These are all great Canadian ideas that have yet to take hold in the United States. In fact, some of these ideas are positively controversial south of the border. Seriously, try and convince a Philips Head devotee that the Robertson is better. So let's add another to this list while we're at it: The right of shareholders to nominate directors in a company and have those directors placed on a proxy ballot.
In Canada, securities acts allow shareholders with five per cent of the shares in a company to nominate director candidates before an annual or special meeting and have the company include that nomination in its meeting materials. This is a basic and unremarkable tenet of securities law. Sure, activists and dissidents will nominate directors during contested proxy fights over board policies and corporate governance, but it's rare that five per cent shareholders avail themselves of the option to nominate directors on a regular basis. In short, it's hard to build support for a nominee without running a full blown proxy contest and it can even be hard to demonstrate that you do, in fact, own five per cent of a company. Still, the provision exists and gives shareholders greater access to the board of directors.
Things are different down south. The battle over implementing an American version of this sleepy Canadian rule has been intense. Back in 2011, the Securities and Exchange Commission approved a rule giving shareholders who owned three per cent of a company's shares, and who had owned those shares for three years, the right to nominate directors and have those directors placed on a company's proxy ballot.
The nice thing about the SEC rule, as opposed to the Canadian one, was its attempt to strike a balance between proxy access for shareholders and criticisms that such rules benefit activist investors interested in turning a quick buck through financial engineering. The three year holding period limited access to shareholders who had demonstrated real commitment to the company.
This rule was struck down in a 2011 lawsuit filed by the U.S. Chamber of Commerce on weird, technical grounds (basically, the lawsuit found that the SEC hadn't engaged in sufficient cost-benefit analysis when implementing the rule, which is both kind of weird and totally tangential to this article). Recently, institutional investors have attempted to step in where the SEC failed. They have proposed bylaws implementing a variation of the SEC rule and tabled those bylaws for a vote at annual meetings. However, companies like Whole Foods Market Inc. have objected to the tactic, forwarding their own bylaws with a much higher threshold – first nine percent and five years, now five percent and five years are required to nominate just one director – and petitioning the SEC to have the shareholder bylaw removed from the proxy ballot on the grounds that it conflicts with their proposal. So far, they've succeeded.
So why is something so typical in Canada so fraught in the U.S.?
Legally, these bylaws are less risky for U.S. companies than Canadian ones. In the U.S., many companies have staggered boards, meaning that a third of the directors only come up for election once every three years, so that only one third of a board can be replaced at any given meeting. While I think that boards may be weary that the presence of shareholder-nominated directors may call into questions certain business decisions they've made – there's some evidence, based on Chancellor Chandler's dicta in Airgas v. Air Products, that the presence of dissident directors can be evidence of board chicanery (page 150, if you must) – the legal risks are slight. Similarly, the Canadian experience shows that these bylaws are little used and, when they are, it's in the context of a proxy fight, something more common in the U.S. than Canada.
Ultimately, the answer may be in the corporate culture of the two countries. In Canada, boards are more comfortable with so-called mandatory rules that companies can't modify through amending corporate bylaws, such as the five per cent nomination rule. In the U.S., corporate rules tend to be "enabling," meaning that even the default rules in state corporate statute can be changed through bylaw amendments.
Boards have historically used these "enabling" rules to insulate themselves from threats. Poison pills, staggered boards, advance notice bylaws, and other corporate governance innovations are a function of board's ability to pass bylaws and, frankly, shareholders' relative indifference to insulated boards. When regulators like the SEC propose rules that limit board discretion, boards get antsy.
And, perhaps, rightfully so. There's a compelling argument for enabling corporate rules – not every company is the same, shareholder bases differ, and an appropriate rule for one company may not be an appropriate threshold for another. The troubling part of the Whole Foods story is the board using SEC rules, and not the ballot box, to defeat shareholder proposals. It's one thing to protect board discretion, it's another to use SEC rules to defeat shareholder proposals altogether.
All that said, U.S. companies have had to deal with the like of Carl Icahn and Bill Ackman for decades; in Canada, activism is a newer threat to boards. We'll see if Canadian boards remain so content with our dissident-friendly regime if guys like Icahn and Ackman continue to turn their glances northward.