text:
Davies Ward Phillips & Vineberg LLP is a business law firm of approximately 240
lawyers with offices in Montréal, Toronto and New York. The firm is consistently
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© 2016 Davies Ward Phillips & Vineberg llp. All rights reserved.
1 Executive Summary
Shareholder Engagement: Boards Must SetPriorities and Establish a Framework
Developments in Canada: Warming up to shareholder
Global developments: Shareholder engagement is a focal point
Active Investing, Proxy Contests and Long-
Term Capital
14 Activism, performance and governance
14 Proxy contests decline
15 Key activism trends and issues
16 Institutional investors and long-term capital
Proxy Access: Flood in the United States Yetto Spill Over into Canada
22 Issuers will face increased pressure to facilitate shareholder
input into director nominations
22 U.S. experience: Floodgates open for proxy access
23 Canadian experience: Only talk of a flood
Shareholder Proposals: Canadian IssuersFace Shareholder Proposals on a Variety ofTopics
Shareholder proposals continue as a tool for expressing
shareholders' views
Low levels of support for shareholder proposals
Number of withdrawn shareholder proposals on the rise
Gender Diversity: It's Time to Get on
36 Lack of gender diversity remains a top governance issue
36 Women remain significantly under-represented
37 Investors and regulators are demanding more action in
light of issuers' slow progress
Compensation Issues and Say-on-Pay
46 Adoption of "say-on-pay" by Canadian issuers continues
to rise
46 Say-on-pay trends in 2016
48 CEO compensation continues to rise
49 Director retainers continue to grow, replacing meeting
Majority Voting: Lower Tolerance for
Undersupported Directors
54 Undersupported directors leave the boardroom
Forum Selection Bylaws: Making Their
Way into Canada
60 What are forum selection bylaws?
60 Canadian issuers are successfully adopting forum
selection bylaws
61 ISS and Glass Lewis remain unsupportive of exclusive
venue bylaws
Mitigating Corruption Risk: Understand
How Corruption Risks Apply to You and
Establish a Compliance Program
Corruption investigations and their penalties likely on the rise
Consequences of corrupt practices can be devastating to a
business and its principals
Understand how corruption risk applies to you and establish a
compliance program
Takeover Bid Code and Early Warning
Reporting Amendments
74 Amended takeover bid code
74 More time and leverage for target boards
75 Minimum 50% tender condition prevents minority blocking
positions and makes partial bids more difficult
75 The future of poison pills?
76 Securities commissions' focus to turn to other defensive
76 Amended early warning reporting (EWR) rules
77 Key changes to EWR and alternative monthly reporting (AMR)
78 Filers must now disclose more detail regarding plans and
future intentions
Other Current Issues and Trends Relevant
for Boards
82 CEO succession planning: Boards should take a proactive,
hands-on approach
83 ISS and Glass Lewis tighten up "overboarding" policies
84 Cybersecurity risk: Risk management continues to be a high
85 Update on flawed proxy voting infrastructure: Voluntary
"meeting vote reconciliation" protocols proposed
87 Database and Methodology
91 Key Contacts
The major theme of this sixth annual edition of Davies Governance Insights is
the rise in importance of direct communication between boards of directors
and public companies' shareholders, commonly referred to as shareholder
engagement. In the current environment where the focus of sophisticated
investors ranges across a wide spectrum of governance issues and long-term
and shorter-term investment objectives, the benefits for an issuer of director-
shareholder engagement are significant. Shareholder engagement can greatly
assist a board in understanding how the balance of different, often conflicting,
shareholder objectives and time horizons is represented among the issuer's
shareholder base and, by extension, how to deal effectively with pressure
from investors to change a company's governance or strategy. Engagement
with a broad cross-section of a company's shareholders also facilitates a
board's understanding of how its major shareholders may feel about various
issues today's boards are charged with managing — including enhancing board
composition and effectiveness, whether to facilitate some form of proxy access,
improving board diversity, resolving compensation issues and responding to
investor feedback on other plans or proposals being pursued by the issuer
— all topics and trends we discuss in this report. It also assists in developing
compromise solutions, which can prevent investor concerns from developing
into public fights.
Another key message in this year's Davies Governance Insights is the need
for issuers to continue to push hard to achieve greater diversity, not just on
their boards but throughout their leadership ranks. Taking meaningful steps
to grow the diversity of an issuer's leadership group not only expands the pool
of individuals with an in-depth understanding of a company's strategies and
challenges from which board and executive candidates may be selected but also
sets the stage for more effective decision-making by boards and management
and improved company performance. We believe the regulatory approach in this
area will start to become significantly more prescriptive and stringent unless
issuers show meaningful progress in their diversity objectives, beyond just
articulating a desire to do so.
A final key theme of Davies Governance Insights 2016 is the broad range of
issues and risks which boards of directors must ensure are being appropriately
managed — the rise in the number and complexity of issues faced by boards
makes performing director duties more onerous than ever. From topics such as
director "overboarding" to proactive succession planning, managing bribery
and foreign corruption and cybersecurity risks, and considering and responding
to shareholder proposals, each board must remain focused on ensuring the
company has the expertise available to understand, manage and mitigate a wide
range of issues and risks, and to identify and respond to new challenges as they
This edition provides boards, general counsel and investors with important
information about the top governance developments and trends we observed in
2016, including "our take" — practical advice at the end of each chapter focusing
attention on the steps that should be taken or considered in response to the
various issues.
