Why shareholder democracy matters
Shareholder voting system in Canada and the US is largely dysfunctional.
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 maximize 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
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
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.
The amalgam of these measures is what is generally referred to as
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
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
A complex problem
That dysfunction sometimes results in the effective disenfranchisement of
beneficial shareholders. The impact is not only felt by small retail
shareholders as one might expect – large institutional shareholders fall
victim to the dysfunction as well.
These problems are exacerbated by the complexity of the capital markets,
with the practices of share lending and short selling compounding the
difficulty of determining who is truly entitled to cast the votes associated
with a given share. Because many shareholders simply do not vote, it can be
difficult to determine instances of over-voting, which is where more than
one holder votes the same share.
There is growing acknowledgement in the US and Canada that the processes of
shareholder democracy need attention, particularly since both regulators and
institutional shareholders are placing substantial wagers on shareholder
votes as an incentive for better and more robust corporate governance.
Those that have sought to map the processes by which shares are voted have
drawn flow charts of daunting complexity. A symptom of that complexity is
that each of the stakeholders in the voting process only sees the narrow
slice of the overall voting pie that is closest to them. This is true of
shareholders, issuers, transfer agents, proxy agents, intermediaries,
depositories, custodians, proxy solicitors, brokers, regulators and
Each stakeholder has a vested interest in the way the current processes
work. In some ways shareholders perceive themselves to be invested in the
dysfunction, and in some cases this may be true. In other cases the
complexity of the system makes it difficult for stakeholders to perceive
where their best interests truly lie, and they may be reluctant to consider
change that they might otherwise embrace if they had a better understanding
of the whole process.
The Canadian Society of Corporate Secretaries (CSCS) represents one of those
stakeholders: corporate secretaries and governance professionals. In many
ways we are the professionals closest to the front lines.
The CSCS believes that a necessary first step in transforming the processes
of shareholder democracy to make them suitably efficient and reliable is for
all stakeholders to gain a better understanding of the whole system. The
multiplicity of parties and the very different worlds in which they operate
have, to date, impeded gathering and sharing of the information that is
vital to that understanding.
The CSCS has decided to become the catalyst for that vital first step. It is
hosting an unprecedented gathering of the key stakeholders in the Canadian
capital markets on October 24 and 25 in Toronto. The two-day summit will
invite all stakeholders to participate in moderated expert panels.
Participants will be strongly encouraged to submit papers to the summit that
set out the processes that they administer along with an evaluation of
current outcomes, the strengths and weaknesses of the processes, and the
opportunities for improvements they feel exist.
As part of the summit there will be expert panels focusing on proxy voting
processes in other markets, including the US, Europe and Asia.
At the conclusion of the summit, the CSCS hopes to have created an
unparalleled repository of information that can serve as a basis for
understanding how the current system works, identifying the points of
failure and proposing changes that serve to level the playing field for all
shareholders, registered and beneficial alike. We will be working with noted
academics from prominent Canadian universities to ensure that all materials
from the summit, including video and transcripts of the sessions, are
assembled as a cohesive work to facilitate subsequent reference.
Information concerning the summit, including the preliminary program,
registration and sponsorship, is available on the CSCS website at
Cross Border Ltd. 1995–2011.