The end of 2013 and early 2014 saw a variety of proposals and developments in Canada on a range of corporate governance matters. Here are a few areas to watch over the course of the coming months.
- Gender Diversity
Following up on the Staff consultation paper issued in July 2013, the Ontario Securities Commission (OSC) has proposed a “comply or explain” model regarding the representation of women on boards and in senior management. The proposal involves amendments to Form 58-101F1 Corporate Governance Disclosure which, if adopted, will require most companies listed on the Toronto Stock Exchange (TSX) and certain other non-venture issuers reporting in Ontario to provide new annual disclosure concerning gender diversity (typically in an issuer’s proxy circular). The new requirements would include disclosure of, among other matters, the issuer’s policies with respect to the identification and nomination of women directors; consideration of the representation of women in the director identification and selection process and in executive officer appointments; any targets regarding the representation of women in such positions; and the number and proportion of the issuer’s directors and executive officers who are women. Under the “comply or explain” regime, an issuer that has not adopted a policy, given consideration to the level of representation of women or adopted targets would be required to explain why it has not done so. It is the OSC’s view that the proposed amendments should encourage more effective boards and better corporate decision-making by requiring greater transparency on these matters. This transparency is also intended to assist investors when making investment and voting decisions. The OSC’s comment period closes on April 16, 2014.
In a consultation paper published in December 2013 regarding possible changes to theCanada Business Corporations Act (CBCA), Industry Canada has also asked whether new measures to promote diversity (including gender diversity) within corporate boards of directors should be included in the CBCA and what such measures might entail. Any such changes to the CBCA could potentially affect nearly 235,000 federally incorporated corporations, including almost half of Canada’s largest publicly traded companies. Comments have been requested by Industry Canada by May 15, 2014.
- Director Term Limits
As part of its proposal on gender diversity, the OSC has also proposed similar “comply or explain” amendments with respect to whether or not issuers have adopted director term limits. The OSC agrees with stakeholders that regular renewal of board membership contributes to the effectiveness of a board, and director term limits can promote an appropriate level of board renewal and provide opportunities for qualified board candidates (including women). Mandatory term limits have not been proposed.
Director term limits have not previously been the subject of much attention in Canada. A recent study by the Clarkson Centre for Board Effectiveness suggests that Canadian issuers are not concerned about the impact of long tenure on board effectiveness. The proxy advisory firm Institutional Shareholder Services Inc. (ISS), however, has recently solicited feedback on director tenure and determined that institutional investors consider long director tenure to be problematic, although there are varying views regarding the nature of their concerns. Some investors are concerned that a lengthy director tenure can diminish a director’s independence, while others view it as limiting a board’s opportunity to refresh its membership. In this regard, more than half of the investors surveyed by ISS indicated that ISS should consider a policy on director rotation, specifically with respect to the board chair, lead director and key board committee chair positions. Issuers were not supportive of this kind of policy development. Glass Lewis & Co. (Glass Lewis) on the other hand believes that director age and term limits are typically not in the best interests of shareholders and may be indicative of a board that has a difficult time making “tough decisions”. Glass Lewis points to academic literature which suggests that there is no evidence of a correlation between director performance and either length of term or age. In any event, if a board has these limits, Glass Lewis expects they will be adhered to and not waived. If a board waives its limits, Glass Lewis will consider recommending shareholders withhold votes from the nominating committee unless there is a reasonable explanation.
- Majority Voting
In February 2014, the TSX announced rule changes requiring TSX-listed issuers, other than issuers that are majority controlled, to adopt majority voting policies for director elections at uncontested shareholders’ meetings, or to amend their constating documents in order to give effect to these new requirements. The TSX rules will require directors to resign if they are not elected by a majority (50% + 1) of votes cast at an uncontested shareholders’ meeting. Boards of directors would then be required to accept such resignations unless there are “exceptional circumstances”. For more information, see our February 2014 MarketCaps by Alexander Lalka and Vanessa Grant.
The rule changes require that TSX-listed issuers describe their majority voting policies in their proxy materials sent out in connection with their annual meeting of shareholders. In addition, after an uncontested meeting at which directors are elected, each issuer must disseminate a press release disclosing the voting results for the election of each director.
