Every year RiskMetrics Group, a leading global provider of risk management and corporate governance products, updates the policies that underpin its benchmark proxy voting recommendations. One of the key issues for 2010 for RiskMetrics is slate director balloting which has, at least to this point, been tolerated by Risk Metrics in Canada. For 2010 public meetings, however, RiskMetrics now takes the position that individual election of directors has become best practice in Canada and that a majority of the largest capitalized issuers on the S&P/TSX Composite Index adhere to this practice. The foundation of a company’s corporate governance structure is a company’s relationship with its shareholders and how it addresses the ability of shareholders to vote for its directors. Consequently, RiskMetrics has updated its policies and has indicated that it may recommend that shareholders withhold votes from the all directors if director nominees of TSX-listed issuers are presented to shareholders for election as a slate and where RiskMetrics has identified: (a) additional corporate governance practices that fall short of best practice for the Canadian market; or (b) concerns about compensation practices and the alignment of pay with performance.
A slate directors ballot in combination with some or all the following governance practices may result in a “withhold” recommendation from RiskMetrics:
- less than majority independent board;
- less than majority independent key committees;
- insiders on key committees;
- no separate nominating or compensation committee;
- no disclosure of director attendance at meeting or less than 75% of directors present at meeting without acceptable reasons;
- no disclosure of audit fees broken down by category;
- non-audit fees paid to an external audit firm are greater than audit and audit-related fees;
- former CEO or CFO is on the audit or compensation committee;
- no separation of the Chair and CEO roles or no independent lead director identified; and
- board is classified (i.e. terms overlap)
Other factors may also contribute to a “withhold” recommendation from RiskMetrics. These factors include a common share capital structure with unequal voting rights, poor compensation practices, disclosure concerns or other significant corporate governance concerns. RiskMetrics notes that the new policy should not be applied in the following circumstances:
1. The company was previously listed on the TSX Venture Exchange and recently graduated to the TSX; and
2. The company has committed to replace slate director elections with individual director elections within a year.
RiskMetrics believes that the “double trigger” approach is appropriate because slate director elections discourage shareholders from providing feedback and deprive shareholders of the opportunity to disapprove of individual directors. Further, it expects that the new policy will align best practice on director elections in Canada with best practice in markets around the world. The discouragement of slate ballots would give shareholders the opportunity to vote for their choice of directors individually in a contested election so that the resulting board of directors accurately reflects the wishes of a majority of the shareholders. The policy complements the majority voting standard, which provides that directors must receive affirmative votes from holders of a majority of a company’s shares voted in order to be validly elected, which has been recommended by the Canadian Coalition for Good Governance.