The Quality of the Shareholder Vote in Canada
Key Issues The Need to Be Addressed
The problems with the proxy voting system are so layered and complex that, in our view, a number of issues must be addressed before effective solutions can be proposed. The issues that we have identified as being the most immediate are set out below.
- Access to Information - There is not enough information available about the proxy voting system to allow an independent party to either prove that systemic problems exist or provide the confidence that they do not. Most of the information about the operation and effectiveness of the system resides with third-party service providers (transfer agents, proxy agents, proxy advisors and proxy solicitors) who have a great deal invested in the system and whose business interests would be affected by any change in the system. We hope this paper will contribute to a better understanding of the issues among issuers and investors. However, a more comprehensive audit of the system must be conducted by a task force of subject matter experts appointed by the government or by securities regulators.
- Movement Away from Paper-Based System - Some of the problems in the proxy voting system will be eliminated when issuers are no longer obligated to provide hard copies of their proxy materials to their investors. There will always be some investors who prefer paper versions of the materials, but there is a point at which the cost to the issuer and the mechanical complications outweigh the importance of providing the materials in the medium of choice to the investor. Canadian regulations need to do to more to encourage the transition away from paper-based materials. Notice-and-access is a step in this direction, but the recent proposals by the CSA are only a first – and quite tentative – step towards a true paperless system.
- Revisiting the Commitment to the OBO Concept - One of the hallmarks of the Canadian (and US) proxy voting system is that investors may elect to conceal their identity from the issuer (the OBO/NOBO system). The fact that issuers cannot communicate directly with many (today almost half) of their investors makes the communication process much more complicated.
- Problems Created by Intermediary Files That Are Not Reconciled for the Purpose of Proxy Voting – Intermediaries (brokers, banks, custodians) are required to create a list of their clients who are entitled to vote at a shareholder meeting, together with the number of shares held by those clients. However, those lists are often "unreconciled". They have not been adjusted to eliminate, for example, shares that have been loaned. The loaned shares will therefore still appear on the list prepared by the lender's intermediary for voting purposes, and will appear on the list prepared by the borrower's intermediary for voting purposes. As a result, the vote attaching to a single share may be voted more than once.
- Issues Related to Broadridge's Place in the Market – Almost all of the intermediaries in Canada have outsourced their responsibilities in connection with communications between issuers and investors to Broadridge. Broadridge has played a leading role in improving and streamlining the proxy voting system in Canada. However, Broadridge is not subject to regulation in Canada and neither issuers nor investors have a line of sight into how Broadridge has handled the voting instructions from investors in connection with any particular meeting.
- Deciding Whether Empty Voting Matters and How to Deal With It – There is no question that empty voting occurs. The problem is that there is no way to determine how extensive it is. If it has no real impact on the outcome of a shareholder vote, perhaps there is no reason to focus on it. If, however, it were shown that it happens more than rarely and could have a material impact on the results of a shareholder vote, then the basis of shareholder decision making may come into question.
- Power of the Proxy Advisory Firms – Many institutional investors rely heavily on the recommendations of proxy advisory firms in deciding how to vote their proxies. Some issuers feel that the degree of de facto reliance gives proxy advisory firms the power essentially to dictate governance practices. Others are concerned that the proxy advisors do not understand issues specific to that issuer or even that they get some things wrong in their analysis. Finally, some are concerned with conflicts of interest where a proxy advisor both sells governance consulting services to issuers and provides voting recommendations to investors. A better understanding of the role and methods of proxy advisory firms is needed. In addition, issuers need a forum in which to articulate their concerns - a forum that would be capable of providing responses and solutions that alleviate the current concerns.
- Responsibilities of Investors – Do investors have any responsibilities to the issuers in which they invest or to the capital markets generally? Should they be expected to vote? If so, how do they reconcile securities lending with their proxy voting policies? These issues are receiving increased focus and in some cases affect other issues addressed in the paper. Institutional investors should engage actively in the issues facing the proxy voting system and the role that they play.
- Engagement of Securities Regulators - Securities regulators must acknowledge the importance of an effective and reliable proxy voting system. They should be championing a comprehensive review of the system and be prepared to regulate aspects of the system in which they have not been involved.