The Quality of the Shareholder Vote in Canada
Features of the System
The following is a summary of the features of the proxy voting system that are relevant to the discussion in this paper:
- Investors Hold Their Interest Indirectly – Most investors (both retail and institutional) hold their interest in shares indirectly, through one or more intermediaries. The issuer therefore has no direct relationship with most of its investors.
- Shares Held in Fungible Bulk – Each intermediary holds shares in "fungible bulk". "Fungible" means that each share is identical and so it does not matter to the investor whether it has invested in one share as opposed to another share. "Bulk" means that the intermediary has a position in the aggregate of all the shares in which it holds an interest for its clients.
- OBO Status – Investors have the right under Canadian securities law to elect not to allow their intermediaries to disclose their identity to the issuer. The investors who do so are referred to as "OBOs" (Objecting Beneficial Owners). Those who allow their intermediaries to disclose their identity to the issuer are "NOBOs" (Non-Objecting Beneficial Owners).
- Unreconciled Records – The records submitted by intermediaries in connection with shareholder meetings are often not reconciled to eliminate positions relating to shares that have been loaned or should otherwise not be available to be voted.
- System is Operated by Third-Party Service Providers – The machinery of the proxy voting system is operated by third-party service providers. Transfer agents and proxy solicitors act on behalf of issuers, proxy agents act on behalf of intermediaries and proxy advisors act on behalf of investors.
- System is Complicated – The proxy voting system involves a number of different parties and at least as many different systems and databases. It is susceptible to administrative and technological errors.
- System is Not Transparent – How communications flow between issuers and investors is not visible to any of them. The lack of transparency means that when an error occurs, it will often not be discovered – and therefore will not be rectified.
- Vote Confirmation Not Provided – The proxy voting system, as it currently operates in Canada, does not provide to an investor confirmation that the investor's voting instructions were translated into a vote that was counted at the shareholder meeting. Vote confirmation is possible in concept, but requires cooperation from everyone through whose hands the communications between the issuer and investors pass. Alternatively, one provider would need to control each of the steps of the communication process required to provide vote confirmation.
- Dominant Role of Broadridge – The proxy agent for almost all of the intermediaries in Canada is Broadridge. Accordingly, Broadridge is responsible for all of the mailings and tabulation of voting instructions for a very significant percentage of investors in every public company in Canada. Proxy agents are not regulated in Canada.
- Votes May Be Cast by Persons with No Economic Interest in the Issuer – Votes may be cast by persons who have no economic interest in the issuer. This may occur because the person sold its interest prior to the meeting, or as a result of derivative instruments that allow a person to acquire a right to vote with no economic exposure to the share being voted.
- Power of Proxy Advisory Firms – Many institutional investors use the research services and proxy voting platforms offered by proxy advisory firms. As a result, proxy advisory firms have the ability to influence the way in which their clients (typically institutional investors) vote.
- Regulatory Engagement – The proxy voting system is regulated primarily under securities law. That regulation ends when investors give their voting instructions to their intermediaries. How the votes are tabulated and proxies are cast is completely unregulated. Moreover, securities regulators do not monitor compliance with those aspects of the system that they do regulate.