Canada\u2019s securities regulators are trying to make shareholder democracy a little more efficient, although it seems the system has bigger problems.
The Canadian Securities Administrators<\/b> had proposed some changes to the proxy-voting system in April that aim to enhance the efficiency of the proxy process by allowing issuers to provide notice of, and access to, voting materials rather than automatically sending materials to all shareholders \u2014 many of whom don\u2019t bother to vote.
The CSA\u2019s objective is to cut some of this unnecessary waste and save money. The trade-off is that some shareholders \u2014 particularly, retail investor shareholders \u2014 may be less likely to vote if they have to navigate a new process and if they don\u2019t have the impetus of physical materials demanding their attention.
Indeed, a \u201cnotice and access\u201d model has been in place in the U.S. for a couple of years now \u2014 and one apparent result has been a lower incidence of retail investor shareholder voting. The CSA acknowledges this and indicates that its proposal deliberately differs from the U.S. model, partly in the hope of avoiding some of that drop-off in retail investor voting.
Some industry stakeholders worry that avoiding this drop-off won\u2019t be easy. According to the Vancouver-based Shareholder Association for Research and Education<\/b>\u2019s comment: \u201cWe do not believe that the differences between the U.S. provisions and the proposed requirements for Canadian issuers will produce a significantly different result.\u201d
SHARE\u2019s comment points out that after N&A was introduced in the U.S., retail investor voting dropped by about 50% \u2014 and the voting rate was significantly lower among those receiving the notice alone rather than the full proxy package. SHARE\u2019s comment says the N&A proposal should be scrapped in its current form as it\u2019s not in shareholders\u2019 best interests.
The Canadian Foundation for the Advancement of Investor Rights<\/b>, a Toronto-based investor advocacy group, says in its comment that the impact on voting rates should be the primary consideration: \u201cIn our view, this aspect [of potentially reduced retail investor participation] outweighs all others in importance. While we do not dismiss the potential benefits of cost savings, or the environmental factors of producing less wasted printing (and, therefore, paper, ink and the like), any change to shareholder communications with beneficial shareholders will only be successful if it does not reduce retail shareholder participation in corporate democracy.\u201d
Many other comments assume that it will lower voting rates, as that has been the experience in the U.S. And, whether it does or not, several comments suggest that it\u2019s not the method of calling a meeting that most impacts retail investor voting; it\u2019s the fact that in the current system, many retail investors aren\u2019t informed about meetings at all.
Several comments point out that the bigger problem impeding retail investor voting is the fact regulators do not require issuers to pay for the delivery of proxy notifications and materials to shareholders that hold their securities in Street name and don\u2019t have their identities disclosed to the company. (Issuers either implicitly shift that cost to securities dealers or simply let these shareholders go without notification.)
According to Broadridge In-ves-tor Communications Corp. <\/b>data, about 37% of Canadian companies currently refuse to pay for the delivery of proxy materials to shareholders who want to remain anonymous. And this group now accounts for the majority of shareholders \u2014 51%, up from just 20% in 2002.
The Investment Industry Association of Canada<\/b> reports in its comment that in the latest proxy season, dealers paid for mailings to about two-thirds of these clients, but the remaining one-third \u201cwere effectively shut out\u201d of the process.
It is often assumed that dealers can just pass these costs along to shareholders, the IIAC\u2019s comment says. However, that often isn\u2019t the case: \u201cDealers are reluctant to charge small mailing fees to individual clients (even if these small amounts add up to large amounts in the aggregate) because they do not want to be perceived as \u2018nickel and diming\u2019 clients in a highly competitive environment.
\u201cDealers are also under a great deal of pressure to provide clients with high rates of return on investments, and have been facing recent criticism from government and regulators on the fees that they charge their clients,\u201d the IIAC comment adds, noting that small, independent dealers are particularly challenged in their cost-cutting.
Moreover, shareholders shouldn\u2019t be penalized for protecting their privacy, says the IIAC comment, which echoes the view that issuers should be required to pay for proxy delivery to all shareholders.
Allowing companies to avoid paying for proxy delivery, London-based Hermes Equity Ownership Services Ltd. <\/b> says in its comment, \u201chas become a serious deficiency in our proxy system.\u201d
Although regulators are proposing required disclosure from firms that refuse to pay for delivery, the Hermes comment points out this may not do much because affected shareholders probably won\u2019t learn of the company\u2019s decision, which will be \u201cdisclosed in the proxy circular that [they] will not receive\u201d until after the meeting.
The Hermes comment continues: \u201cIn our view, securities law should require issuers to send proxy related material (through [N&A] or otherwise) at their expense to all of their shareholders, irrespective of whether they choose to protect the privacy of their personal information. We urge the CSA to ensure that at least [N&A] cover all shareholders.\u201d
Indeed, in several comments, one of the fundamental problems with the CSA proposal is that it isn\u2019t broad enough in several respects. The CSA is planning to allow issuers to use N&A for only routine annual meetings. N&A won\u2019t be allowed for \u201cspecial meetings,\u201d on the basis that these may involve more important items, such as the approval of major transactions. Also, issuers would be allowed to choose to use N&A for some shareholders and not others.
