With corporate governance issues continuing to percolate, inside the boardroom and out, TMX Group Inc. has proposed new rules for electing directors of listed companies. The proposals, which are open for public comment until Oct. 11, are something of a departure for TMX, which has largely stayed away from this sphere for some years, leaving such matters to securities regulators.
Although TMX recognizes that its new proposals set goals not currently required by most other Canadian jurisdictions, and that the Ontario Securities Commission has also considered some of these matters, TMX appears to have concerns about catching up with the world. The proposals state that, if adopted, the changes would bring Canada “closer to the practices of other major international jurisdictions” and would give Canadian investors an effective voice in electing directors.
The core of the proposals would require that: listed companies elect directors individually rather than by slate; hold an annual election for each director; and disclose whether the company has adopted a majority voting policy, and if they have not, provide an explanation for not doing so. These proposals, says Leslie McCallum, counsel with Torys LLP in Toronto, “have been on the radar of regulators and the TSX for a while.”
Adds David Surat, counsel with Borden Ladner Gervais LLP in Toronto: “They are part of a trend, supported by proxy advisory firms and shareholder advocacy groups such as the Canadian Coalition for Good Governance.”
This trend represents a movement away from entrenched boards and toward greater shareholder rights.
TMX’s proposals would not affect the vast majority of companies. According to TMX, 83% of issuers listed on the S&P/TSX composite index already elect directors individually; 98% hold elections for all directors annually; and 57% have a majority voting policy. Companies listed on the TSX Venture Exchange are already required to elect individual directors annually and will not, for the most part, be affected.
“There is a general belief that the proposals are best practices and only a minority of companies are not compliant,” says McCallum.Effectively, TMX wants to bring all TSX-listed issuers in line regarding the election of directors.
Under Canadian law, she explains, voting for directors of public companies is based on a “plurality system” — shareholders can either vote “for” a nominated director or “withhold” their votes. When a slate of directors is put up for election, and if the election is not contested, the entire slate of directors is elected if even one vote is cast “for” the slate, regardless of the number of “withhold” votes cast. Essentially, “withhold” votes do not count and nominated directors can get elected by voting for themselves if they also are shareholders. As a result, a majority of shareholders do not have the power to remove directors, even if the shareholders believe the directors are underperforming.
TMX’s proposed changes seek to eliminate this state of affairs by requiring each director to be elected individually at each annual meeting, thus clearly demonstrating the level of support that each director has among shareholders, says Surat. If a majority voting policy is adopted, “withhold” votes would be considered “against” votes for each director.
Unlike slate voting, if a director receives a majority of “against” votes under a majority voting policy, the director would be required to resign. “This depends on the policies of each issuer [and the] discretion of the board,” says Surat, adding that it’s a matter of “conforming to established practices,” as corporate law does not require a director to resign.
Surat points out that the majority voting process can also put some companies at risk for not having enough directors to meet regulatory requirements: “What if sufficient directors do not get shareholder approval?” This, he says, could mean that the company would not be able to meet TSX obligations of having at least three independent directors.
TMX is not attempting to mandate majority voting but is seeking to implement a disclosure model for majority voting policies. The proposal for annual elections takes account of the fact that some companies hold staggered elections, allowing a group of directors to be elected each year.
“Staggered boards provide stability,” says McCallum. “They don’t get refreshed every year.” IE