Our corporate governance experts can help your board, committees and senior
management customize the right solutions to remain in compliance with
current corporate governance trends and requirements. For assistance or more
information on any of the issues raised, contact one of our experts listed under
"Key Contacts" at the end of this report.
For details concerning our research methodology and the source of data relied
on for purposes of our analysis, see "Database and Methodology" near the end
of this report.
Boards Must
Set Priorities
and Establish a
Boards Must
Set Priorities
and Establish a
hareholder engagement by public
companies continues to increase.
Shareholder-director engagement
has become one of the main focal
points for institutional investors and
others and is now widely considered a key
component of good corporate governance
practices. Boards should discuss and map
out a framework for engagement that works
for the company, including whom they will
engage with and when, and appropriate
topics for engagement.
Developments in Canada:
Warming up to shareholder
The evolution in Canada's corporate landscape has led shareholders and
Canadian public company boards alike to review their current approaches to
shareholder engagement. These changes include a more intense focus on
issuers' corporate governance practices, greater degrees of active investment
management by institutional investors, a rise in activist investing and proxy
contests, the increased use of proxy advisory services, and more and more
institutional investors developing their own voting guidelines. Historically,
engagement was limited to annual and quarterly disclosures and filings and,
perhaps, engagement at annual general meetings (AGMs) or annual investor
days. Today, those interactions are viewed as a minimum baseline effort and,
increasingly, significant investors are expressing their desire to directly engage
with Canadian issuers' directors, on a variety of governance-related topics.
In this climate, investors, proxy firms and other market participants are
emphasizing the importance of improving and increasing the dialogue between
directors and shareholders. Institutional Shareholder Services (ISS), Glass
Lewis & Co. (Glass Lewis) and Kingsdale Shareholder Services Inc. (Kingsdale),
panellists at Kingsdale's April 2016 Governance Summit, highlighted these
trends and agreed that nuanced approaches to engagement can be a powerful
proactive defence against activism and shareholder dissatisfaction.
The Canadian Coalition for Good Governance (CCGG) also continues to advocate
for enhanced engagement and ongoing dialogue with shareholders — as
discussed below in "Proxy Access: Flood in the United States Yet to Spill Over
into Canada", engagement can go so far as giving investors director nomination
rights in the form of proxy access bylaws.1 To date, proxy access has not
achieved the level of broad-based support in Canada that we are seeing in the
United States; however, increasingly, engagement includes at least discussing
board composition and obtaining feedback on management's director nominees
from investors. Some Canadian issuers have specifically included a procedure
for investors to provide, albeit informally, proposed nominees for inclusion on
board "evergreen" lists in their engagement policies.
In March 2016, the Institute of Corporate Directors (ICD) published guidance to
help boards of Canadian public companies develop an engagement approach to
corporate governance between directors and significant shareholders. The ICD
endorsed the 2014 U.S. Shareholder-Director Exchange (SDX) Protocol, which we
discussed in detail in Davies Governance Insights 2015.2 SDX encourages boards
Boards Must
Set Priorities
and Establish a
The ICD views
the lack of
a standard
framework as one
of the greatest
obstacles to
dialogue between
directors and
shareholders of
Canadian public
to adopt a clear policy on the way they will approach engagement, identify
potential engagement topics and seek out and prepare for investor engagement.
The ICD viewed the lack of a standard framework as one of the greatest obstacles
to increased dialogue between directors and significant shareholders of Canadian
public companies. ICD's guidance is in many ways consistent with the SDX
Protocol but designed to account for the unique aspects of Canada's markets,
and it contemplates issuers adopting a proactive and consistent shareholder
engagement strategy involving regular meetings between shareholders and
board members.3
Global developments: Shareholder
engagement is a focal point
As in Canada, shareholder engagement by public companies in the United States
and the European Union has continued to increase over the past year and has
become a focal point.
In July 2016, a group of 12 U.S. CEOs, including those from GE, Berkshire
Hathaway and major institutional investors such as BlackRock and Vanguard,
released an open letter titled Commonsense Corporate Governance Principles.4
According to these principles, directors have a responsibility to engage in
robust communications with the company's shareholders on key governance
and shareholder issues. PwC's 2015 Annual Corporate Directors' Survey
noted that 69% of U.S. company directors now say they participate in direct
communication with institutional shareholders, compared with 62% in 2012.5
Sixty percent of directors surveyed say their companies have established or
discussed protocols regarding permissible topics for discussion between directors
and shareholders, as well as the process by which shareholders can request
direct dialogue with the board.6 PwC's analysis of 2016 U.S. proxy statements
revealed that 64% of 100 S&P 500 companies disclosed that they engaged with
shareholders, with the same number reporting that they took some action as
a result of the engagement.7 Further, and as discussed below in "Proxy Access:
Flood in the United States Yet to Spill Over into Canada", shareholder proposals
on proxy access are expected to increase in the United States, prompting
recommendations for additional shareholder engagement in this area.8
In the European Union, the European Parliament adopted amendments to the
European Commission's proposal to revise the Shareholders' Rights Directive,
introducing new measures aimed at encouraging engagement between publicly
traded companies and their shareholders that will take effect in 2016.9
Shareholder engagement, and particularly engagement between shareholders
and directors, is increasingly a global trend that can be expected to gain
momentum into 2017. With Canadian shareholders becoming much more
proactive and shareholder engagement being one of the top issues for investors,
the need for a proper shareholder engagement strategy, whether formal or
informal, is critical. However, there is no one-size-fits-all solution, and many
companies are developing their own context-based approach.
