More Voices at the Table

Proposed amendments to the CBCA will bring governance rules like majority voting into law for many companies. Are these changes necessary? There’s some doubt. Are they coming? No doubt at all

IN MAY 2015, the directors of Quebecor Inc., after a seven-hour board meeting in Montréal, decided against accepting the resignation of Michel Lavigne as a company director, even though 72 per cent of shareholders had withheld their support for him in the annual board election. Quebecor had, the same year, adopted for the first time a majority voting policy that required directors to submit their resignation if they failed to win a majority of votes in board elections.

Lavigne, who headed Quebecor’s compensation committee, was apparently being punished by the company’s shareholders for the generous severance package awarded to Quebecor’s departing CEO. Quebecor’s board chair, former prime minister Brian Mulroney, explained that it was unfair that Lavigne should alone suffer the backlash against a pay decision made by the board collectively.

Fast-forward to September 2016: Navdeep Bains, the federal Minister of Innovation, Science and Economic Development, introduced Bill C-25, which if enacted will make significant changes to the corporate governance (including director elections) of public companies incorporated under the Canada Business Corporations Act (CBCA).

The CBCA is the incorporating statute for nearly 270,000 corporations. Although most of these are small or mid-size and privately held, many large businesses have incorporated under the CBCA, including almost half of Canada’s largest publicly traded companies.

The amendments proposed in Bill C-25 stem from a House of Commons committee’s statutory review in 2010, which was followed, four years later, by a public consultation by Industry Canada. The CBCA amendments, which have passed second reading in the Commons and are now awaiting review by the Standing Committee on Industry, Science and Technology, would apply only to federally incorporated companies, not to companies incorporated under provincial statutes.

The CBCA amendments “are a modern and progressive approach,” says Susan Marsh, General Counsel at Morneau Shepell Inc. (which is provincially incorporated). “It’s already entrenched in the policies and practices in the [Toronto Stock Exchange] rules and the securities laws, which Morneau Shepell follows. [The federal government] is essentially getting up to speed on what current practices and policies are.”

Phil Mohtadi, General Counsel at Sears Canada Inc. (CBCA-incorporated), agrees. “I don’t think it’s going to have a significant impact on Sears. It doesn’t fundamentally change our corporate governance practices.

“That’s because several of the changes in the Bill are already reflected in the rules of the [TSX], in particular the requirement for annual board elections, voting on an individual basis for directors rather than as a slate, and the majority voting requirement. Those are significant changes to the CBCA, but they’re already reflected in the rules of the TSX. Majority policy has been a policy of the company for several years.”

However, David Reid, a partner at DLA Piper (Canada) LLP in Vancouver, is less satisfied. “It’s one thing to have it as an advisory or a ‘should comply with,’” he says, “but the CBCA will be the only regime in North America that makes these practices an absolute. I’m concerned that it’s removing effectively the board’s discretion in terms of its fiduciary duties.”

ANNUAL BOARD ELECTIONS

The C-25 amendments would require annual elections of directors for CBCA corporations. Currently, the CBCA requires that an election of directors be held at least once every three years, thereby permitting staggered boards.

The amendments would require “distributing corporations” (essentially, reporting issuers or public companies) that were incorporated under the CBCA to hold elections of the full board of directors annually. Corporations that are not “distributing corporations” under the CBCA (essentially, private companies) could continue to hold elections of directors as infrequently as every three years.

Although most CBCA corporations already hold annual director elections, the C-25 amendments would codify this requirement for public companies and align the CBCA with the listing requirements of the Toronto Stock Exchange and the TSX Venture Exchange (TSX-V), which since 2012 have required listees to hold annual elections of directors.

INDIVIDUAL DIRECTOR ELECTIONS

Until recently, public companies tended to nominate a slate of directors rather than permitting shareholders to vote on each director separately. Since 2012, however, the Toronto Stock Exchange and TSX-V have required listees to elect directors on an individual basis.

The CBCA amendments would now also require that shareholders be given the right to vote for each nominee on an individual basis, whether the corporation is private or public. This approach promotes greater shareholder choice, because management’s nominees would no longer be nominated on an “all or none” basis, and each nominee could be evaluated by the shareholders.

“It’s not as if individual nominees are running mini-political campaigns with shareholders,” says 
Alex Moore, a partner at Davies Ward Phillips & Vineberg LLP, “but boards are reaching out more to make sure they understand the point of view of shareholders, that shareholders understand the point of view of directors, and that there’s less of a disconnect.”

MAJORITY VOTING

Under current law in Canada, shareholders can either vote for directors or withhold their votes. This means that a director can be elected with a single vote, even if all other votes are withheld. The C-25 amendments stipulate that a director cannot be elected unless a majority of the shares that are voted are cast for that director. A nominee who does not receive a majority of the votes cast is prohibited from serving as a director, except in “prescribed circumstances.”

