CSA’s proxy voting protocols provide fresh guidance

New proposals called ‘a step, albeit a trickle, in the right direction’
A woman walks through Brookfield Place in Toronto on the day of Brookfield's AGM for shareholders in 2014. The CSA has now released new protocols for proxy voting and meeting reconciliation. REUTERS/Mark Blinch
A woman walks through Brookfield Place in Toronto on the day of Brookfield's AGM for shareholders in 2014. The CSA has now released new protocols for proxy voting and meeting reconciliation. REUTERS/Mark Blinch
THE CANADIAN SECURITIES ADMINISTRATORS released its Final Proxy Voting and Meeting Vote Reconciliation Protocols in late January, but only time will tell whether they will have a positive impact on the voting tabulation process.

“The protocols are voluntary and there is no enforcement process,” says Arman Farahani of McMillan LLP in Vancouver. “They are very detailed, but a lot of the participants operate in unconnected silos, so how effective this is going to be remains to be seen.”

Still, the CSA has indicated that it will be monitoring the implementation of the protocols over the next two voting seasons, with an eye to the need for further regulatory or legislative measures.

“These new proposals are clearly a step, albeit a trickle, in the right direction,” Farahani says. “This issue remains a huge problem for participants who have varying interests and are not necessarily connected to each other.”

The protocols follow on a consultation and review process that started in 2013. “The CSA wanted to clear up questions of accuracy, transparency, over-voting, missing votes and reconciliation that are known to plague the process,” Farahani says.

After discussions with market participants and a review of six uncontested shareholder meetings held in 2014, the CSA concluded that both information and communication gaps existed.

From the information perspective, meeting tabulators did not have accurate and complete vote entitlement information to establish the rights of intermediaries to vote. “Getting that type of confirmation is incredibly difficult because so many players are involved and there is so little transparency,” Farahani adds. “A confirmation, for example, that a vote has been submitted doesn’t mean that it has been tabulated.

To address this, the protocols provide guidance on information that intermediaries should provide to tabulators; tabulator’s use of this information to determine intermediaries’ right to vote; how to match proxy votes to vote entitlements; and what tabulators should do if depositories or intermediaries have not provided the required vote entitlement information.

On the communication side, the CSA determined that there were no established channels between intermediaries and tabulators to exchange and confirm information. To remedy this, the protocols provide guidance on how tabulators, intermediaries and Broadridge Investor Communications Corporation might develop mechanisms to confirm that all votes submitted by Broadridge on behalf of intermediaries have been received by tabulators; how tabulators should deal with over-voting; and how parties should communicate about rejected, uncounted or pro-rated proxy votes.

In March 2016, the CSA published proposed protocols for comment. Responses from market participants led the CSA to make several amendments to the proposals. The key changes encourage intermediaries to formulate written policies regarding client account vote reconciliation, implement internal safeguards to monitor the effectiveness of those processes and establish notification methods so beneficial owners of shares can obtain verification of how their vote was treated and any disputes resolved.

The final proposals also encourage tabulators and the Canadian Depository for Securities Limited (CDS) to provide contact information to intermediaries and Broadridge and assist in resolving over-vote issues. Because there are no electronic communication methods in place for tabulators to notify Broadridge of rejected or pro-rated votes, tabulators now have 10 business days from final tabulation to do so.

While the protocols are targeted to vote reconciliation for uncontested meetings, Farahani points out that they can be relevant for proxy contests and should be considered where appropriate. “Overall, the success of these Protocols will depend entirely on key participants taking responsibility for fixing a system that is now complex, opaque and fragmented,” he says.

As the proxy season starts up, stakeholders should also be aware of the 2017 voting guidelines released by proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis. “The one that sticks out most has to do with director overboarding,” says Matthew Merkley of Blake, Cassels & Graydon LLP in Toronto.

ISS recommends that shareholders withhold their votes from any director nominees who are CEOs of public companies and sit on more than one outside public company board; non-CEOs are limited to four boards in total. The recommendation applies, however, only if the nominee in question has attended less that 75 per cent of board and committee meetings in the past year without a valid reason. These requirements could significantly affect directors who sit on subsidiaries’ boards.

“ISS has not provided special consideration to service on subsidiary boards within the context of overboarding,” Merkley says.

Glass Lewis recommends withholding votes for any director who is an executive officer of any public company and serves on more than two public company boards; non-executive directors are limited to five boards. Glass Lewis adds that it may also consider other factors including attendance records, the size and location of the companies involved, the director’s duties at the various companies, and whether the director serves on the board of any large private companies.

Both ISS and Glass Lewis guidelines allow directors to sit on fewer companies than did the 2016 guidelines. According to Merkley, the increased constraints stem from governance experts’ concerns that directors devote sufficient time and energy to a board so as to represent shareholders effectively.