Stephen Erlichman is executive director of the Canadian Coalition for Good Governance.
It is an accepted tenet of corporate law that company shareholders elect company directors. But until just a few years ago, shareholders of Canadian public companies had practically no say in who sat on their company boards. The federal government's Bill C-25 is an important step toward fixing this problem and significantly improving public-company governance in Canada.
Today in Canada, public companies use "plurality voting" for uncontested director elections – elections in which there are an equal number of board nominees and available board seats. In these elections, shareholders can either vote "for" a board nominee or "withhold" their vote. "Withhold" votes are treated as abstentions and only "for" votes are counted. A shareholder cannot vote "against" a nominee. As a result, a nominee who acquires even a single company share can get elected with only one vote "for" by simply voting for themself. From a global perspective, Canada's plurality voting system is an outlier. As far as the Canadian Coalition for Good Governance (CCGG) is aware, only Canada and the United States allow these types of uncontested director elections.
Since 2004, recognizing the deficient state of Canadian law, the CCGG has encouraged Canadian public companies to adopt a more accountable approach to director elections. CCGG's majority voting policy published in 2006 provides that any nominee who is elected, but fails to receive at least a majority of votes "for," must tender their resignation to the board. The board must accept this resignation within 90 days absent "extraordinary circumstances." In 2014, the TSX took steps to implement this type of approach by requiring nearly all of its listed issuers to adopt a similar majority voting policy.
While a majority voting policy is helpful, it is not the solution. Director nominees who receive a majority of "withhold" votes have to resign, but these resignations can be rejected by the board. Furthermore, there are more than 1,600 companies listed on the TSX Venture exchange that are not required to adopt a majority voting policy. Ultimately, the policy remains a partial workaround to a problematic law.
Enter Bill C-25, a piece of federal legislation that would amend the Canada Business Corporations Act (CBCA). The CBCA is the governing statute for almost half of Canada's largest public companies. Bill C-25 would enshrine majority voting in the CBCA: uncontested director nominees would be elected only if they receive a majority of "for" votes.
Director elections under Bill C-25 would be a marked improvement over existing practice. Majority voting would apply to all CBCA public companies on all stock exchanges. With limited exceptions, nominees rejected by a majority of votes would not become directors. In cases where a board requires time to accommodate the loss of a key incumbent director, the board can take comfort in a recent amendment to Bill C-25 introduced at committee in the Senate. The change proposed by the Senate committee would allow incumbents to remain on boards for up to 90 days following an election loss. This amendment to Bill C-25 echoes the 90-day grace periods in both the CCGG and TSX majority voting policies.
While Bill C-25 would have important legal ramifications for director elections, its practical influence should not be dramatized as some critics have done by warning of "chaos" and "sudden death" elections. Only rarely do director nominees fail to receive majority support from shareholders today and there is no reason to think this will change if majority voting under Bill C-25 becomes the law. In theory, a failed election could occur, thus requiring another shareholder meeting to be called, but even the C-25's critics concede failed elections are "quite unlikely." After all, shareholders hope to see an increase in the value of the companies in which they have a stake; they do not wish to cause turmoil at the company by voting against director nominees in the absence of a very good reason to do so.
CCGG firmly believes in the principle that shareholder votes should determine whether directors are elected. Bill C-25 codifies this principle, a development that is widely supported, including by Maureen Jensen, the chair of the Ontario Securities Commission, who stated she was "very pleased that recent amendments to the CBCA will mandate majority voting."
CCGG applauds the federal government for proposing to enshrine majority voting in the CBCA. CCGG also commends Parliament for its bipartisan support of Bill C-25's majority voting provisions. When Bill C-25 is passed into law, the amended CBCA will be the first statute in Canada to provide for majority voting. It should not be the last. The next step is for other corporate statutes in Canada to be amended to align with the CBCA's majority voting provisions. After more than a decade of consideration and debate, the time has come for majority voting to be the law across Canada.