Reforming Canada’s proxy voting system

There is a growing consensus that the proxy voting system, and indeed the wider system of shareholder democracy in Canada, is flawed and in need of reform. In a series of meetings led by the Canadian Society of Corporate Secretaries (CSCS) held in late 2011 through 2012, various stakeholders in the proxy system have come together to discuss the process by which shareholders vote their shares and how they are counted – or not counted, as the case may be.

The aim is to develop a facilitation program to redefine shareholder democracy with a view to ensuring that all those with an ownership stake in a public company are fairly and evenly represented. It is a lofty goal, and if it is to succeed, all players – issuers, institutions, transfer agents, the depository, custodians, brokers, managed funds, regulators, proxy agents and advisers – must participate openly. David Masse, chairman of the CSCS, enthuses: ‘If all the stakeholders concert their efforts, the solution is within our grasp.’

Identifying the problem

According to some experts, voting within the Canadian proxy system is rife with inaccuracies and structurally excludes or marginalizes certain sections of the shareholder base. Put simply, some votes are not submitted, others are submitted and not counted, and others still are counted twice. There is also the more complicated issue of shareholders that legally take trading positions which effectively negate their financial interest a company. Should those shareholders’ votes be counted?

The importance of this issue was highlighted in a court ruling handed down on September 12 this year. The Supreme Court of British Columbia handed Canadian telecoms company Telus a legal victory over New York-based hedge fund Mason Capital Management, which had challenged Telus’ move to consolidate its dual-share structure. Consolidating the telecoms firm’s class structure will mean that non-voting shares will be converted and will hold the same voting power as class-A voting shares. The decision is being lauded as a victory for shareholder democracy and a rebuff of hedge funds and others that engage in so called ‘empty voting’.

As reported in the Globe and Mail, Mason controls almost 20 percent of Telus’s voting shares, but its short position on Telus non-voting shares is almost as large as its ownership of voting shares. ‘When a party has a vote in a company, but no economic interest in that company, that party’s interests may not lie in the well-being of the company itself,’ Justice John Savage said in his ruling. ‘The interests of such an empty voter and the other shareholders are no longer aligned and the premise underlying the shareholder vote is subverted.

‘Telus argues that Mason’s position is an example of empty voting. Mason has simultaneously acquired common shares and shorted non-voting shares. Mason’s control over Telus’ voting stock is many times Mason’s net economic interest in Telus. Through its trades, Mason has successfully decoupled its economic interest in Telus shares from the voting rights carried with those shares. Mason only stands to profit if the holders of the common shares are unwilling to accept the one-to-one conversion.’

The CSCS plan aims to address this and other proxy voting issues. The process of developing a possible solution is expected to take five years. Slated to commence in late 2012, the proposal includes several steps:

2012-14: stakeholder working groups will undertake a comprehensive survey resulting in accurate mapping of every business process and information exchange in the proxy voting system.

2015: based on the survey and analysis stage, development and submission of a detailed proposal for reform supported by the stakeholders will be drafted. It will cover not only new business processes and normalized data flows, but also the legislative framework required to support them.

2016-17: implementation and monitoring to ensure that the new processes and supporting legislation take effect on schedule in 2017.

Stumbling blocks

Masse believes the ambitious and potentially controversial proposal is vitally important, but it is not universally supported. Similar moves to update the proxy system in the US have been met with regulatory indifference and active opposition from some members of the brokerage community who argue that a liberalization of the system is both unnecessary and overly cost-prohibitive.

‘We believe there is a sufficient consensus among the stakeholders that the time is right for fundamental reform, and that the reform program can proceed without a commitment on the part of the brokerage community to participate at this early stage,’ Masse says.

One argument against the CSCS plan is that reform should not be led by a third-party association. Detractors say regulators need to lead the reform. In response to Masse’s plan, the Investment Industry Association of Canada (IIAC) says in a letter: ‘We do agree that a cross-industry working group to discuss technical issues and/or brainstorm ideas for improving policy is needed, but we do not think that the CSCS ‘Summit’, as currently envisioned, is the most appropriate or productive forum for these issues and ideas to be discussed.’

The IIAC has offered its support for a planned review of the shareholder communications and voting process to be undertaken by the Ontario Securities Commission (OSC), and has expressed its willingness to participate in an OSC-facilitated review process, as noted in an official submission letter to the OSC in response to Staff Notice 54-701. ‘Although we believe that regulators are best equipped for managing this review process and the team of experts that will need to be consulted, if an outside party is engaged to manage the review, there must be a clear and accountable process for documenting input into the process,’ the letter reads. ‘Even if an outside party is engaged, a regulatory team should be involved in overseeing the process and approving the final report or recommendations.’

All change has a cost

In order to be successful in its objective of establishing a robust, end-to-end, auditable voting process with digital information flows for voting data and key analytical data sourced from XBRL-tagged securities filings, the CSCS and the other members of the reform group will need to bring about a range of regulatory changes. Amendments will be required to the Canada Business Corporations Act, the Ontario Business Corporations Act, other corporate statutes in other provinces, and the Bank Act.

The ultimate objective is to establish a regime with equal rights and equal treatment for beneficial and registered shareholders so that all shareholders are able to vote their shares effectively, easily, with confidence, and with the data needed to make well-informed choices. Creating such a program will require securing appropriate funding – Masse estimates costs at $2.5 million to $3 million. Given the large number of organizations that have expressed initial support for the proposal, and with others expected to come on board as it progresses, Masse estimates that a contribution of approximately $15,000-$20,000 for each participant could fund the effort. It’s yet to be seen whether Canadian organizations believe the cost is worth it. 

Masse concludes: ‘The success of this project will ensure that Canadian capital markets will have yet another competitive advantage on the world stage.’