@page_break@Most of the comments argue that N&A should be allowed for all sorts of meetings, and that it should be used for all shareholders equally. In some comments, this is simply a cost consideration. As an N&A model is intended to generate savings for issuers, the more widely it can be used, the greater the savings.
But several comments also point out that limiting N&A to routine meetings will severely undermine its usefulness \u2014 particularly for junior issuers, as the rules of the
S&P\/TSX Venture Exchange<\/b> essentially make all members\u2019 annual meetings count as special meetings. As the comment from Calgary-based GG Consulting Corp. <\/b>explains: \u201cAccordingly, although [N&A] might be more important for small- and mid-cap issuers, no venture issuer can use [N&A] as it is currently set out in the proposed regulations.\u201d
Indeed, Broadridge\u2019s comment warns that the implementation of the N&A proposal may not be economically viable in its current form. Between the fact the model may not be useful for venture-level issuers and the impact of other corporate laws that may limit its use, the Broadridge comment says, the number of shareholders eligible to receive N&A delivery and the number of issuers who can use it is \u201cseverely impacted.\u201d The Broadridge comment estimates that only 19% of Canadian issuers could have chosen the new model in the 2010 proxy season, with just 15.3% of investors receiving materials this way.
Moreover, the Broadridge comment cautions that Canadian issuers won\u2019t see cost savings as significant as those enjoyed by U.S. firms because previous reforms to disclosure rules in Canada have already generated some cost savings. The incremental benefit of the N&A model is probably just reduced printing and postage costs and, if N&A applies to only annual meetings, the amount won\u2019t be material. If the savings are insignificant, the comment continues, introducing the N&A model may not be worth the effort.
Others comments object to the proposed narrow application of the new N&A model on more philosophical grounds. SHARE\u2019s comment says that limiting N&A delivery to meetings that are not special meetings \u201cis likely to perpetuate the already too common view that the election of directors and (re)appointment of auditors are \u2018routine\u2019 matters that require less attention from shareholders than \u2018special\u2019 resolutions.\u201d
Rather, SHARE\u2019s comment adds, the election of directors is \u201carguably the most crucial matter to be considered by shareholders each year.\u201d And the auditing role is critical, too, it stresses: \u201cVoting on directors and auditors is routine only in the sense that each happens annually. Securities regulation should encourage shareholders to view voting on directors and auditors as seriously as voting on other items.\u201d
Many of the comments also express worry about the CSA\u2019s plan to allow companies to pick and choose which investors to use the new model with. Some comments point out that allowing selective use of the N&A model will give companies an opportunity to \u201cgame\u201d the system \u2014 using N&A for certain shareholders, on the basis that that is likely to lead to lower voting rates among that group, while soliciting votes from management-friendly shareholders with physical proxies.
According to the submission from Carol Hansell, senior partner with Davies Ward Phillips & Vineberg LLP<\/b> in Toronto: \u201cWe suggest that such selectivity, at worst, introduces an ability to manipulate the proxy voting system to achieve a desired vote result and, at best, adds another complication to an already complicated process and another way that similarly situated shareholders may not be treated equally.\u201d
Hansell\u2019s comment also says the CSA\u2019s initiative doesn\u2019t address many of the common complaints with the proxy voting system.
In fact, a number of the submissions on the CSA\u2019s proposal highlight many of these complaints \u2014 chief among them being the lack of certainty in the voting process. Others include overvoting, empty voting and unequal treatment of different shareholders.
Indeed, Hansell is now finalizing a report examining the proxy system in Canada \u2014 and is recommending reforms. Her report had not yet been published as Investment Executive <\/i>went to press.
The Toronto-based Canadian Coalition for Good Governance<\/b>, for one, says in its comment that an effective proxy voting system is essential to shareholder democracy: \u201cIt is of significant concern to our members that a shareholder voting its shares in Canada has no guarantee that those shares will be counted or counted accurately.\u201d
The CCGG comment adds that the CSA needs to address this \u2014 and other problems with the proxy voting system \u2014 immediately.
Victoria-based British Columbia Investment Management Corp., <\/b>which provides funds-management services for public bodies, also calls for making the proxy-voting process fully transparent and verifiable. Currently, although the proxy intermediary confirms that it has submitted an investor\u2019s votes as directed, the BCIM comment says, the inves-tor doesn\u2019t receive any assurance that they were voted as instructed: \u201cThe consequences of a miscast or missed vote can have serious economic implications,\u201d which could swing the outcome of a merger approval or determine whether a contentious proposal passes. And proxy voting will be an even bigger issue as majority voting for directors becomes a more common practice.
\u201cIt is just a matter of time (if it hasn\u2019t already happened without us knowing) until a significant proxy contest is declared lost, when it was really won,\u201d says GG Consulting\u2019s comment. \u201cUnfortunately, under the existing regime, there is no way to show that the shareholders who voted were those entitled to vote, and the rightful shareholders may be stuck with a decision they did not support.\u201d\tIE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
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