Governance Insights for 2012 — Canada

The following post comes to us from Berl Nadler, partner at Davies, Ward, Phillips & Vineberg LLP, and is based on the executive summary of a Davies publication by Carol Hansell, titled “Governance Insights 2012,” available here.

Executive Summary

In our annual review of the topics shaping governance today, we consider the ideas that will trend in boardrooms across Canada for months and years ahead. The dominant theme is the shareholder. Directors need look no farther than the events of 2012 to convince them that shareholders have the power to seize the governance agenda.

We believe that the first response of boards to shareholder activism is changing dramatically in light of recent events. Our section on the Power and Influence of Canadian Shareholders looks at the experience of three issuers (Canadian Pacific, Research in Motion and Magna) confronted by shareholder demands for governance change. In each case, the shareholders used different tools to effect change, and in each case they were successful. Boards in 2013 will incorporate the lessons learned from these situations in considering their own response to shareholder concerns with their governance practices.

At the same time, boards of Canadian issuers will also be able to draw on the experiences in 2012 when they believe that the actions of a few shareholders threaten the fair treatment of all shareholders. In Boards Seek Fairness for All Shareholders, we describe the sudden emergence of the “empty voting” dilemma on the Canadian governance scene. The success of TELUS Corporation in dealing with a proxy challenge from an “empty voter” has engaged the courts, regulators, investors and issuers in public policy discussions that may have significant impact on shareholder decision making. We also examine the adoption of “advance notice by-laws” by more than 30 issuers (largely in the mining sector) in order prevent a surprise attack on the floor of the annual meeting from effectively disenfranchising the vast majority of shareholder who vote by proxy based on disclosure in the proxy circular.

In Shareholder Democracy Movement Continues we consider the status of two comparatively new governance practices relevant to all public companies. The first is majority voting. Two of the elements of majority voting (individual director voting and disclosure of voting results) have been widely adopted by Canadian issuers and have now been made mandatory by the TSX. In 2013, boards will need to consider carefully the approach they should take if any director receives a majority of withhold votes. Absent extraordinary circumstances, there will be strong shareholder demand for the resignation of that director. The other recent governance development is say on pay. Say on pay has been adopted by almost all TSX 60 issuers, but has not been widely adopted by other issuers. Nor have Canadian regulators or exchanges indicated that they intend to mandate say on pay, although that remains a possibility. It is important for boards to be aware that in 2012, shareholders demonstrated that they will use say on pay to send a message to the board, when the first Canadian issuer lost its say on pay vote.

Shareholder rights are never more directly engaged than in the process by which they cast their votes. Focus on the Integrity of the Shareholder Vote Intensifies brings up to date developments in the very important, if complex, area of the proxy voting system in Canada. Davies has been a thought leader in this area with the release in 2010 of The Quality of the Shareholder Vote in Canada. In 2012, many of the topics discussed in that paper have garnered the attention of the courts and of securities regulators and will likely continue to be influential in the year ahead.

While the interaction of shareholders with the issuers in which they invest was the overwhelmingly dominant theme in governance in 2012, governance of emerging market issuers was another important issue. Issuers with operations in emerging markets have been the subject of extensive regulatory focus and enforcement activity throughout 2012, a trend that we expect will gain force in 2013. Challenges in Overseeing Operations in Emerging Markets sets out for management teams and boards of these Canadian issuers, some of the most important challenges that will demand their attention in 2012. Among these is the focus of Canadian regulators on financial reporting and other disclosure controls as well as the increased enforcement activity under anti-bribery legislation. In 2013, boards of issuers with operations in emerging markets should be particularly sensitive to risks posed by anti-bribery legislation and the way in which those risks are being managed. The reputational damage suffered by issuers such as SNC-Lavalin in 2012 should provide a compelling incentive for boards to get out ahead of this issue in 2013.

We end our review with a catalogue of the most recent developments in governance standards under New Governance Guidelines, Criteria and Rankings. The Canadian Coalition for Good Governance has released important new guidance and both ISS and Glass Lewis have updated their proxy voting guidelines for 2013. OSFI is also in the process of updating its governance guidelines for financial institutions, with a renewed emphasis on risk management. Interestingly, Standard & Poor’s issued new governance criteria in 2012 which will form an important part of its assessment of the creditworthiness of an enterprise it rates.

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One Comment

  1. Christian Koenig
    Posted Saturday, February 9, 2013 at 11:31 am | Permalink

    Dear Mr. Nadler
    I have two short remarks concerning the TELUS case study which is presented in DAVIES GOVERNANCE INSIGHTS 2012 and which I have been following as well in the last months.

    1)Firstly, the dual-share class unification on a one-to-one basis was definitely not in the interest of all shareholders. In the last two years, the voting shares traded at a premium of 3.70% when compared to the non-voting shares. The long-term average premium of 4.67% is even higher. Clearly, shareholders attributed a value to being able to control TELUS. Using market data, one can easily compute that the long-term market value of the total voting premium was approx. USD 270 million. I see no reason why any voting class shareholder should voluntarily choose to get herself diluted by her share of this control premium, in particular since both share classes were liquid and one therefore cannot justify the one-to-one unification with increased liquidity of the newly established share class. The fact that TELUS’ voting premium collapsed after the announcement of the unification plan does not mean that market participants approved the idea; it merely indicated that no one thought that it was possible to block the unification.

    2)Secondly, the conflicts of interests are not as clear as you suggest in the article. One can surely question Mason’s motives in this trade; after all it is a bet on acquiring enough votes to renegotiate the terms of the share class unification in favor of the voting class shareholders. While Mason was the most significant stakeholder (approx. 20%) in this share class, the other 80% would have also benefited from the fund’s strategy. Moreover, according to Black (Black, B., (2012). Equity decoupling and empty voting. The TELUS zero-premium share swap. M&A Lawyer, Oct. 2012) most of TELUS’ management held non-voting class shares and thereby were conflicted as they clearly favored the one-to-one conversion.

    In my personal opinion, the clear losers in this unification are the voting class shareholders. Economically speaking, they deserved the premium which Mason was demanding. It is interesting how the bad publicity that the hedge fund got interfered with the economic rationale of the voting class shareholders.

    Best regards,
    Christian Koenig

    * I do neither have any sort of affiliation with the actors involved in this trade nor do I have an economic interest in the unification as I did and do not trade the company’s stock.

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