Canadian shareholders celebrated a victory last week when the Toronto Stock Exchange announced new listing standards that close one of the most illogical loopholes in Canadian corporate law. But the battle for reform is not yet complete.
The TSX announced a long-awaited new rule for companies trading on the exchange, requiring them to adopt a policy that will compel directors to offer to resign if they fail to win a majority of the votes in annual board elections. The most incredible news is that such a rule is needed at all.
The controversy over so-called majority voting stems from a quirk in Canadian and U.S. corporate law, giving shareholders a vote on directors – but only allowing them to vote "for." Shareholders can decline to vote, but that means a director can theoretically be elected with just one vote. It makes a mockery of corporate democracy. Until recently, many Canadian shareholders did not even bother voting their proxies.
About six years ago, the Canadian Coalition for Good Governance – the advocacy group for large pension funds and other major investors – decided to fight for shareholder rights by lobbying companies to voluntarily adopt majority voting policies. Most companies in the S&P/TSX composite index have since agreed to do so. The CCGG has also pressured regulators to change laws and regulations so that all companies – not just ones willing to volunteer – would have meaningful director elections. But legal reform has proved more difficult.
Last Thursday, however, a breakthrough emerged when the TSX announced it will make majority voting rules mandatory for all listed companies, and accepted the CCGG's recommended wording. It says that boards cannot refuse to accept a director's tendered resignation, except in "exceptional circumstances" that would have to be publicly explained. That provision is key because there have been numerous cases in the U.S. where boards have simply turned down a director's offer to resign. In Canada, directors lost a vote at Magna International in 2011, and remained on the job. The following year, Magna adopted majority voting.
The new TSX rule is a breakthrough in Canadian corporate governance, but the campaign is not over. The TSX is a private company; nothing has changed in the legal structure for director voting. The new standard will only apply however long and in whatever format the exchange chooses.
Ottawa should reform its key corporate legislation – the Canada Business Corporations Act – to entrench majority voting as a legal requirement for all companies with public shareholders. The CBCA is under review for potential amendments, so the time is right to push for change. A fundamental reform of shareholder democracy is long overdue. Annual board elections should be more than an empty gesture.