Below are some important considerations to bear in mind as Canadian issuers
start to formulate an approach to shareholder engagement.
Shareholder engagement offers boards the opportunity to gain insight into
significant shareholders' priorities and concerns, while building relationships
that may be leveraged later should the need arise — for example, in any future
proxy battle, say-on-pay vote, contested director election or other forms of
activism. Here are seven key principles that boards should strive to observe
when developing an approach to shareholder engagement.
Develop a shareholder engagement framework or policy. As a best
practice, consider developing and adopting a written policy on how the
board intends to engage with its shareholders and communicate it to your
shareholders. The board's engagement efforts are intended to complement,
not displace, the CEO's, management's and investor relations professionals'
primary responsibilities in this area. In the absence of a formal policy,
boards should at least consider developing a framework for engagement
that sets out the parameters for whether, when and how they will engage
with investors, both in the regular course of business and when faced with
investor demands to do so or in special situations.
Communicate continually with shareholders. Effective shareholder
engagement involves ongoing communications with shareholders, rather
than reliance on scheduled shareholder events, such as AGMs or quarterly
and annual public disclosures. Those channels are largely now considered
only a baseline; investors expect frequent dialogue. Communication
protocols should be simple and accessible, and key contacts should be
established and disclosed to shareholders. The board, management and
investor relations professionals should be kept well apprised of the "rules of
and directors is
expected to gain
momentum into
Boards Must
Set Priorities
and Establish a
Know your shareholders. Through management briefings, and with the
assistance of proxy solicitors when appropriate, the board should be updated
on the company's most significant shareholders, including the size of their
share positions (including any material short positions), their investment
rationales, their general investment strategies and track records, the
structure of their decision-making processes, how they vote their shares and
whether they involve proxy advisory firms, as well as any material policy
guidelines or restrictions established by the investors.
Use different approaches and formats. In formulating an approach to
shareholder engagement, a board should consider the format of meetings
with different types of shareholders. Individual meetings may be preferable
to group meetings when there is a high level of divergence in shareholder
perspectives and/or objectives or when the board desires to build goodwill
with a significant shareholder. Group meetings, perhaps even web-based,
may be more appropriate when the board chooses to engage with smaller
shareholders or those with common interests or concerns. In any case,
the framework should be flexible and take into account the unique
circumstances of the company, including during different business cycles.
Prepare for meetings. Adequate preparation before meetings is critical.
Being prepared not only maximizes the effectiveness of the communications
but also assists the board in managing the potential risks of engagement,
such as selective disclosure and tipping. Participating board members
should be briefed by management and, in some cases, legal counsel before
meetings. Attendees should have good information on the shareholders they
are meeting, understand their issues of concern and be armed with potential
responses prior to scheduled meetings.
Define the issues/topics for discussion. Director-shareholder engagement
is most effective on governance-related topics such as board oversight of
the company's strategy, risks and internal controls, the board's composition
and decision-making processes, succession planning and executive
compensation. The CEO and/or other members of the management
team should not be present for discussions on CEO compensation or
performance but can be present for other discussions. In most instances,
operational matters are best left for management to discuss. Market-
sensitive or material non-public information that will not be discussed
should be identified. It would be prudent to clarify expectations regarding
confidentiality with shareholders in advance.
Regularly review your shareholder engagement strategies. Boards should
keep a record of their engagement activities and investor communications.
Follow-up with shareholders and providing transparency on engagement are
also key — engagement does not stop once the discussion has been held.
Solicit feedback from engaged shareholders, where possible, and review
engagement strategies at the board level at least annually and reuse as
As companies develop their approach to shareholder engagement, both the
ICD guidance and the SDX Protocol provide useful road maps of important
elements that the board and/or governance committee should consider. If
your organization is considering a shareholder engagement strategy or policy,
our team of governance experts can assist to ensure that you strike the right
balance and do not inadvertently run afoul of corporate and securities laws.
Proxy Contestsand Long-TermCapital
Proxy Contests
and Long-Term
hareholders in public companies
vary dramatically in their investment
goals and strategies, from long-term
capital institutions to active
institutional investors to activist-focused
funds. All have strong arguments for their
approach but various shareholders may
advocate at their investee companies for
fundamentally different strategies. Boards
must engage with the full spectrum of their
shareholders to understand better how to
balance these competing interests.
Activism, performance and
One of the challenges faced by public companies and their boards remains the
fact that shareholders are not a monolithic class. Not all institutional investors
have the same objectives; some advocate for long-term investing, others for
active investing, and not all activist investors are focused solely on short-term
gains. Shareholders and their interests and priorities vary, and boards and
senior management of public companies will continue to face different and often
conflicting demands.
