Many people in the US and Canada believe the proxy voting process needs repair. Corporate Secretary asked David Masse, senior legal counsel and assistant corporate secretary of CGI Group and chairman of the Canadian Society of Corporate Secretaries, to define the problems with the proxy voting system and explain why an upcoming summit to change the process is critical.
The focus on all aspects of corporate governance has been steadily increasing. The initial focus was on the role of directors in ensuring that the business is managed to maximise value for shareholders. As enterprises failed earlier in the decade as a result of mismanagement, the burden of regulation and expectations related to best corporate governance practices increased proportionately.
It is the natural course of that progression to have the focus shift onto the role of the shareholder in selecting, electing, evaluating and eventually replacing corporate directors.
A number of important initiatives along those lines are gaining traction in all jurisdictions as well. Say on pay and majority voting are two of the most important of those initiatives. Institutional shareholders and their advisers are paying much more attention to how they vote their shares in director elections.
This is good because it has real potential to motivate directors to pay closer attention to their role, and to how their decisions are perceived and evaluated by shareholders. Social pressure resulting from votes withheld from directors – particularly where the directors’ re-election might be in doubt – is strong medicine indeed.
Getting out the vote
For a democracy to function well, the people must be able to vote. This begs the question of whether shareholders have the right to vote. The answer at first blush for holders of common shares is self-evident: of course shareholders have the right to vote. However, the real nub of truth for director elections is much more nuanced and quite a bit more problematic to arrive at.
First off, not all shareholders have the right to vote. Some shares may not have voting rights, and even for typical common shares that do have voting rights, not all holders are treated equally. Only registered shareholders are considered to have the full exercise of the rights that are attached to the shares they hold. Shareholders whose names are not entered on the register of shares are not shareholders within the meaning of most corporation laws, and have no standing to vote.
This is increasingly problematic, since most shareholders are not registered holders – their shares are held on their behalf by others. In the first case, the actual registered shareholder is the depository. In the United States, it’s the Depository Trust Company; in Canada it’s the Canadian Depository for Securities. The depositories hold the shares on behalf of brokers and other intermediaries.
As often happens, there can be a maze of intermediaries between the holder and the registered share position. Holders whose shares are held this way are called beneficial shareholders.
The financial rights attached to shares are well administered in the current system. This means that registered and beneficial shareholders alike receive the dividends and proceeds of transactions to which they are entitled quickly and reliably.
This is not necessarily so with the right to vote. Whereas the incentives of all market participants are clear and well aligned with respect to financial rights, voting rights haven’t benefitted from the same focus. The incentives are sometimes not as well perceived or appreciated, and the alignment among participants that would be required to allow votes to be delivered and counted as easily and efficiently as dividends is therefore lacking. The result is that the shareholder voting system is in large measure dysfunctional.