A coalition of Canada's largest institutional shareholders is launching a new salvo at weak boardrooms across Canada, asking regulators and companies for new powers to nominate alternative corporate directors.
The Canadian Coalition for Good Governance (CCGG), which represents most of Canada's public pension funds and other major institutional investors, is calling for new rules to make it easier for major shareholders to propose new directors and have their names added to annual proxy-voting lists.
CCGG executive director Stephen Erlichman said existing legal options for adding new directors to a board are complex and often unsuccessful, so are rarely employed. But that means shareholders can only vote for the candidates put forward by the companies, leaving no real choice in the election process.
"There are 10 [board] openings and you're being told, 'Here are the 10 people you're voting for,'" Mr. Erlichman said in an interview. "We're saying, 'shouldn't shareholders have some kind of say in who at least some of these people are?'"
He said it may take a long time to convince legislators to change proxy-voting laws, so the CCGG also wants companies to adopt proxy-access policies on a voluntary basis in the interim.
The CCGG has launched campaigns in the past urging companies to voluntarily adopt policies that have become widespread practices – including say-on-pay advisory votes on executive pay and majority voting policies, which require directors to tender their resignations if enough shareholders withhold their support for them at annual meetings.
The coalition says it has targeted proxy access as the next frontier because the ability to have a meaningful say in the nomination process is "a fundamental tenet of shareholder democracy."
"The nominee slate tends to reflect the board's, or in some cases, still the chief executive officer's, network or relationships and perspectives," the CCGG said in a proposed proxy-access regime, released Thursday.
The CCGG's proposal recommends that shareholders who own a minimum of 3 per cent of a company's shares – or 5 per cent of the shares at smaller companies listed on the TSX Venture Exchange – should be allowed to propose director nominees equal to 20 per cent of seats on a board. Shareholders should be allowed to work together to aggregate their shares to reach the 3-per-cent threshold, the CCGG said.
Mr. Erlichman said the CCGG does not expect a new policy to be quickly embraced, noting that the coalition has faced strong opposition to the idea in panel discussions and private meetings with companies.
But he said companies need to understand that the idea is not as radical as they think. Some countries – including Germany and Italy – already have proxy-access rules, while more than 30 major U.S. companies – including General Electric Co., Citigroup Inc. and Bank of America – have voluntarily adopted proxy-access policies, allowing shareholders who own at least 3 per cent of the company's shares to nominate directors.
American companies have faced a spate of shareholder resolutions this year calling on them to adopt proxy access policies. The campaign has been led by New York City Comptroller Scott Stringer, who oversees five municipal public pension funds, and has been supported by other major U.S. pension funds, including the California Public Employees' Retirement System (Calpers), which is the largest U.S. pension fund. Pension fund TIAA-CREF has also sent letters to 100 companies this year urging them to adopt proxy-access policies.
The CCGG says proxy-access powers in Canada would be used infrequently in situations where shareholders are most unhappy with a board's performance. Mr. Erlichman said many major shareholders are long-term investors and index investors and cannot easily sell shares in companies when there is a problem. "They're trying to say, 'Look we're there for the long run, let's just make sure that the right people are the directors supervising the company.'"
Many U.S. companies have included an additional requirement that shareholders must have owned their shares for three years before they are allowed to propose new board nominees, ensuring the power is only used by long-term investors and is not exploited by people attempting takeovers or other strategies.
But Mr. Erlichman said the CCGG rejects including any similar ownership time requirement in Canada, saying it creates two classes of shareholders with unequal rights and makes the faulty assumption that people who are newer owners of shares aren't planning to be long-term investors.
Instead, the CCGG proposes that shareholders must declare they are not seeking control of the company when they nominate directors.