Active investing continues to be a major investment sector in 2016 in Canada as
elsewhere. While this year has seen a decline in public proxy contests (discussed
below), other techniques to achieve board change such as non-public activist
efforts, though difficult to quantify, are on the rise in Canada.
Replacing a portion of an issuer's board is one of the many objectives sought by
active investors. Other outcomes activist investors may seek include promoting
or blocking a particular transaction or encouraging management to return
capital to shareholders through stock buy-backs, dividends and other near-
capital returns, such as by decreasing spending on research and development
or on employment. Activist investors vary widely in their objectives and
approaches, which makes it very important for boards to engage with their
shareholders and understand their perspectives.
Proxy contests decline
The year 2016 in Canada saw a significant decline in the number of proxy
contests, with only 21 campaigns having been publicly announced as of the end
of August 2016, compared with 55 in the year 2015.10 Consistent with past years'
trends discussed in our Davies Governance Insights reports, management wins
continue to represent a slight majority of the cases, and activist shareholders
are increasingly seeking minority board representation, rather than to replace a
majority of directors or to compel or defeat a transaction. Also consistent with
prior years, public proxy contests in Canada continue to be focused primarily on
the resource sector and on Canada's smaller-market-cap companies.
In addition to being influenced by changes in market and economic conditions,
the decline in proxy contest numbers is largely due to activists increasingly
seeking only "short slate" board representation in their campaigns and to the
growing trend of increased engagement by boards with their investors. This
latter trend has, in turn, been driven partly by past public successes by activists,
In 2016, we saw
a significant
decline in proxy
contests, with
21 campaigns
announced by
the end of August
2016, compared
with 55 in 2015.
Proxy Contests
and Long-Term
which have motivated boards to engage privately and implement changes
where a convincing case is made by the activist. The result is that shareholder
concerns are now frequently voiced and negotiated behind the scenes, and
board representation or other changes are agreed to between the activist and
the issuer without a public announcement or formal proxy contest. In effect, the
result is board renewal or some other activist "win" driven by the shareholder
without the need to launch a formal contest or take the dispute public. And the
influence of activists, coupled with the increased focus of regulators, investors
and other market participants on corporate governance and shareholder
democracy, has prompted many public companies to be proactive in addressing
perceived problems in advance, in an effort to ward off activist overtures before
they even arise.
Key activism trends and issues
Recently, in Davies Shareholder Activism and Proxy Contests: Issues and Trends,11
we discussed the activism trends in Canada and some of the principal issues and
challenges faced by both activists and target companies. In our report, we also
highlighted notable differences between Canadian and U.S. activist campaigns
and the legal environment in which activists operate. For more details, please
consult our report by clicking here. Topics covered include:
the right to requisition a shareholders' meeting
stake-building and beneficial ownership reporting
group formation: insider trading and joint actor characterization
selective disclosure
empty voting
short slate proposals
limited private proxy solicitation and advance notice bylaws
public proxy solicitation and the broadcast exemption
compensation arrangements for director nominees
universal proxies
vote buying: soliciting dealer fees in proxy contests
regulatory developments with respect to proxy advisory firms
Institutional investors and longterm
In response to the rise in activist activity over the past 10 to 15 years, particularly
in the United States but also in Canada and globally, a small but influential
group of market participants are publicly urging companies and their boards
to readopt a greater emphasis on long-term profitability. In the United States,
large institutional shareholders BlackRock, State Street, Berkshire Hathaway,
Vanguard and a number of other major institutions are publicly articulating their
perspectives and expectations on matters that they perceive as being critical
to refocusing on long-term interests. For example, long-termism is one of the
major themes underlying the Commonsense Principles of Corporate Governance,
released this past summer by those and other significant investors, as well as by
major U.S. issuers GE, General Motors Company and Verizon. The stated purpose
of those principles is to provide a framework for "sound, long-term-oriented
governance".12 The principles include several recommendations intended to
foster a renewed focus on long-termism, including a suggestion that boards
should consider whether providing earnings forecasts is appropriate or does
more harm than good.
Separately, Larry Fink, the CEO of BlackRock, continues his engagement
campaign with the CEOs of S&P 500 companies to implement a strategic
framework for long-term value creation. To generate sustainable returns over
time, Fink suggests that companies need to revisit and curtail inflated dividend
payouts in favour of long-term investments, such as reallocating funds to
research and development.
The "short term" versus "long term" debate also received amplified attention
this year in the U.S. presidential campaign, when Hillary Clinton advocated
proposals to combat "quarterly capitalism" through mechanisms such as capital
gains tax reform, and linked short-termism to broader concerns about the
growing income disparity gap.13
In Canada, an initiative called Focusing Capital on the Long Term (FCLT) was co-
founded in 2013 by the Canada Pension Plan Investment Board (also a signatory
of the U.S. Commonsense Principles of Corporate Governance initiative) and
McKinsey & Company. Its aim is to combat short-term strategies perceived to
be entrenched in today's markets, with a view to advancing practical actions to
focus business and markets on the long term. FCLT argues that the "relentless
focus on short-term performance and hypersensitivity to the current news
cycle" have distorted asset prices and market volatility in general, which in turn
undermines corporate investment, holds back economic growth and lowers
A small but
group of market
participants is
advocating for
issuers to refocus
on long-term
strategy and
value creation.
