Last week the Toronto Stock Exchange (“TSX”) announced much anticipated plans to strengthen corporate governance requirements for listed issuers after receiving approval from the Ontario Securities Commission (“OSC”).
The changes – which we expect to set the stage for an increased level of transparency and shareholder rights in the Canadian marketplace, were the result of a larger review of shareholder democracy held by the OSC and will eliminate the controversial use of slate elections and require directors to be elected both individually and on an annual basis. The changes also go a step further and require companies to publically disclose the vote results of board elections. Previously, companies were only required to disclose whether or not specific resolutions had passed unless shareholders present at the meeting demanded a poll.
During the 2012 proxy season, the continued use of slate elections as well as the number of companies listed on the TSX who did not publicly disclose vote results were matters of particular contention among trends reported by Glass Lewis. Slate elections, where shareholders can only vote on the board as a whole, constitute an “all or nothing” approach and are tremendous obstacles to greater board accountability and a more transparent electoral process. Although the use of slates has declined over the past few years, slightly over 20% of all Canadian shareholder meetings reviewed by Glass Lewis in the first two quarters of 2012 elected their directors as a slate.
As mentioned, disclosure of proxy voting results has also been a lingering problem in Canada. While we have seen noteworthy improvements from 2011, 17% of companies in the S&P/TSX Composite Index failed to provide a detailed breakdown of poll results – a problem that remains even greater among smaller firms outside of this index.
In addition to the aforementioned requirements regarding the election of directors, the TSX has also received approval from the OSC to require companies to disclose whether they have adopted a majority voting policy for uncontested director elections, and to disclose to the TSX if a director received a majority of ‘withhold’ votes in cases where majority voting has not been adopted. The announcement of this “comply or explain” approach is a particularly encouraging step for investors and corporate governance advocates as it is currently unmatched by any North American stock exchange, and includes an announcement further stating that the TSX is currently seeking public comment on potentially mandating a majority voting policy for companies listed on the exchange.
Although Glass Lewis fully advocates this increase in shareholder rights, we believe shareholders would have also liked to see mandated advisory vote on executive compensation (“say-on-pay”), and industry participants and issuers are still waiting to hear further commentary on this issue from the OSC. Nearly one-third of companies on the S&P/TSX Composite have voluntarily adopted say on pay, up 10% from the previous year and although this increase is certainly encouraging, a mandated say-on-pay proposal for all TSX-listed would only serve to raise the bar further still. Activist shareholder pressure, along with the additional scrutiny provided by the mandatory disclosure of vote results, could help to bring more and well-deserved attention to this issue.
The aforementioned changes to the TSX Company Manual will become effective on December 1, 2012, just in time for shareholders to see the results during the approaching 2013 proxy season.