Category Archives: elections

Stock Options and Institutional Investors

Stephen Jarislowsky, CEO of investment firm Jarislowsky Fraser Ltd., was recently interviewed by the Globe and Mail’s Report on Business. (See “Why Jarislowsky thinks stock options are dangerous.”) One of his key points has to do with the role of institutional investors in effecting positive governance change in Canada.

The way stock options are reported is a good example of the difference between regulatory change and effects of pressure from institutional shareholders, one that we at the Clarkson Centre have seen in our own research.

In 2008, there was a legal requirement, as part of the compensation disclosure rules, that each company disclose the value of option gains realized by each Named Executive Officer during the most recent fiscal year. But starting in 2009, the CSA reworked the compensation disclosure and removed the requirement to disclose Option Gains. As a result, since Option Gains disclosure is no longer required, only 16.6% of companies listed on the S&P/TSX Composite Index this year disclosed the value of option gains (and that number includes companies that had no options outstanding or no options exercised during the year so they were given credit by default as the options gains were obviously $0). So, where option gains disclosure was previously available for 100% of companies, it has fallen off dramatically with the removal of the regulatory requirement.

Conversely, the process for Director Elections in Canadian companies has been improving year-over-year despite the lack of a change in regulatory requirement. The current minimum requirement is that shareholders be allowed to vote “For” or “Withheld” for their board of directors. There are two problems with this. First is the fact that, since shareholders are not able to vote “Against”, then a director’s election is carried with even a single vote “For” (which hardly counts as a ringing endorsement). Secondly, many companies still use a ‘slate’ voting structure, under which shareholders can only vote “For” all or none of the directors. There is no option to vote “For” individual directors unless the company voluntarily chooses to hold elections in that way.

Since 2004, however, due in large part to the support of institutional investors such as the Ontario Teachers’ Pension Plan and the Canadian Coalition for Good Governance, more and more S&P/TSX Composite Index-listed companies are implementing a majority voting policy that not only allows shareholders to vote for individual directors but also counts votes “Withheld” as a vote against the director. In cases where a director receives less than 50% of votes cast “For”, that director must submit their resignation for the board’s consideration. In 2010, more than 50% of Index-listed companies in Canada have such a majority voting policy in place, and this is in large part due to institutional investors pushing for positive governance change, encouraging companies to do more than the bare minimum required.


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Filed under best practices, compensation, corporate governance in the news, elections, stock options

Proxy Access for Shareholders

We noted with interest a new development south of the border:
SEC Adopts New Measures to Facilitate Director Nominations by Shareholders

According to the text of the new rule (PDF here),

The new rules will require, under certain circumstances, a company’s proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder’s, or group of shareholders’, nominees for director.

Here in Canada, shareholders have long had proxy access — but it hasn’t been used to nominate directors. (For more on that, see this blog entry by Lisa Fairfax: Some Canadian Perspective on Proxy Access.)

This seems to suggest that it’s at least open to question whether American shareholders will actually make use of the opportunity opened up by the new SEC rule. But then, why would there be so much support for the rule if it were truly unlikely to be used? According to another posting by Lisa Fairfax, it all comes down to differences in the rules about solicitation:

…my research suggests that the solicitation exemptions are critical for ensuring the viability of the proxy access rule. Indeed, in Canada, where there is a proxy access rule that goes virtually unused, corporate governance experts note that one of the reasons for the non-use is shareholders’ inability to solicit on behalf of their nominees outside of the limited information printed in the corporation’s proxy statement. In this regard, the fact that solicitation basically requires the filing of a separate proxy statement apparently makes the Canadian proxy access rule unattractive. By comparison, the fact that the new US rules enable shareholders to solicit without such a filing should make the US rules more attractive, and hence more likely to be utilized by shareholders.

Also worth noting: The closest thing we’ve seen to Canadian shareholders using proxy access to nominate directors is found in shareholder proposals that have occasionally been put forward to require nominating committees to nominate more nominees than there are vacancies on the board, effectively giving shareholders a degree of choice. To the best of our knowledge, however, such proposals have never actually been adopted.

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Filed under directors, elections, proxies

Trend Watch: How are Directors Elected?

Voting systems to elect corporate directors vary along two major dimensions. First, shareholders can be offered either a) an entire slate of candidates, who stand or fall together, or b) a list of individual candidates, each of whom stands or falls on his or her own merits. Individual director voting empowers the shareholders to indicate which directors they are happy with instead of just voting for the whole board of directors

Secondly, there is the distinction between ‘plurality’ and ‘majority’ voting. Under the plurality system, each shareholder has the option of either voting for or instead withholding approval from, those directors. Withholding doesn’t technically count as a vote against. But if anyone — even a single shareholder — votes “yes”, then the directors are successfully elected. Under the competing majority voting system, directors need to receive 50% of votes +1 in order to be elected. The latter is generally considered preferable by governance advocates. The Canadian Coalition for Good Governance has been at the forefront and have championed Majority Voting. Here are the CCGG’s Majority Voting Guidelines.

Our research here at the Clarkson Centre shows the trends along both of those dimensions.

First, here’s what our data show regarding the trend from slate voting towards individual director voting:
The prevalence of slate voting has been on a steady decline since 2004, and it’s particularly obvious in the trend shown since 2006. Currently, only about 14% of the companies on the S&P/TSX Composite use a Slate vote for director elections.

Next, here’s what we’ve seen in terms of the trend from plurality to majority voting:
Majority voting adoption of the Corporations on the S&P/TSX Composite has more than doubled over the last 4 years.

For an example that illustrates the struggle to implement best practices in this area, see this recent story, from the Globe and Mail: Linamar board gets the message, finally.


Filed under corporate governance in the news, directors, elections