The TD Canada Trust Tower is reflected in the windows of the Royal Bank of Canada headquarters in downtown Toronto. TD Bank shareholders recently voted in favour of proxy access bylaws, while RBC shareholders voted against them. REUTERS/Chris Helgren
BOTH THE DESIRABILITY and the future of proxy access bylaws in Canada remain up in the air, despite the Toronto-Dominion Bank’s adoption of the first such corporate bylaw in Canada on March 30.
The uncertainty is reflected in the Royal Bank of Canada’s rejection of a similar shareholder proposal just days later. But the fact remains that the level of support at both financial institutions demonstrates institutional shareholders’ mounting interest in proxy access bylaws. Although the boards of both banks recommended against the proposals, the TD proposal was adopted, albeit by just 52.2 percent of shareholders, whereas the rejected proposal at RBC fell just short, garnering some 46.8 percent of the vote.
Proxy access, which refers to the ability of shareholders to nominate alternative directors to the board, has long been a live issue in the United States. But serious debate over its place in Canadian corporate governance has only emerged recently.
“Proxy access has been a big deal in the US because shareholders there don’t have the right to nominate candidates for election as directors, whereas we’ve had this statutory right forever,” said Andrew MacDougall of Osler, Hoskin & Harcourt LLP in Toronto.
Indeed, Canadian law allows shareholders to nominate directors from the floor at annual meetings. But the tradition of slate voting — in which the board offers a slate of directors upon whom the shareholders vote as a group, usually by proxy and in advance of the meeting — effectively dooms most floor nominations.
The recent trend to widespread adoption of advance notice provisions, which requires shareholders to give warning of their intention to propose nominations from the floor, allows company management more time and opportunity to fight off the challenge.
A more appealing alternative to floor nominations is the ability of five percent of a Canadian company’s shareholders to requisition a meeting for any reason, including removal of the board. But this mechanism has its own difficulties.
“Proxy access gives shareholders a greater level of comfort that their materials will find their way into the proxy circulars that management must distribute before the annual meetings,” MacDougall said.
Critics of proxy access point out that concern about misuse by activists has led to a number of control mechanisms in the US. These have been designed to make the submission of nominations appealing only to long-term investors.
“For example, shareholders might only be able to nominate directors if they held three percent ownership for three years,” MacDougall explains. “That would effectively preclude nomination from activists who don’t want to tie up so much capital for so long.”
MacDougall believes, however, that moving to the American model would not benefit investors.
“The problem with the TD and RBC proposals is that they looked a lot like the US version of proxy access,” MacDougall said. “Still, it’s important to remember that the proposals did not seek to remove directors, but merely to provide a mechanism for a nomination process going forward.”
Much of the impetus for proxy access has come from the Canadian Coalition for Good Governance. The CCGG’s proposal does not require shareholders to own shares for any length of time, but contemplates nominations from anyone who controls three to five percent of the company, depending on the entity’s size.
Properly used, MacDougall said, proxy access is a leverage for discussion.
“What institutional shareholders really want, if there is an issue about board composition or direction, is a dialogue,” he said. “And if the board isn’t paying attention, proxy access should be there as a tool to bypass the board and go directly to the shareholders.”
In other words, if things are working the way they should, shareholders shouldn’t have to resort to proxy access.
“The TD and RBC votes do not give rise to the conclusion that shareholders were unhappy with the boards or with the way the boards were communicating,” MacDougall says. “Rather, the votes were ultimately a matter of proxy mechanics as a governance tool going forward.”