Proxy System in Canada is Broken Too

“It seems counter-productive to continue to improve the disclosure and governance aspects of the capital markets only to have these improvements potentially lost through an inadequate proxy voting process,” according to Tom Enright, the President of the Canadian Investor Relations Institute.  Earlier this month CIRI published comments on the discussion paper entitled “The Quality of the Shareholder Vote in Canada” that was released last year by the law firm of Davies Ward Phillips & Vineberg LLP (the “Davies Paper”).

 I’ll mention a few of CIRI’s comments: 

• CIRI would propose that consideration be given to regulatory initiatives under a fair disclosure regime to require that any report/recommendation be provided to the appropriate issuer in a timely fashion, prior to the report being issued to the proxy advisor firm’s institutional clients. We understand this practice is being followed by Governance Metrics International when it creates research reports on the risk profile of corporate issuers for its investor community clients.
• CIRI would like to see advisory firm voting recommendations be provided to all issuers (not just large capitalization companies who sign up for them) in advance of the recommendations being issued to investor clients and in a manner to provide sufficient time to provide a real and meaningful opportunity for issuers to correct factual research errors or engage in a dialogue with advisory firms if contentious issues arise. While the ability of selected, large capitalization companies to sign up to receive a copy of the recommendation is an improvement, we know of at least one TSX 60 company that signed up for the report but never received it.
• Proxy advisory firms should be required to disclose (a) if and when a recommendation has been provided to the issuer, (b) the name and contact information of the research analyst responsible for the recommendation, (c) the most recent date a discussion was held with the issuer and (d) whether there was any consultation with either the issuer’s management or board prior to the recommendation.
• Proxy advisory firms should be required to establish a mandated appeals process for those issuers who have concerns about a research report that cannot be resolved through direct dialogue with the advisory firm.
• Institutional investors should be required, as we believe they are in the UK under the Stewardship Code, to disclose whether or not and to what degree they rely on the recommendations of proxy advisory firms with regard to shareholder voting issues. In addition, institutional investors should be required to disclose or certify as to the internal controls they use to ensure the integrity and reliability of the services provided to them by a proxy advisory firm.
• If not already the case, it should be mandated that votes on securities of individual issuers should have significant input from the individuals, such as the portfolio manager, or investment teams directly responsible for the decision to purchase and own the securities.

 The 200+ page Davies Report can be found at http://www.dwpv.com/shareholdervoting

This all comes as the Ontario Securities Commission continues to review the proxy system in Canada. It solicited comments earlier this year.