Proxy Contests
and Long-Term
Six of the
world's largest
released a
supporting the
LTVC Index,
and several
committed to
allocate about
US$2 billion to
funds tracking
the index.
returns for savers.14 FCLT lays part of the blame for this short-termism on boards
themselves, not just shareholders. FCLT founders Mark Wiseman and Dominic
Barton believe, among other things, that boards should battle short-termism by
doing the following:15
Ensure boards select the right members with a diversity of opinion, proven
experience and functional expertise, with an emphasis on identifying
individuals with a track record for independent thinking.
Spend more time on value-added topics such as long-term strategy and less
time on "non-value adding governance items of which there are many".
Engage with long-term investors and facilitate discussions about long-term
strategies and metrics, not just short-term issues such as compensation and
Compensate directors for long-term performance and pay directors more
for the additional time they need to spend performing their duties, but
structure that compensation in the form of long-term incentives, such as
significant equity investments in the companies they manage.
FCLT's mission led to the launch in January 2016 of a newly formed S&P
Long-Term Value Creation Global Index (LTVC Index) in cooperation with six
of the world's largest institutional investors and in collaboration with the S&P
Dow Jones indices. The LTVC Index is designed to select and track companies
selected through qualitative and quantitative analyses. Qualitative criteria for
inclusion in the LTVC Index factor in the effectiveness of corporate governance
through a demonstrated ability to manage both current and future economic
and governance opportunities and risks by focusing on a long-term strategy. The
quantitative criteria consider a company's sustained history of financial quality
and long-term investment returns.
Six of the world's largest institutional investors released a statement in support
of the LTVC Index, and several have committed to initially allocate about
US$2 billion to funds tracking the index. As of June 2016, the LTVC Index tracked
over 240 diverse companies across 10 sectors, including consumer staples,
industrials, healthcare and financials. The LTVC Index includes some Canadian
companies such as Royal Bank of Canada, Telus and Canadian National Railway.
Over 100 institutional investors have devoted funds to the LTVC Index, including
pension funds and asset managers; however, it remains inaccessible to retail
investors. A proposal has also been made in the United States to establish a
long-term stock exchange with listing requirements intended to correlate to
long-term profit sustainability.16
In light of the diversity of priorities and objectives of today's investors, and the
conflicting demands these may place upon boards, it is increasingly important
that boards and investors engage in dialogue to understand each other's
goals and perspectives. While, in practice, a company's largest institutional
shareholders are more likely to hold a long-term perspective and may, given
their size, resources and shareholdings, incline boards to become more
aligned with their views as opposed to those held by the rest of their investor
base, boards need to carefully consider the goals and priorities of all major
shareholders, in both the near term and the long term. This means listening to
all significant investors with short- and long-term objectives, including activist
investors, and thoughtfully considering the relative pros and cons of their
proposals for the business, in the context of management's current strategies
and plans.
In addition to spending more time engaging with investors, boards should
ensure that they are allocating sufficient time on their agendas to discuss and
develop responses to investor feedback, and to identify and articulate their own
internally developed strategies. Having quarterly board meetings to discuss
typical annual disclosures and quarterly reporting may, for many investors,
be perceived as being insufficient and falling short of directors' duties to the
company and its investors.
Boards need to
carefully consider
the short- and
long-term goals
and priorities
of all major
Proxy Access:
Flood in the
United States
Yet to Spill Over
into Canada
Proxy Access:
Flood in the
United States
Yet to Spill Over
Into Canada
n contrast to Canadian issuers'
experience to date, large U.S. issuers
are increasingly expected to have proxy
access measures in place. Boards of
Canadian issuers should be aware of this
trend and continue to focus their efforts on
shareholder engagement, including investor
feedback on their board composition and
director nominations. Canadian issuers
can expect to face more pressure from
their investors, whether through demands
for proxy access or in other forms, to
facilitate shareholder input into the director
nomination process.
Issuers will face increased
pressure to facilitate shareholder
input into director nominations
Shareholders elect directors. But management usually nominates the directors
put forward to shareholders for election. "Proxy access" is one means by
which significant shareholders (or groups of shareholders) can formally insert
themselves directly into the director nomination process — by having their
nominees included in management's proxy materials. Proxy access has risen
in prominence because it gives those investors a say in director nominations
without the expense of having to mount a dissident proxy campaign. In the
United States, issuers frequently face proposals by their investors (both formally
and via back-channel engagements) to adopt proxy access bylaws; the 2015
proxy season was described as the year the U.S. "proxy access floodgates"
opened. To date, this trend has not yet emerged in Canada, but Canadian boards
should remain cognizant of the issue. We expect that Canadian issuers will face
increased pressure to facilitate direct shareholder involvement in the director
nomination process, whether through formal shareholder proposals (in the
longer term) or through shareholder engagement mechanisms (in the short
U.S. experience: Floodgates open
for proxy access
As we described in Davies Governance Insights 2015,17 proxy access was the top
corporate governance issue in the 2015 U.S. proxy season. According to a recent
report by Ernst & Young LLP, in 2016 proxy access was the most common subject
of shareholder proposals for U.S. issuers.18 In a recently published market survey,
a major U.S. law firm predicts that in the coming year, a majority of S&P 500
issuers will have adopted proxy access measures.19
The recent history of proxy access in the United States began in 2010, when
the U.S. Securities and Exchange Commission (SEC) adopted a formal proxy
access rule. Opponents successfully challenged, and the U.S. Court of Appeals
struck down, the rule. Then, in late 2014, New York City Comptroller Scott M.
