The Toronto Stock Exchange has proposed new rules for electing directors of listed companies. Under the proposals, directors would have to be elected individually rather than by slate; staggered boards would not be permitted; and disclosure would be required as to whether an issuer has adopted a majority voting policy. Comments are due by October 11, 2011.
Slate voting and majority voting, as well as the overall effectiveness of the proxy voting system, were topics on which the Ontario Securities Commission sought comment earlier this year as part of a shareholder democracy initiative. The OSC’s staff notice attracted a significant number of comment letters from market participants, and the TSX proposal explicitly solicits comment on whether other organizations, such as Canada’s securities regulators, are better suited to pursue these corporate governance initiatives. While the TSX monitors corporate governance disclosure and may delist companies that fail to comply with securities laws, the TSX’s proposal to regulate director elections is its first corporate governance initiative since 2005, when securities regulators replaced the TSX as the main corporate governance standard-setter with the adoption of National Policy 58-201, Corporate Governance Guidelines, and National Instrument 58-101, Disclosure of Corporate Governance Practices.
The TSX has indicated that approximately 83% of listed issuers in the S&P/TSX Composite Index already elect their directors individually rather than by slate; approximately 98% hold elections for all directors annually rather than having a staggered board; and approximately 57% have a majority voting policy. Moreover, TSX Venture Exchange issuers are already required to hold annual individual director elections.
In the United States, according to the governance advisory firm ISS, most large public companies no longer have staggered boards, and majority voting was the most popular topic for shareholder proposals during the 2011 proxy season. Both the elimination of staggered boards and mandatory majority voting appeared in early versions of the Dodd-Frank Wall Street Reform and Consumer Protection Act but were eliminated from the final legislation.
Majority voting policies operate as follows: in uncontested elections, because the number of director nominees is the same as the number of openings on the board and there is no legal mechanism for shareholders to vote against a director, every nominated director is generally appointed, even those who receive a majority of “withhold” votes. Issuers with majority voting policies counter this outcome by requiring those directors to tender their resignations, which the board generally accepts absent exceptional circumstances. While the TSX is proposing to eliminate slate voting and staggered boards, it is not proposing to make majority voting mandatory. Rather, issuers would be required to disclose in their management information circulars whether or not they have adopted a majority voting policy for directors in uncontested elections. If not, the issuer would have to explain why not and would also have to inform the TSX if a director receives a majority of withhold votes.