry representatives:
- Over-reporting and over-voting was observed in all of the meetings that the CSA reviewed, however, in each instance the errors did not appear to be material;
- The over-reporting and over-voting was due to meeting tabulators missing or having incorrect vote entitlement information. This was a result of incorrect information being included in the paper omnibus proxies as well as human and technological errors;
- The risk of over-reporting and over-voting is exacerbated by the fact that intermediaries do not have access to their official vote entitlements– meaning the vote entitlement that an intermediary has for a meeting is based on the information provided by depositories and intermediaries–and so cannot determine if the meeting tabulator has missing or inaccurate information;
- Meeting tabulators employ different methods to reconcile proxy votes from intermediaries to official vote entitlements; and
- Some meeting tabulators made errors resulting in valid proxy votes being rejected or not counted.
The CSA concluded that the current proxy voting infrastructure is “antiquated and fragmented” and suggested that its review called for the following five improvements:
- Modernizing how meeting tabulators receive omnibus proxies;
- Ensuring the accuracy and completeness of vote entitlement information in omnibus proxies;
- Enabling intermediaries to find out their official vote entitlement for a meeting;
- Increasing consistency in how tabulators reconcile proxy votes to official vote entitlements; and
- Establishing communication between meeting tabulators and intermediaries about whether proxy votes are accepted, rejected or pro-rated.
The CSA noted that in advance of the 2015 proxy season all key players involved in vote reconciliation should focus in particular on the following:
- Intermediaries should take steps to ensure that they provide vote entitlement information to meeting tabulators in a timely and accurate manner; and
- The Securities Transfer Association of Canada should work with its members to develop consistent and transparent standards for how meeting tabulators use an association document developed by Broadridge Financial Solutions, Inc. at the request of the CSA that links various numeric identifiers with intermediary names.
For the 2016 proxy season the CSA intends to direct industry participants to work collectively to develop industry protocols to address the five areas of improvement described above and any additional shortcomings that are uncovered during its upcoming review of proxy contests.