Stringer, on behalf of the New York City pension funds he oversaw (valued at
US$160 billion), announced a campaign dubbed the "Boardroom Accountability
Project".20 As part of the campaign, he submitted proxy access proposals
to 75 U.S. issuers. The proposals were based on the defunct SEC rule and
contemplated that shareholders collectively holding 3% of an issuer for at least
Proxy access
gives significant
investors a
say in director
without the
expense of
mounting a
dissident proxy
Proxy Access:
Flood in the
United States
Yet to Spill Over
Into Canada
The number of
U.S. issuers that
have adopted
proxy access as
a result of 2014's
Project has gone
from just 4 to
over 240 today.
three years could nominate up to 25% of the board using management's proxy
materials. The campaign was remarkably successful: the number of U.S. issuers
that have adopted proxy access has gone from just four before the campaign21 to
over 240 today.22
The most typical U.S. proxy access bylaw imposes the following criteria in order
for a shareholder (or shareholder group) to be eligible to have its director
nominee(s) put forward in management's proxy materials:
minimum ownership threshold of 3%
minimum holding period of three years
maximum cap on shareholder appointees to the board of between 20% and
maximum limit of 20 shareholders in a nominating group
A majority of U.S.-style proxy access bylaws also include clauses that restrict the
use of proxy access in the wake of a proxy contest. Many also include provisions
requiring nominating investors to hold full economic and voting ownership of the
subject shares, count incumbent investor nominees for purposes of determining
the maximum number of investor nominees eligible in any given year and
prohibit the resubmission of investor nominees who previously failed to receive
a prescribed level of shareholder support for their election. Less consistently,
some bylaws also require loaned shares to be recalled (or be subject to a right of
recall) to qualify toward calculating the minimum share ownership threshold.
With the flood of proxy access proposals, proxy advisory firms ISS and Glass
Lewis have adopted U.S. voting guidelines on acceptable proxy access measures
(they can be found here and here, respectively).23
Despite the rising prevalence of proxy access bylaws in the United States, we
understand that no shareholder has yet used a proxy access right to nominate a
Canadian experience: Only talk of
a flood
The Canadian experience has been different and no "flood" has yet emerged
here, although there is no question that the topic has been seriously discussed
over the past two years, and proxy access is gaining traction with some
institutional shareholders in Canada. And we believe the focus in Canada on
proxy access will grow in coming proxy seasons.
Proxy access is generating considerable debate in Canada; in May 2015, CCGG
proposed its own proxy access standard,25 and in October 2015, the Institute for
Governance of Private and Public Organizations published a paper opposing any
new proxy access standards.26 Despite these discussions and debates, during the
2016 Canadian proxy season, not a single shareholder proposal to implement
proxy access was put forward for a vote by shareholders of a Canadian issuer
on the Composite Index or SmallCap Index. In our view, two principal factors
account for this lack of proxy access proposals.
First, the legal regime in Canada is distinct from that of the U.S. Most Canadian
corporate laws already include some form of proxy access. For example, the
Canada Business Corporations Act (CBCA) and most provincial corporate
statutes permit shareholders holding at least 1% or $2,000 worth of the issuer's
voting shares for at least six months to submit a shareholder proposal with
nominations for the election of directors. Subject to certain exceptions, the
issuer is required to include or attach the proposal to management's proxy
circular. The nomination can also include a supporting statement of up to 500
words. In addition, shareholders holding 5% or more of the shares entitled to
vote at a meeting can requisition the issuer to call a special meeting; activist
investors have frequently used this requisition right over the past several years
to nominate their proposed directors in lieu of some or all of management's
nominees. Although these mechanisms do not align perfectly with the proposed
proxy access mechanism advocated by CCGG, they nevertheless provide
powerful tools to investors. Moreover, the frequently cited impediments to
shareholders exercising their director nomination rights in the United States,
such as staggered boards, are, in practice, non-existent in Canada in light of
Canadian corporate laws and Toronto Stock Exchange (TSX) rules prohibiting the
Second, while discussions concerning proxy access to date have typically
followed the U.S. formulation, there are significant distinctions between the
Canadian and U.S. markets, which may suggest that U.S.-style proxy access is
not appropriate for the Canadian market. The smaller Canadian market, smaller
market capitalizations of Canadian issuers and the fact that shares of Canadian
issuers tend to be less liquid and more frequently controlled by significant
investors than is the case in the United States serve to magnify the influence
of institutional shareholders in Canada. These unique qualities of the Canadian
market also make it easier for institutional investors to meet the relevant 5%
ownership threshold to requisition a meeting or the 1%/$2,000 threshold to
submit a shareholder proposal to nominate directors. As a result, these investors
carry significant clout in Canada, and issuers may already be more prone to pay
attention to their concerns.
Proxy access
to generate
debate in Canada.