These new requirements, which follow the voluntary adoption of majority voting by many issuers over recent years, come into force for TSX-listed issuers with fiscal years ending on or after June 30, 2014 effective as of their first annual shareholder meeting after that date.
- Proxy Voting System
In August 2013, the Canadian Securities Administrators (CSA) published a consultation paper seeking feedback from issuers, investors and other stakeholders on approaches to address concerns regarding the integrity and reliability of the proxy voting infrastructure in Canada. The consultation paper follows, in particular, an earlier OSC staff notice on shareholder democracy published back in January 2011. While the CSA consultation paper lists many areas for discussion, it focuses on two main issues: (a) is accurate vote reconciliation occurring within the proxy voting infrastructure; and (b) what type of end-to-end vote confirmation system should be added to the proxy voting infrastructure? For more information, see our August 2013 MarketCaps by Steve Cutler, Brett Kagetsu, Kathleen Ritchie and Tina Woodside. While the initial comment period on the CSA’s consultation paper closed in November 2013, various securities commissions have held or will be holding further consultation sessions with market participants and other interested parties during the early part of 2014.
Industry Canada has also requested comments on proxy voting system issues. In addition to the above issues raised by the CSA, it has specifically highlighted concerns about “overvoting” (when the voting rights attached to a share in a corporation are exercised more than once) and “empty voting” (when a shareholder has transferred its economic interest to a third party but has retained the right to vote).
The issues involved in reforming the proxy voting system are numerous, technical and highly complex, involving many market participants both in Canada and abroad. We expect that ongoing consultations and other discussions, as well as the implementation of any measures proposed to address the identified issues, will extend for many years.
- Proxy Advisory Firms
In September 2013, the CSA provided an update on its earlier consultation paper concerning the potential regulation of proxy advisory firms. That consultation paper, issued back in June 2012, raised certain concerns about the services of proxy advisory firms (the most prominent being ISS and Glass Lewis), such as potential conflicts of interest, perceived lack of transparency, potential corporate governance implications and alleged undue reliance by institutional investors on the recommendations provided by such firms. For more information on the original consultation paper, see our June 2012 MarketCaps by David Taniguchi and Tina Woodside.
In its September 2013 update, the CSA noted that the feedback it received differed between the various groups of market participants (i.e. issuers, institutional investors, and proxy advisory firms). The CSA has determined that it prefers a policy-based approach that will give guidance on recommended practices and disclosure for proxy advisory firms to promote transparency and understanding of the services provided. The CSA intends to publish this proposed approach for comment in the first quarter of 2014. For more information, see our September 2013 MarketCaps by Martine Guimond, Tina Woodside and Ali Amadee.
- Shareholder Activism – By-law Amendments
Shareholder activism has been much in the news in Canada, with high profile cases involving well known Canadian companies such as Agrium, Canadian Pacific Railway and TELUS. While it is beyond the scope of this newsletter to delve into the topic of shareholder activism, we expect to see continued proposals from issuers to mitigate the risks of an activist campaign. On the corporate governance front, these efforts include the adoption of amendments to existing corporate by-laws – in particular, adoption of advance notice by-laws (requiring a shareholder to give notice of its intention to nominate directors at an annual meeting of shareholders), enhanced quorum by-laws (requiring a higher quorum where a shareholder proposes to replace a majority of the board members) and by-laws to deal with “golden leashes” (disqualifying director nominees who receive certain third party compensation, thereby restricting the ability of activists to offer special compensation to its elected director nominees and not to re-elected incumbent directors).
These types of by-law amendments have drawn comments from the proxy advisory firms, such as ISS and Glass Lewis, as well as from institutional investors. For example, ISS has taken the policy position that it will generally vote against enhanced quorum by-laws, and that it will apply a “case by case analytical framework” with regards to “golden leash” by-law amendments that are put to a shareholder vote, taking into account factors such as the board’s rationale for proposing such a by-law and whether the by-law materially impairs or improves shareholder rights. The issue of golden leashes has recently been particularly controversial in Canada, drawing strong views in Agrium’s recent proxy battle, for example. Following the adoption of “golden leash” by-law amendments by a few U.S. companies last year, the first Canadian issuers to propose similar amendments may well be seeking shareholder approval during the course of the upcoming proxy season.