Summary of Proposed Amendments
On September 9, 2011, the Toronto Stock Exchange (TSX) published for comment proposed amendments to Part IV of its Company Manual. If implemented, the proposed amendments would require issuers listed on the TSX to elect directors individually, to hold annual elections for all directors, to disclose annually in their Management Information Circular whether they have adopted a majority voting policy in uncontested meetings and, if not, to provide an explanation as to why. In addition, where a majority voting policy has not been adopted, the issuer must advise the TSX if a director receives a majority of "withhold" votes.
In ceding the lead role in corporate governance to securities regulators in 2005, the TSX stated that it would continue to monitor corporate governance disclosure. In its notice proposing the amendments, it acknowledged OSC Staff Notice 54-701 Regulatory Developments Regarding Shareholder Democracy Issues published on January 10, 2011 which invited comments on slate voting and majority voting for uncontested director elections.
The amendments are subject to a 30 day comment period ending October 11, 2011 and will become effective upon approval by the Ontario Securities Commission.
Individual Director Elections
Under the proposed amendments, holders of voting securities of a listed issuer would be able to vote "for" or "withhold" voting, separately for each director nominee rather than by slate. According to the TSX, approximately 83% of issuers listed on the S&P/TSX Composite Index currently elect directors individually. If implemented, the proposal would require issuers to hold individual director elections for both uncontested and contested elections, representing a marked departure from voting on board slates.
Annual Director Elections
The TSX also recommends that security holders should be entitled to vote on the election of each director on an annual basis. If adopted, this amendment would effectively eliminate staggered boards, where only a subset of directors is elected each year and director terms are for a period exceeding one year. According to the TSX, 98% of issuers in the S&P/TSX Composite Index already hold annual director elections. As such, mandating annual director elections would not place a heavy burden on most issuers.
Majority Voting for Director Elections
As it stands under Canadian corporate law, security holders are entitled to vote "for" or to "withhold" their votes in respect of the election of directors. In uncontested elections under this plurality voting system, each nominee director is elected to the board provided at least a single vote is cast for the nominee.
In contrast, under a majority voting system, security holders are effectively permitted to vote "for" or "against" board nominees. Majority voting arrangements typically provide that if a majority of votes are withheld from the election of a nominee director, the individual must tender his or her resignation to the board, which is generally expected to accept the resignation and publicly announce its decision. According to the Canadian Coalition for Good Governance, 57% of issuers listed on the S&P/TSX Composite Index have adopted a majority voting policy.
The TSX has not proposed to mandate majority voting or the adoption of a majority voting policy, instead opting for a "comply or explain" model, whereby issuers must disclose annually in their Management Information Circular whether they have adopted a majority voting policy for directors for uncontested meetings and if not, to explain what practices they employ relevant to director elections. Additionally, listed issuers who have not adopted a majority voting policy must advise the TSX if a director receives a majority of "withhold" votes.
Rationale for Amendments
A dominant force driving the proposed amendments is the TSX's desire to strengthen the voices of Canadian security holders in director elections and to reinforce Canada's reputation for supporting strong governance standards, aligning the nation and its investors more closely with the practices and standards of other major international jurisdictions.
The mandating of annual director elections will effectively foreclose the entrenchment of boards achieved through staggered elections. Furthermore, the TSX believes that disclosure of an issuer's adoption or non-adoption of a majority voting policy will enhance the governance dialogue between issuers, security holders and other stakeholders and considerably improve transparency.
Finally, although the amendments do not mandate majority voting or the adoption of a majority voting policy, the TSX contends that majority voting policies support good governance by providing a meaningful way for security holders to hold directors accountable and to remove underperforming or unqualified directors. As such, the TSX plans to continue to monitor the corporate governance landscape to determine if a rule requiring listed issuers to adopt a majority voting policy may be appropriate in the future.