Proxy Access:
Flood in the
United States
Yet to Spill Over
Into Canada
are demanding
more meaningful
access to
the director
So does all of this mean that proxy access is an issue that Canadian boards can
ignore? We think not. Despite the lack of Canadian proxy access proposals in the
past two proxy seasons, the issue remains under focus and investors continue
to seek ways to have more meaningful input into the director nomination
process and to better understand how those views are taken into account by the
companies they own.
Proxy access has gained considerable traction in the United States. Boards
of Canadian issuers should keep abreast of these U.S. developments. If proxy
access gains momentum north of the border, boards will benefit from the lessons
learned in the United States.
Whether or not proxy access measures are implemented, boards should avoid
being taken by surprise by the nomination of a director by a shareholder.
Shareholders are increasingly demanding more meaningful input into the
director nomination process, in some form. Failure to facilitate or even consider
these desires or to develop appropriate ways to respond to them can result in
adverse consequences, including shareholder proposals, criticism from investors
and proxy advisory firms, reputational damage, proxy contests and low (or
less than majority) levels of support for management's director nominees.
We recommend that Canadian boards and their general counsel consider the
following actions to mitigate the risks of such outcomes.
Implement a shareholder engagement policy. Effective communication
is vital. Consider implementing a comprehensive shareholder engagement
policy, and keep it updated. These policies can and increasingly do include
guidance for investors on how they can provide input into the director
nomination process and how the issuer will consider and respond to that
feedback. For example, some issuers allow investors to submit director
nominees for inclusion in "evergreen" lists maintained by their board. See
"Shareholder Engagement: Boards Must Set Priorities and Establish a
Framework" above for more details.
Engage with shareholders. Once the issuer has adopted a shareholder
engagement policy, or even in the absence of a formal policy, the
board should ensure that it is actually engaging with the issuer's
major shareholders to understand their views on various governance
topics, including board composition and effectiveness. As discussed in
"Shareholder Engagement: Boards Must Set Priorities and Establish a
Framework", facilitating direct shareholder engagement remains one of
the top governance concerns for many investors, and, in our view, boards
should consider implementing an engagement process in some form (which
will vary from issuer to issuer).
Implement a robust director evaluation and nomination process. Ensure
that the director nomination process implemented by the nominating
committee is robust and defensible. Management's board nominees should
reflect an appropriate depth and breadth of experience and diversity, and
the nominating committee should take into account input from shareholders
when selecting director nominees. Only high-calibre individuals who will
be able to effectively supervise management of the issuer should be
nominated. Once nominated, the board as a whole and each individual
director should be subject to a rigorous evaluation process and, as part of
that process, feedback should be considered from shareholders regarding
the composition and effectiveness of the issuer's board members.
Use management's proxy circular as a communication tool. In addition
to providing shareholders with prescribed information, the proxy circular
is a valuable tool that can be used to effectively communicate with
shareholders. Use the proxy circular to provide greater transparency
about the issuer's director nomination process, including (1) how the
nominating committee or particular directors participate in shareholder
engagement activities and (2) how shareholder input factors into assessing
and recommending director nominees for consideration by the board and
Canadian Issuers
Face Shareholder
Proposals on a
Variety of Topics
Canadian Issuers
Face Shareholder
Proposals on a
Variety of Topics
ver the past three years, a greater
number of Canadian public
companies have faced shareholder
proposals on a variety of topics. In
contrast to historical practices, no longer are
financial institutions the primary targets.
Perceived deficiencies in issuers' gender
diversity and executive compensation
practices continue to be the most common
topics of shareholder proposals put to
Canadian companies. More issuers can
expect to face shareholder proposals,
particularly if they have ongoing deficiencies
in key areas under investor scrutiny.
Shareholder proposals continue
as a tool for expressing
shareholders' views
In 2016, shareholders of Canadian public companies continued to be active in
making their views known through the use of the shareholder proposal regime
under Canadian corporate law. When an issuer receives an eligible shareholder
proposal (typically made by a shareholder holding over 1% of the outstanding
voting securities with a fair market value of at least $2,000 and held for at least
six months), the issuer must include it in its management proxy circular and
agenda for its upcoming AGM. However, shareholder proposals need only be
presented as recommendations. A board is not legally compelled to implement
a proposal even if it is approved by a majority of shareholders; in practice,
however, this may have negative implications for the issuer.
The following were the most common topics presented by shareholder proposals
in Canada in 2016:
increasing female representation on the board, in senior management or
streamlining and simplifying financial information and financial reporting
disclosing voting results separately for each class of shares
requiring an advisory "say-on-pay" vote on executive compensation, or
seeking corrections to perceived deficiencies in compensation policies or
paying a fair share of taxes
establishing term limits on directors' tenure
As Table 4-1 indicates, although 2015 saw a surge in the number of shareholder
proposals, in 2016 their number has reverted to the more moderate levels
witnessed in previous years. However, the number of issuers receiving
shareholder proposals has remained relatively constant year over year. Perhaps
the most important trend we have observed over the past three years is that
financial institutions are no longer the main targets of shareholder proposals,
as was historically the case. In today's market, a variety of issuers in different
industries are facing shareholder proposals on governance-related and other
topics, with the principal areas under investors' focus being issuers' lack of board
and/or executive diversity and deficiencies in executive compensation practices.
