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Corporate Secretary, October 5, 2011 article


Corporate Secretary


Why shareholder democracy matters

by   |   5 Oct 2011

Shareholder voting system in Canada and the US is largely dysfunctional.

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 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 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.

The amalgam of these measures is what is generally referred to as ‘shareholder democracy.’

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.

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 governance professionals.

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.

First steps

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


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