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Skirting rules, board members remain in spite of lost support

A review of 2015 voting trends shows 21 directors of Toronto Stock Exchange-listed companies received less than 50 per cent support from shareholders in board elections this year.


Two-thirds of corporate directors who failed to win majority support for re-election this year have remained in their jobs, despite policies requiring directors to tender their resignations when they lose votes.

A review of 2015 voting trends by Kingsdale Shareholder Services shows 21 directors of Toronto Stock Exchange-listed companies received less than 50 per cent support from shareholders in board elections this year. Seven directors later resigned, while 14 have remained on their boards.

The votes are being closely watched by shareholder advocates after the TSX introduced a new rule last year requiring listed companies to adopt majority voting policies, which are corporate policies that require directors to tender their resignations if they receive less than 50 per cent voting support.

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The TSX policy allows boards to reject the resignations in "exceptional circumstances." But that loophole appears to have been used in many cases.

Kingsdale vice-president Victor Li said many companies are rejecting resignation offers by stating they cannot afford to lose important directors and cannot easily find replacements. He said some companies may still replace those directors for next year's proxy season, but those who don't could face even more shareholder pressure if they ignore the results. Some may even become vulnerable to targeting by activist shareholders who try to exploit existing shareholder unhappiness with the board, he warned.

"If you decline resignations this year and next year, some time down the road you will see repercussions from shareholders," he said. "The intention of the policies is only to keep directors in very exceptional situations. But every company says they are exceptional."

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, said his group expects companies to accept resignations of directors who lose shareholder support.

The CCGG's own guidelines suggest that in "extraordinary" circumstances, companies may reject a resignation or delay its acceptance while searching for a replacement, but directors should typically leave.

"The intention behind this is that only in very rare circumstances would you be able to justify rejecting the resignation," Mr. Erlichman said.

Under Canadian voting rules, shareholders can only vote "for" a director or "withhold" their vote, which means the vote is not counted. There is no way to vote against directors, which means directors can technically be elected with just one vote of support.

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The CCGG has championed majority voting policies since 2006 as an indirect way to allow shareholders to remove directors by requiring them to tender their resignations when they get a majority of "withhold" votes. While many companies agreed to adopt policies, the TSX introduced a rule making them mandatory as of June 30, 2014.

Mr. Erlichman said if majority voting policies prove toothless because companies routinely reject resignations, it will give more ammunition to the CCGG's campaign to urge governments to rewrite voting laws so shareholders can simply vote against directors.

"It just augers toward saying we need to have legislation," Mr. Erlichman said.

Securities lawyer Jennifer Longhurst of Davies Ward Phillips & Vineberg LLP said shareholders are increasingly willing to vote against directors to protest a plethora of issues, particularly executive compensation payments. The result is that some boards feel some directors – especially those on compensation committees – are being singled out unfairly.

The largest company to face a negative vote for a director this year was Quebecor Inc., where director Michel Lavigne, who heads the compensation committee, received just 28 per cent support from Class B shareholders.

Quebecor chairman Brian Mulroney said in May the board rejected Mr. Lavigne's resignation offer because the loss of a director of "the high quality and integrity of Mr. Lavigne would be deplorable." He said Mr. Lavigne was being targeted because of unhappiness over a severance benefit paid in 2014 to the company's former chief executive officer, but he shouldn't bear the brunt of shareholder unhappiness.

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Spyglass Resources Corp. reported five of its seven directors lost votes this year, but the Calgary-based oil and gas company said it decided to keep four of the directors because it said it would be too damaging to have so many directors leave. The fifth director, Jeff Smith, resigned "pursuant to his wishes," the company said.

New Millennium Iron Corp. faced an especially complex situation when six of its nine directors lost votes this year, including the company's independent chairman and its chief executive officer.

The mining company launched a review that eventually led to the departures of one related director and two independent directors, while three new independent directors joined the board. The company's chair and chief executive officer remained in their positions.

Ms. Longhurst said she believes companies need to have some flexibility to deal with extreme circumstances, such as a "failed" board when all directors receive a negative vote.

A Davies review of proxy voting trends shows at least two Canadian companies have embraced the U.S. practice of creating "enhanced quorum" rules, which say directors cannot be defeated in a majority voting situation unless at least 50 per cent or even 65 per cent of shares have been voted. A typical voting quorum is around 25 per cent of shares, Ms. Longhurst said.

She said shareholders are unhappy with enhanced quorums because they make it even harder to remove a director. But companies say it is unfair if a shareholder takes advantage of a low voter turnout to force directors off a board.

Kingsdale data show only four directors failed to win majority support in 2014, but Mr. Li said fewer companies reported their detailed voting results last year because the new TSX rules had not taken effect, so it is unclear whether shareholders were far more militant this year.

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