The regulations for Bill C-25 define those circumstances as: (1) the requirement in subsection 102(2) of the Act for at least two directors who are not officers or employees of the corporation or its affiliates; and (2) the Canadian residency requirements in section 105 of the Act.

Here, again, Bill C-25 treads ground already broken by the TSX. In 2014, the exchange adopted a majority voting requirement, but the rule is only classified as a listing standard so it could be changed at any time, whereas the C-25 amendments would become law. Also, the TSX rule allows for a board to reject the resignation, in “exceptional circumstances,” of directors who fail to gain a majority.

“In the most recent year,” says Moore, “we didn’t see any examples of directors not getting a majority whose resignations were rejected. So we don’t have this phenomenon of zombie directors where they don’t get the [majority] vote, but they’re still walking around and still on the board.”

“It gives a meaningful way for shareholders to hold individual directors accountable,” says Marsh. “It gives them a stronger voice in electing directors. Morneau Shepell’s been doing it since 2011.”

That being said, the amendments on majority voting could create problems, says 
Carol Hansell, founder and senior partner at Hansell LLP in Toronto. “If the nominee doesn’t get a majority vote in favour, essentially they’re not elected. That doesn’t address the issue of failed elections, where, say, nine positions on the board need to be filled but only six of the nominees receive majority votes.”

As Patrick Donnelly, Vice President, Legal of HudBay Minerals Inc., notes, “This could prevent boards from acting, in certain very limited circumstances. If a number of directors don’t get elected, it’s possible a board can be left without a quorum and therefore unable to act. I hope they address that before the Bill becomes law.” (HudBay is CBCA-incorporated.)

Stephen Erlichman, Executive Director of the Canadian Coalition for Good Governance (CCGG), which comprises many of the largest pension funds and other institutional investors in Canada, says concerns about a “failed board” are overblown. “Majority voting exists in countries other than Canada and the US without huge problems occurring. There are ways in which these procedural issues can be worked out.”

He points to the US, where the Council of Institutional Investors drafted a provision for the Model Business Corporation Act under which decisions regarding director nominees who win a plurality — but not a majority — of votes would be held over for 90 days, while the directors who gained a majority would appoint directors to fill their seats. “This is a solution, but it doesn’t have to be the solution,” says Erlichman.

In a submission to Industry Canada during its CBCA consultation, the coalition contended: “The fact that the majority of Canada’s largest issuers have had majority voting policies in place for years and the prospect of ‘failed boards’ has not materialized is evidence that the concern is unwarranted. The important point is that the principle of shareholder authority in director elections should prevail.”

Hansell says the TSX listing standard has “gotten us most of the way” to majority voting. “When people say it’s just a [TSX] rule, I’m not sure what the problem with that is. In order for the rule to be changed, it has to go through the Ontario Securities Commission. It’s a big deal.”

A TSX survey of 200 listed issuers in 2013, before the TSX rule was even adopted, found that 76 per cent already had majority voting policies. Since the TSX’s adoption of the requirement, some corporate boards have invoked the “exceptional circumstances” exemption to reject the resignations of directors who failed to win a majority. The Davies Governance Insights 2015 report revealed that in 2015 only one of 10 directors who failed to achieve majority support from shareholders had their resignation accepted by the board.

The latest Davies Governance Insights 2016 report, however, suggests that this tendency may be changing: in 2016, in all cases where directors of issuers on the S&P/TSX Composite and SmallCap indices received less than majority approval, the boards accepted their resignations. “It’s not clear at the moment that there’s a problem in that regard that needs to be addressed,” says Hansell.

DISCLOSURE ON DIVERSITY

Bill C-25 requires “prescribed corporations” to report annually on diversity among their boards and senior management. The companies will need to comply with National Instrument 58-101, adopted in 2014 by the Canadian Securities Administrators (CSA).

In 2015, for the first time, TSX listees had to disclose in their proxy circulars the number and proportion of women in director and executive positions. Under “comply or explain,” an issuer that hasn’t adopted a policy on the identification and nomination of women directors or given consideration to their level of representation is required to explain why.

In addition, Bill C-25’s regulations would require public corporations to report annually whether they have “adopted a written policy relating to diversity other than gender amongst the directors and members of senior management.” If the corporation has adopted such a policy, it must provide “a short summary of its objectives and key provisions.” If the corporation has not adopted such a policy, it must explain “why it has not done so.”

