A new proxy standard

Many shareholders of Canadian companies are suffering from a failure to communicate when it comes to proxy voting. Shareholders and companies alike are concerned that they may be disenfranchised by a range of issues including: electronic voting platforms; the requirements to notify non-objecting shareholders about shareholder meetings; votes at shareholder meetings not being counted; and the ability to audit present systems.

These challenges have spurred movements toward reform in several areas. This year’s Canadian Society of Corporate Secretaries (CSCS) conference highlights how serious companies are about these issues in presenting a breakout panel titled ‘New developments in proxy voting’. The panel will cover everything from the CSCS’ ‘White paper on shareholder communication’ to the new SWIFT ISO 20022 standard for proxy messaging.

‘There have been a lot of problems with the system – over-voting, securities lending and people not getting their proxy forms in time for the meeting,’ says panel moderator Wesley Hall, CEO of Kingsdale Shareholder Services, a Toronto-based solicitation firm. ‘There have been issues where institutional investors submitted votes and found out later that they were not counted. That kind of thing raises a lot of alarms.’

The passage of National Instrument 54-101 was supposed to spark greater transparency among companies. Titled ‘Communication with beneficial owners of securities of a reporting issuer’, it was adopted by the Canadian Securities Administrators to outline the roles and responsibilities of publicly traded companies, their transfer agents, financial intermediaries (such as brokers and custodians) and depositories. Its aim is to ensure that beneficial shareholders receive proxy-related materials for shareholder meetings.

That’s not exactly what has come to fruition, says Glenn Keeling, a partner at Laurel Hill Advisory Group and the leader of the proxy firm’s Canadian operations. ‘Those issuers are not able to effect those operations because the data is being channeled between the intermediaries and Broadridge. The intent of 54-101 to open up competition and offer more choices, in actual practice, hasn’t really done that,’ he says, referring to the ADP spin-off that manages most securities processing in Canada.

Not all shareholders are alike

Bill Mackenzie, director of special projects at the Canadian Coalition for Good Governance, says one of the fundamental problems is that there are three kinds of shareholders. The first are the registered shareholders identified in the share registry. The unregistered shareholders, or beneficial shareholders, comprise the next two groups: non-objecting beneficial owners (NOBOs) and objecting beneficial owners (OBOs). The difference is that NOBOs’ identities can be disclosed to the company, while OBOs’ cannot.

‘The rules in Canada are silent on distribution to objecting beneficial owners and who has to pay the costs’ with regard to notification mailings, says Mackenzie. ‘The law recognizes that [OBOs] are there, but it’s not clear who has to pay the costs of mailing [proxy materials] to them.’

This has created a void among Canada’s 3,000-plus public issuers, Mackenzie says, adding that it’s reasonable to expect many smaller companies to take advantage of this loophole to save mailing costs. But this is creating a level of disenfranchisement among shareholders who aren’t receiving the same communication from the companies whose shares they own. A primary recommendation in the CSCS’ white paper on shareholder communication addresses this issue, asserting that, according to Section 51 of the Canada Business Corporations Act (CBCA), full recognition of shareholders is limited to registered shareholders and to a subset of shareholders represented by intermediaries.

Find your own shareholders

The paper explicitly states that ‘although the CBCA now prevents intermediaries from voting shares in which they don’t have a beneficial interest unless steps are taken to receive voting instructions from the beneficial shareholder, nothing in the Act requires that beneficial shareholders be enfranchised, and the issuer is not entitled to recognize the beneficial shareholder directly.’

As a result, the paper makes strong recommendations for recognizing beneficial shareholders. The paper proposes amending current statutes to allow issuers who have access to ‘reasonably reliable information on the identity of their beneficial shareholders to use that information to treat beneficial shareholders in the same way as registered shareholders for the purpose of voting the shares they own at meetings.’ In addition, it states that many companies have such information reasonably available to them through Broadridge.

The problem, Keeling says, is ‘the legal community gets very uptight when two different groups are mailing materials to shareholders as they now can under 54-101.’ This uneasiness often prevents companies from taking advantage of the rules.

For the record

Moving toward dematerialization through electronic means is one way to facilitate communication and voting. David Masse, assistant corporate secretary at Montreal-based CGI Group, explains that Canadian statutes require corporations to keep registers and only those shareholders in the registers are recognized as shareholders. By adopting an electronic system, including an electronic voting system that recognizes shareholders through information that is readily available, Canada can more easily keep up with the fast-paced capital markets globally, he says.

