Director Elections and Shareholder Democracy 


January 2012

Securities Bulletin
Burke Heather, student-at-law

With proxy season approaching, issues surrounding the election of directors of public companies will once again come to the fore. This article reviews some of the issues regarding director elections that exist and that gained the attention of Canadian securities regulators last year.

slate vs. individual director elections

Under a slate system, a group of directors (a slate) is nominated for election, usually by management of the company. Shareholders vote for the slate on an "all or none" basis, resulting in the entire slate either being elected or not being elected.

A criticism of slate elections is the inability of shareholders to express approval or disapproval for individual directors. While slate elections were at one time quite widespread, their prevalence has declined significantly over the past number of years in favour of individual director elections. Individual director elections allow shareholders to cast votes on director nominees on an individual basis, thereby providing shareholders with the opportunity to express disapproval regarding an individual director by withholding support for such director.

plurality vs. majority voting

In Canada, corporate statutes currently provide for the election of directors by plurality voting. In a plurality voting scheme, shareholders are given the choice to vote either ‘for' a nominee director, or to ‘withhold' their vote for such nominee. This scheme means that the nominees with the largest number of ‘for' votes are elected as directors of the company up to the maximum number of directors to be chosen at the election. Such a voting scheme, it is argued, avoids the situation whereby a company could be left without a sufficient number of board members, as might be the case if shareholders could in fact vote ‘against' directors.

In uncontested elections, a plurality voting scheme allows an individual to be elected with less than a majority of the votes cast in favour of his or her election, regardless of the number of votes ‘withheld' from the individual's election. A recent high-profile example of this was the re-election of Mike Harris to the board of directors of Magna International Inc. in 2011. Mr. Harris was re-elected to the Magna board with only 38% of the votes cast in favour of his re-election (the remaining votes were ‘withheld' from voting). Taken to its extreme, in a plurality voting scheme an individual could be elected with just a single vote ‘for' regardless of the number of votes ‘withheld' from the individual's election. Not surprisingly, one of the main criticisms of this voting scheme is that it runs counter to shareholder democracy and aids in the entrenchment of a company's board.

In response to the concerns around plurality voting, the boards of a number of larger companies in Canada have adopted majority voting policies. In a typical majority voting policy, any nominee for director who receives a greater number of votes ‘withheld' from than ‘for' his or her election, would be required to tender his or her resignation as a director. Note that this approach does not change the voting standard from plurality to majority. A director nominee who receives more ‘withheld' votes than ‘for' votes is still elected, but following such election must then tender his/her resignation. The remaining board members would, absent unusual circumstances, generally accept such resignation.

A majority voting policy differs from a majority election standard (in which an individual who received more ‘withheld' votes than ‘for' votes would not be elected at first instance) and allows the board sufficient time to reorganize and reconstitute itself (e.g., to recruit and appoint replacement directors) if necessary, without creating any governance issues or putting the board or any committees thereof offside any laws or regulations with respect to, for example, minimum number of directors, or independence or residency requirements for directors.

Cumulative voting, which is expressly permitted under both the Canada Business Corporations Act1 as well as the Business Corporations Act (Ontario),2 is another method of electing directors in public companies. If the articles of a company provide for cumulative voting, each shareholder controls a number of votes equal to the number of votes attached to the shares owned by the shareholder, multiplied by the number of director positions to be filled. These votes may be allocated across a range of nominees for directors or, more distinctively, may be allocated to one particular nominee. The use of cumulative voting allows minority shareholders to concentrate their voting power on one or more nominees, and increases the likelihood that representatives of minority shareholders will be elected to the board.

Cumulative voting is not a widespread practice in Canada. With very limited exceptions, none of the major financial corporations listed on the TSX allow cumulative voting, and proposals to allow cumulative voting have been consistently voted down by shareholders over the past decade.

frequency of board elections

Both the Canada Business Corporations Act and the Business Corporations Act (Ontario) permit director terms of up to three years3 and staggered terms.4 Supporters of staggered elections argue that multi-year, overlapping terms of office provide directors with a longer-term viewpoint for the success of the business as well as stability in board composition, since the majority of the directors would not face re-election in any particular year.

However, critics point to both the lower level of accountability of directors who are not facing re-election in a particular year, and also the difficulties which staggered boards pose for potential takeovers – making any proxy fight a multi-year battle because only a minority of board positions would be eligible for election each year. Most companies in Canada hold annual elections for all members of the Company's board of directors as annual elections are seen as being an essential part of best practices corporate governance, permitting shareholders the opportunity to evaluate and vote on the performance of board members on a more frequent basis than would be the case under staggered elections.

regulatory landscape and initiatives

In January 2011, the Ontario Securities Commission ("OSC") published a staff notice advising that it was assessing whether reforms to securities laws were appropriate to facilitate individual director voting and majority voting for director elections.

Similarly, in September 2011, the Toronto Stock Exchange ("TSX") published proposed amendments to its Company Manual which, if adopted, will require companies listed on the TSX to elect directors individually and hold annual elections for all directors. The TSX acknowledged that a large number of listed companies in the S&P/TSX Composite Index have voluntarily adopted individual and annual director elections, and that adopting these rules for all companies is therefore a "natural evolution toward improving shareholder democracy." The TSX Venture Exchange requires companies listed on its exchange to permit shareholders to vote on the election of directors annually.

Additionally, the TSX's proposed amendments would require each TSX-listed company to disclose annually in its management information circular whether the company has adopted a majority voting policy for uncontested meetings, and if not, to explain the Company's practice for electing directors and why a majority voting policy has not been adopted. Given the corporate and securities laws concerns of mandatory majority voting (i.e., the threat that too few directors may be elected to achieve quorum or committee requirements), the TSX did not consider it appropriate, at this time, to mandate such a requirement for its listed companies, preferring instead to adopt a disclosure model.

Discussions and proposals to improve the effectiveness of corporate governance in Canada and elsewhere are expected to continue, particularly in light of corporate difficulties exposed over the course of the 2008-2009 credit crisis and ongoing questions about the effectiveness of current corporate performance. The OSC notice and TSX proposed amendments are the latest regulatory initiatives toward granting Canadian shareholders a more effective voice in electing directors.

by John Conway and Burke Heather, student-at-law

1 Canada Business Corporations Act, RSC 1985, c C-44 s 107 [CBCA].

2 Business Corporations Act (Ontario), RSO 1990, c B.16, s 120 [OBCA].

3 CBCA, s 106(3); OBCA, s 119(4).

4 CBCA, s 106(4); OBCA, s 119(5).

a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2012