Moore finds it encouraging that, with respect to gender diversity, Ottawa has chosen to dovetail its regulations with the existing securities law requirements. However, he says, “it begs the question whether overlapping regulations are really necessary in the first place. There is also the risk that over time, Industry Canada will not keep up with changes in the securities rules, so we then have to deal with inconsistencies.”

“The federal government as well as the [Canadian Securities Administrators] are trying to move diversity forward at the board level,” says Erlichman, “and [Bill C-25] is just an additional way of doing so. The more people who are trying to get to a certain result, the more likelihood they will get to that result sooner rather than later.”

Of all the board seats of issuers on the S&P/TSX Composite Index and the S&P/TSX SmallCap Index, only 12.3 per cent were held by women in 2014, rising to 17.7 per cent in 2016, according to Davies Governance Insights 2016. Of board seats on TSX 60 issuers, the percentages held by women was slightly higher: 20.1 per cent in 2014 and 24.6 per cent in 2016.

“We amended our corporate governance guidelines in response to the [securities] rule,” says HudBay’s Donnelly. “We didn’t impose a firm quota for female directors, but we made it clear that in assessing our director nominees, our corporate governance and nominating committee would consider a number of factors, including diversity. And not just gender diversity, but also experience backgrounds and other demographics.”

HudBay’s board now has 20 per cent female directors, and expects to reach “at least 30 per cent in the next couple of years.” The board also has a Hispanic director.

Sears Canada’s Mohtadi says one of the company’s eight directors is female. The board did have two female directors, but one quit and was replaced by a male director. However, he notes, “If you look at the representation of women officers in our executive positions last year, it was close to one-third.”

As for broader diversity, he says, “there are people on the board who might not be described as WASPs, if that’s the test. The board is interested in both gender diversity and ethnic diversity. We don’t have a formal policy or target for gender or non-gender diversity, because our aim is to get the best candidates possible and the ones who can benefit the business the most.”

NOTICE AND ACCESS

Since March 2013, provincial securities commissions have allowed corporations to use the internet to provide meeting materials to shareholders. Corporations are able to mail a streamlined set of materials that includes information on how the shareholder can obtain a fuller set from the corporation’s website. A streamlined package, instead of the traditional proxy package, has the additional benefit of lowering a corporation’s printing and postal costs.

CBCA-incorporated companies, however, have had problems using “notice and access” because of technical wording that restricts them. Bill C-25 amendments would allow the regulations to align with the provincial securities commissions for distributing corporations.

Under these provisions, an issuer can merely send a short notice and form of proxy to its shareholders and avoid mailing an information circular and other proxy-related documents (e.g., financial statements), which it only needs to make available online to shareholders.

Donnelly welcomes the change, which he estimates will save HudBay Minerals $60,000 a year in printing and mailing costs. But he notes that, under C-25, using the “notice and access” method would still require an exemption. “That would be cumbersome and inconvenient, so we’re hoping there will be some sort of blanket exemption granted.”

Also, notes Donnelly, under C-25, the diversity disclosure can’t be addressed through the “notice and access” method. Since the diversity disclosure is part of the information circular, having to find another way to send it to shareholders is inefficient. “We’re hopeful that will be addressed as the Bill evolves,” he says.

WHAT C-25 DOESN’T DO

As significant as the issues that C-25 addresses are those that it does not address. These include several matters raised during Industry Canada’s public consultation in 2014 on reform of the CBCA. No amendments are being proposed to expand proxy access, to mandate automatic disclosure of shareholder voting results, or to ease residency requirements for directors.

Especially noticeable by its absence is “say on pay” — a provision for a non-binding shareholder vote on a company’s executive compensation arrangements. Such votes have recently been adopted voluntarily by many of Canada’s largest corporations and in the European Union, and are now mandatory in the US for corporations subject to federal proxy rules under the Dodd-Frank Act.

Say-on-pay votes started in Canada in 2010 at the major banks’ AGMs. Of the S&P/TSX 60 Index companies, 83 per cent gave shareholders a say on pay in 2016, up from 78 per cent in 2015, according to Davies Governance Insights 2016. However, only 61 per cent of companies in the S&P/TSX Composite Index did so in 2016, versus 50 per cent in 2015.

The rationale for not including a say-on-pay provision in Bill C-25 was articulated by Industry Canada in its discussion paper. “Another view is that current disclosure requirements for executive compensation in place under provincial securities laws ... adequately protect stakeholders, indicating that the trend in executive compensation matters reflects a move toward disclosure standards developed by provincial securities regulators and away from federal regulation of this area through the CBCA.”

So, while far from a revolution in corporate governance, Bill C-25’s amendments to the CBCA will reinforce the trend in Canada toward increased shareholder democracy and the slow advance toward director diversity.

Sheldon Gordon is a freelance business and legal-affairs writer in Toronto.

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