It has long been an open secret that Canada’s shareholder voting system is broken, but until it caused a mess at a name-brand company, nobody would get around to fixing it.
Well, it might just happen. Two of Canada’s biggest corporations face contested votes in coming days: Telus Corp. on Wednesday and Canadian Pacific Railway Ltd. on May 17. Telus wants to collapse its dual-share structure, but a hedge fund is challenging the plan. CP is trying to fend off activist investor Bill Ackman, who wants to replace a good chunk of the board.
If the votes at either company are at all close, the system of collecting and counting shareholder ballots will come under scrutiny. And the result will not be pretty.
Companies report results to two decimal places, which creates the illusion of pinpoint accuracy. The reality is that Canadian corporate votes are approximate at best, which is intolerable when a company’s future is in the balance.
By one estimate, more than half of corporate votes in Canada have problems. One in five is plagued by so-called “overvoting” where shares are voted twice, through a series of mix-ups and miscommunications in the vast and serpentine network of people who are involved in figuring out who owns shares, sending out proxies and tallying votes.
Those numbers come from Computershare, which should know. The company tabulates votes at about 2,400 meetings for Canadian companies.
The Canadian Society for Corporate Secretaries surveyed its members and found that 91 per cent of companies that replied were concerned about the proxy system. The biggest concerns were the “inability to ensure that the votes that should count are the votes that do count” and overvoting.
This has long been tolerated because nobody much cared about corporate votes. Turnout for meetings was minimal, and proxy contests were basically reserved for small companies that flew below the radar.
But shareholder democracy is becoming more than just a buzzword. As Telus and CP prove, no company is immune to a challenge from activist investors, and the result is often a hard-fought shareholder vote that can fundamentally change a company. Other votes are just as key. Transactions can be squashed, and more companies are holding say-on-pay votes.
The fool’s-gold standard remains the situation in 2004 at Iamgold Corp., which was trying to merge with Wheaton River Minerals Ltd. in a controversial transaction. By the time all the votes were in, there were 125 shares voted for every 100 that actually existed.
If overvoting isn’t enough of a problem, the cure is almost as bad as the disease. Because there’s no way to tell quickly whose vote should have counted, and whose shouldn’t have, votes are randomly cancelled. Sometimes votes are prorated – if there are 10 per cent too many votes, 10 per cent of each shareholder’s votes are cancelled. Sometimes all the votes that come in after the proper number of votes has been reached are cancelled.
And if you’re a concerned shareholder, and you want to check if your vote counted? Sorry, it’s nigh impossible in Canada.
How does this happen? Much of the problem stems from the system of securities lending. Long-term shareholders in a company agree to lend out their stock, sometimes earning a little extra money. The shares are borrowed by short sellers and sold to someone else. Both the original owner and the new owner may think they have the right to vote, and cast ballots.
It’s an open question of just who owns the votes on the shares that have been lent. There’s no clear rule on that. Sometimes there’s an agreement between borrower and lender, who can decide if the vote goes with the shares or not. But there’s no overarching standard or guideline from regulators.
Also, the Telus situation raises the concern about empty voting – what happens when a shareholder hedges out their economic interest in a company but keeps huge voting power. That’s what Mason Capital, the hedge fund challenging the plan, has done. Should those votes count?
Whose votes should count and whose shouldn’t? Who owns the vote when shares are lent?
These are questions for regulators. The various players in the shareholder democracy industry know they have a problem. They show good faith in trying to fix it, led by the corporate secretaries group, which organized a summit last year on the theme. Some in the voting business rightly worry that if regulators step in and fix it for them, they will do a poor job.
However, in the end, somebody has to make a rule and enforce it.