Canadian governance roundup

Historically, Canada has been criticized for its relatively lax enforcement of anti-corruption and anti-fraud measures when compared with the rest of the world – but that’s all about to change. Canada has taken a significant step forward in anti-corruption enforcement this year, as evidenced by several legislative changes. The country has also improved its standards on several governance-related issues. Here we present some of the most significant changes to be adopted during the first half of 2013.

Amendments to the CFPOA

Canada’s primary anti-corruption legislation received a big boost in June when amendments intended to close loopholes in the Corruption of Foreign Public Officials Act (CFPOA) were finally approved. The changes bring Canada’s legislation into line with the UK Bribery Act on a number of issues, strengthening its ability to prosecute anti-corruption cases.

Prior to the enactment of the new amendments, the CFPOA could go after corruption cases only where some part of the formulation, initiation or commission of the corrupt acts took place in Canada. This stipulation meant many corruption cases occurring abroad could not be prosecuted. According to law firm Blake Cassels & Graydon, the new provisions ‘deem acts of Canadian citizens, permanent residents, corporations, societies, firms or partnerships on a worldwide basis to be acts within Canada for the purposes of the CFPOA. This provision essentially subjects all Canadian citizens and companies to global regulation by Canadian authorities under the CFPOA.’

Mark Morrison, anti-corruption and compliance partner at Blakes, says, ‘With the change to nationality jurisdiction, a significant barrier has been removed from the authorities’ ability to prosecute these cases. The likelihood of further prosecutions being brought in Canada has definitely increased.’ 

Another significant change increases the maximum time of imprisonment for CFPOA violations from five years to 14, a much stronger deterrent. The amendments also ban facilitation payments, bringing the CFPOA provisions up to the higher standards imposed by the UK Bribery Act.

Morrison says the amendments are part of an emphasis on increased enforcement of anti-corruption laws that started in 2008. ‘In light of this focus on anti-corruption enforcement in Canada and now these laws that make it easier for authorities to investigate and prosecute these cases, any company that is conducting international operations in high-risk countries really needs to have an anti-corruption compliance program in place to ensure it does everything it can to prevent improper or corrupt payments, and to send a message of compliance throughout the company on a proactive basis.’

Advance notice adoption

In the area of board governance, Canadian companies have embraced technology by continuing to implement notice and access with shareholders and by adopting advance notice requirements for director nominations. 

The move by companies to require advance notice of director nominations has been particularly striking, because the idea has been around for many years. Canadian companies had historically ignored this practice in contrast with their American counterparts, but increased shareholder activism has led to a sweeping change in governance practices this year.

‘We’ve never seen anything like this – such a massive adoption of a governance change by so many companies in so short a time,’ observes Andrew MacDougall, partner at Osler Hoskin & Harcourt. ‘We now have more companies that have adopted the advance notice provision than we do companies that have adopted say on pay.’

MacDougall says 518 companies have now adopted the advance notice provision, about 500 within the last year, but only 129 companies have voluntarily adopted say-on-pay provisions. He notes that the adopters of advance notice have predominantly been smaller companies in the natural resource and extractive industries such as mining, and oil and gas, which have been most affected by proxy contests and dissident shareholder battles over the last two years.

‘This is definitely a reaction to the experience those industries and sectors have been facing,’ says MacDougall, adding that companies are adopting advance notice as a form of protection from dissident actions. ‘Although it is extremely difficult to succeed in getting [director] nominations from the floor in the form of a surprise attack, the possibility does exist, so this precludes that possibility and ensures that any debate over the constitution of the board is one that is in front of all shareholders.’ 

Additionally, MacDougall points out that the advance notice provision makes sure all shareholders have an opportunity to make informed decisions about director nominees when they go to execute their proxies.

Companies adopting advance notice provisions must be sure their policies fall in line with the guidelines of proxy advisory firms ISS and Glass Lewis. In a client advisory earlier this year, Kingsdale Shareholder Services told customers: ‘ISS will likely support advance notice policies if the company’s deadline for notice of dissident shareholders’ director nominations is no more than 65 days and no less than 30 days prior to the meeting date. 

‘ISS will also support additional efforts by companies to ensure full disclosure of a dissident shareholder’s economic and voting position, provided the requirements are reasonable and aimed at providing shareholders with the necessary information to review any proposed director nominees. Glass Lewis will support an advance notice policy if the specific date range is reasonable, at around 30-65 days.’

For the 2013 proxy season, new rules asking companies to send proxy materials to shareholders electronically instead of mailing paper copies went into effect, but not as many companies as hoped are taking advantage. Under the notice and access provision, all shareholders are provided with a notice that contains the date, time and place of the shareholder meeting, a brief description of all matters that will be voted on and instructions on how to access an electronic version of all proxy materials or request a paper copy. 

According to Osler Hoskin & Harcourt, only 174 Canadian issuers have taken advantage of the electronic delivery option that notice and access provides. It is expected adoptions will increase next proxy season as more companies adjust their systems to comply.

Majority voting

The Ontario Securities Commission (OSC) revised its Statement of Priorities for 2014 in June by stating its commitment to supporting a majority voting provision for elections of directors to Toronto Stock Exchange (TSX) listed firms and also to begin the process of identifying key problems with the current proxy voting system and then issuing a consultation paper on the matter.

TSX has been pushing to impose a majority voting standard on all its listed issuers for some time, and it intends to begin enforcing the requirement after December 31 this year. This change would require TSX-listed firms to adopt majority voting for uncontested director elections, so each security holder would have to vote for or against for each board nominee. Currently, TSX shareholders voting by proxy can only vote for a board nominee or withhold their vote.

On its website, the law firm Stikeman Elliott points out that because ‘most shareholders of Canadian public companies vote by proxy, directors are elected so long as any affirmative votes are received, regardless of the number of votes withheld. This has two implications: (i) a minority of shareholders voting ‘for’ director nominees has the power to elect those directors; and (ii) even an overwhelming majority of votes withheld will not block the election.’

The change to a majority voting standard would be much better for board governance. Already, several TSX-listed firms have voluntarily adopted majority voting policies, even as opposition has pointed out potential problems the policy can cause, including leaving companies with too few board members to legally operate (if nominees who do not receive a voting majority are asked to resign immediately). Stikeman Elliott notes that ‘these concerns appear manageable with a well-drafted majority voting policy that takes into account the specific circumstances of a particular issuer.’ 

The OSC says it plans to continue its review of shareholder democracy issues, including a plan to publish a concept paper that will analyze the Canadian proxy voting infrastructure and seek feedback that could pave the way for reforms. Many of the country’s largest institutional shareholders have lobbied for the OSC to step in and help correct problems with inaccurate vote counts and the lack of a system to confirm who actually casts votes by proxy. While it is good the OSC has made this a priority for the next year, it hasn’t given any deadlines for when it will offer concrete guidance on anything connected with shareholder democracy.