Shareholder Involvement in the Director Nomination Process

Proxy access is the corporate governance cause célèbre in the 2015 U.S. proxy season. There has been a concerted push on the part of institutional shareholders and others to convince companies to adopt proxy access, most commonly in the form of a trigger of 3% of outstanding voting shares held for 3 years. Shareholders have responded very favourably to the proxy access shareholder proposals put forward by institutions such as the New York City Pension Funds through its Board Accountability Project. A surprising (to many) number of companies [1] have adopted proxy access on the 3%/3 year basis, including some of the largest, best known and established of U.S. companies, some voluntarily and without a majority approved shareholder proposal on the matter. In Canada, the Canadian Coalition for Good Governance (CCGG), an organization which represents institutional shareholders that collectively own or manage approximately Cdn $3 trillion of assets and which has a mandate to promote good corporate governance at Canadian public companies, has just released its own proxy access policy. The policy, entitled Shareholder Involvement in the Director Nomination Process: Enhanced Engagement and Proxy Access (available here), has been developing for over a year following widespread input and consultation among CCGG’s members and other market participants.

It will surprise some readers to know that CCGG is focusing on proxy access since Canada often is looked to as a country that already provides shareholders with the right to nominate directors. [2] In reality, however, the right to access the proxy provided under Canadian corporate statutes is limited as well as onerous and expensive to exercise. It is CCGG’s view that Canadian corporate legislation does not provide shareholders with meaningful input on board composition or access to the proxy.

Under Canadian law, [3] shareholders have the right to submit a shareholder proposal to nominate a director, along with a 500 word supporting statement, provided they own in aggregate 5% of the outstanding voting shares and have held those shares for 6 months. This right, however, does not include the ability to have the shareholder nominees included on the same form of proxy as the company nominees with the same accompanying proxy circular disclosure, nor does it allow shareholders to solicit more than a limited number of proxies in favour of their candidate without preparing their own dissident proxy circular. Canadian shareholders also have a statutory right to requisition a meeting to nominate directors if they hold 5% of the outstanding voting shares [4] but again, in order to solicit more than a limited number of shareholders, a dissident proxy circular must be used. CCGG is looking for a practical mechanism to enable shareholders to exert meaningful influence on board composition without the hostility and expense of a proxy context.

To this end, CCGG’s policy has a two pronged focus: (i) an emphasis on shareholder engagement with the independent members of the board in the ordinary course in order to provide shareholder input into board composition and (ii) direct shareholder access to the proxy when circumstances warrant.

CCGG’s policy encourages both independent directors and shareholders to communicate with each other on board composition on a regular basis. [5] It is CCGG’s view that on-going open-minded dialogue between boards and shareholders on director selection will lead to better boards: more independent and less vulnerable to capture by management, more diverse and more representative of a larger array of perspectives, including shareholders. It also will assist with board refreshment.

In addition to encouraging engagement on board composition, CCGG’s policy seeks to enhance shareholders’ ability to nominate board candidates directly to the company’s proxy where circumstances warrant. We envision this tool being used in situations where board/shareholder engagement has failed. Briefly, CCGG’s enhanced proxy access policy would permit shareholders who in the aggregate own 5% of the outstanding shares of a company with Cdn $1 billion or less in market capitalization, or who in the aggregate own 3% of the outstanding shares of company with more than Cdn $1 billion in market capitalization, [6] to nominate the lesser of three directors or 20% of the board. Shareholders would not be able to nominate another three directors or 20 percent of the board in following years so long as the previously nominated directors, if elected, remain on the board.

Key to CCGG’s policy is that shareholder nominees must be placed on the same form of proxy as company nominees, with the same prominence and with the same nominee biographical disclosure. Provided this is the case, we do not object to shareholder nominees being listed separately from company nominees as long as they are presented on the same page.

Importantly, the policy asks regulators to amend existing rules in order to permit shareholders who nominate directors to use the company’s proxy circular as their own circular for purposes of soliciting support for shareholder nominees.

Notably, in contrast to what has emerged as the standard proxy access threshold in the U.S., CCGG’s policy does not stipulate that a shareholder must hold shares for a certain period of time in order to be able to nominate directors. After lengthy discussions, CCGG members came to the conclusion that permitting only shareholders that meet a holding condition to nominate directors in essence establishes two classes of shareholders, something that CCGG is against on principle.

CCGG’s policy also requires shareholders who nominate directors to represent that they are not seeking control and that their economic ownership interest is at least 3% or 5% (depending on the company’s market capitalization) of the outstanding voting shares. In addition, reasonable solicitation costs on the part of the shareholder should be paid by the company unless shareholders otherwise resolve.

CCGG is hopeful that the adoption of enhanced shareholder involvement and proxy access will follow the same trajectory in Canada as majority voting. [7] CCGG and others worked for a decade to implement a majority voting standard, by engaging with companies on an individual basis, through letter writing campaigns and by submitting shareholder proposals. These efforts resulted in the voluntary adoption of majority voting policies by the majority of companies on the TSX Composite Index, Canada’s largest index. The limited success of this private ordering was followed by regulatory change last year when the Toronto Stock Exchange, after urgings by CCGG and others, required all companies (other than controlled companies) listed on the exchange to adopt a majority voting policy in non-contested director elections. [8] [9] CCGG believes that the ability of shareholders to influence board composition constitutes an essential component of the exercise of meaningful voting rights. CCGG’s policy has begun a public dialogue in Canada about enhancing engagement and proxy access, which we hope eventually will be welcomed by Canadian companies as a fundamental aspect of shareholder democracy.

Endnotes:

[1] According to the Council of Institutional Investors, over 30 companies in the U.S. have adopted some form of proxy access to date.
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[2] See, for example, the CFA study Proxy Access in the United States: Revisiting the SEC Rules.
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[3] See, for example, section 137(4) of the Canada Business Corporations Act.
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[4] See, for example, section 143(1) of the Canada Business Corporations Act.
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[5] In Canada there is a much greater acceptance on the part of independent directors of engaging with institutional shareholders than is currently the case in the U.S and such engagements are not uncommon. They are generally understood by both sides to be advantageous. CCGG itself engages on corporate governance issues such as executive compensation and board composition and refreshment with the independent directors, typically the independent chair and the chair of the compensation committee or governance committee, of approximately 45 to 50 issuers a year and reports to its members the results of such engagements.
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[6] The five percent and three percent thresholds were decided upon, in part, after reviewing the number of companies listed on the TSX and the TSX-V with market capitalizations either above or below $1 billion: 82.2% of the 1,521 companies listed on the TSX have a market capitalization of less than $1 billion and 99.9% of the 1,953 companies listed on the TSX-V have a market capitalization of less than $1 billion. 92.2% of the 3,474 companies on the two exchanges combined have a market capitalization of less than $1 billion.
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[7] See CCGG’s executive director’s earlier post on majority voting in Canada.
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[8] The TSX listing requirement is based on the majority voting policy that CCGG has espoused since 2006 and which includes the important provision that when a director who fails to receive a majority of votes in favour tenders his or her resignation, the board must accept that resignation barring exceptional circumstances.
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[9] CCGG also has continued to urge Canada’s federal and provincial governments to amend their respective corporate statutes to enact a majority voting standard for non-contested director elections.
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