‘What we’re also recommending as a first step is that the statutes that don’t presently allow it [be changed] to permit corporations to set a record date for voting,’ Masse adds. ‘Once a corporation has done that, there exists an excellent system administered by Broadridge that allows a corporation to know with a sufficient degree of certainty who their beneficial shareholders are as of the record date.’

A matter of establishing identity

Masse argues that, if the information already exists, corporations should be entitled to treat those people as if they’re registered shareholders and allow them full voting privileges without acting through an intermediary to file their proxy vote.

‘One of the problems with enfranchising beneficial shareholders to a greater degree is the problem of over-voting, which is a separate and very complex topic. But basically, because there’s an increasing prevalence of securities lending, short-selling and derivatives transactions, the number of beneficial shareholders who think they’re entitled to vote far exceeds the number of shareholders on the record. In order to enfranchise, and defend the rights of beneficial shareholders in a fulsome way, you have to put a control in place to reconcile the beneficial position and the best way to do that is to set a record date for voting,’ Masse explains.

Debra Sisti, head of Canadian research for RiskMetrics Group’s ISS Governance Services division, which provides corporate governance consulting services, says that setting voting cutoff dates becomes more problematic as multinational shareholders play an increasingly large and more important role in Canadian companies. She notes that it is common for intermediaries, who ultimately cast the proxy votes, to set a cutoff date as much as 14 days before the shareholder meeting, making it virtually impossible for shareholders to ask and answer questions or air concerns prior to having to commit to a voting position.

‘It’s not unusual, leading up to the meeting, for us to be dealing with issuers up to the 11th hour, where they’ll start to see votes coming in for an item, say a contentious compensation proposal, then they’ll get hold of their largest shareholder or shareholders to find out why there’s opposition to the items. They may refer back to us to find out what the governance issue is and to get us to explain to them what they need to do,’ Sisti says. ‘I think Canadian issuers are quite willing to try to work through to some solution that will benefit everyone and make amends of contentious items to get their institutional shareholders on board.’

Another emerging solution is the SWIFT ISO 20022, which provides a new standard platform for proxy messaging to further automate the voting process and make it more efficient. Developed by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a member-owned cooperative, it has become the standard financial messaging system in Europe. Mackenzie is enthusiastic about its promise as a more transparent, auditable and standardized messaging protocol. He says a transparent system that works across multiple networks is more important as cross-border transactions increase. ‘Developing an open protocol that can be utilized on any network, versus one that is network-dependent is a good solution,’ he explains.

Masse comments that the CSCS proposes leveraging the work that Broadridge does to more fully regulate the services it provides, including proxy voting. However, he concedes that ‘Broadridge administers a remarkably efficient system for gathering beneficial voting instructions.’

Moving toward transparency

Lack of transparency within the financial markets can actually put companies at risk, and Keeling emphasizes his view that Canadian companies increasingly need to work with third-party providers to survey the landscape of their shareholders, especially institutional investors. ‘Investors can make the choice to remain invisible, and many of them do. This results in a situation where the companies find it very difficult to understand the demographics of the shareholder base. Without this understanding, it is impossible to respond to their concerns. Shareholders have the ability to sit back and slowly accumulate stock and then come forward at the last minute with issues they want addressed. This can result in challenges to individual directors or the board as a whole, not to mention other shareholder proposals. If the company doesn’t know who the shareholders are and how they are likely to vote, how can they be expected to successfully defend these actions?’ he says. That makes the push for transparency all the more important.

Sisti advises that to achieve transparency, several parties need to get on board. ‘Institutional investors need to be part of the catalyst to get this done. They are the shareholders. They have significant power and carry quite a bit of weight. Generally speaking when they want to get something done, they can do so. Obviously, regulators need to be a part of this as well and corporate lawmakers and various intermediaries too. Without all the individual parties being involved it would be much more difficult to achieve the goals that we want to.’

Masse agrees that the system needs to evolve into one that offers a much greater ability to know who shareholders are and to communicate with them, ‘so they aren’t faced with an arcane Catch 22, where they don’t exactly follow the rules, but they don’t break them either.’

At the same time, Masse acknowledges that it’s critical not to prevent or hamper efforts to make the markets more efficient. ‘We’re not trying to drive the clock back to the 19th century and force full disclosure of all shareholder positions and registration of shareholder positions,’ he says. ‘That would be trying to run the clock backwards. We just want more transparency in a way that makes sense.’