Canadian Issuers
Face Shareholder
Proposals on a
Variety of Topics
2016 2015 2014
Number of proposals
47 6549
Number of issuers receiving proposals 24 2618
Number of financial institutions receiving 77 9
Average percentage of votes cast "For" (all 14% 19% 10%
Average percentage of votes cast "For" 7% 11% 10%
(excluding proposals approved by shareholders)
Low levels of support for
shareholder proposals
Despite the rise in the number of issuers facing proposals over the past three
years, in 2016 there were only three successful proposals, compared with eight
in 2015. Table 4-2 sets out those proposals put to shareholders this year that
received more than 50% of the votes in their favour.
Shareholder proposal % votes "For"
Cogeco Inc. Disclosure of Voting Results 93.0%
per Share Category
Suncor Energy Inc. Report on Climate Change 98.0%
Transat A.T. Inc.
Disclose Corrections Made in 100.0%
the Executive Compensation
The average percentage of votes cast "For" shareholder proposals in 2016 was
13.8%. However, this average was partly skewed because of the three successful
proposals being approved by shareholders with overwhelming support. Among
the remaining proposals not approved by shareholders, the average level of
support was lower this year, at 7%, compared with 11% last year and less than
10% in prior years.
Although 47 shareholder proposals were put forward in the 2016 proxy season,
consistent with prior years, they were made by only a handful of organizations.
In some cases, the proposers chose one or two issues and put the same proposal
forward to a number of issuers. In other cases, the proposal was tailored to the
specific issuer.
One trend we have not yet observed in Canada but are witnessing in the United
States is the rise in shareholder proposals seeking to have issuers adopt proxy
access bylaws to allow director nominations by shareholders holding a minimum
percentage of shares, up to a certain number or percentage of the issuer's board
seats. We discuss this topic earlier in this report under "Proxy Access: Flood in
the United States Yet to Spill Over into Canada".
Number of withdrawn shareholder
proposals on the rise
Beyond the 47 proposals that proceeded to a shareholder vote in 2016, an
additional 24 proposals made to 11 issuers were withdrawn before each issuer's
AGM, compared with nine withdrawn proposals made to seven issuers in 2015.27
These proposals focused on the following topics:
recommending an approach to corporate philanthropy
concerning some aspect of executive compensation
requiring disclosure of political spending and lobbying
requesting that the issuer implement a diversity policy
reporting on the steps to improve customer service
establishing limits on directors' tenure
proposing that the issuer pay a fair share of income taxes
simplifying financial information
disclosing voting results separately for each class of shares
The rise in the number of withdrawn shareholder proposals may be due to
increased shareholder engagement, as public companies face more demands to
facilitate direct engagement between the investor and the issuer's board and/
or senior management. As a result of these trends, it is likely that proponents
of shareholder proposals are enjoying more opportunities to engage in dialogue
Although 47
proposals were
put forward
in the 2016
proxy season,
consistent with
prior years, they
were made by
only a handful of
Canadian Issuers
Face Shareholder
Proposals on a
Variety of Topics
with the issuer and successfully reaching agreement with the board on the topic
of the proposal before taking it to a shareholder vote. In almost all cases of
withdrawn proposals, the issuers indicated that proposals were withdrawn "after
discussions with the issuer". Despite this, withdrawn proposals were still often
included in the management proxy circular alongside the issuer's response.
An effective
policy is one
of the most
important tools
to forestall
In today's markets, boards of Canadian public companies in all industries
should expect a higher likelihood of receiving shareholder proposals, given that
investors are increasingly sophisticated, have greater resources and access to
information, and are demanding more input into the governance and operations
of the companies in which they invest. This is particularly the case where public
companies exhibit perceived deficiencies in areas under scrutiny by investors,
such as a lack of gender diversity in their leadership or overly risky or excessive
executive compensation practices.
Boards are advised to engage with proponents of shareholder proposals,
give the proposals due consideration and address the relevant issues in the
management proxy circular as a means of communicating with the shareholder
base at large. One of the most important tools to forestall shareholder proposals
is to have an effective shareholder engagement policy, allowing boards to
identify and respond to investor concerns before investors take more formal
action to have their voices heard.
Diversity: It'sTime to Get on
Diversity: It'sTime to Get on
It's Time to
Get on Board
ender diversity has been one of
the top governance issues under
the spotlight in Canada for the
past several years. Despite greater
disclosure required of issuers in this area,
the progress in increasing the number of
women on boards and in executive positions
remains slow, and regulators are calling
for more action. General counsel and
governance committees should consider
taking more steps to improve the diversity
of their corporate leadership, including
adopting a board diversity policy and
considering whether aspirational targets are
Lack of gender diversity remains
a top governance issue
Now over a year into Canada's "comply or explain" disclosure regime on gender
diversity for Canadian boards and executives, many companies have taken
some steps to improve their leadership diversity and have been providing
enhanced disclosure about what they are doing to promote the representation
of women. However, the rate of progress in this area remains slow. Canadian
securities regulators and governments remain focused on the issue and continue
advocating for more concrete action; they are generally unhappy with the lack
of formal processes that Canadian companies have put in place to implement
meaningful change. Investors are also becoming more vocal and demanding that
companies do more to improve their leadership diversity. Canadian companies
can therefore expect to face increased pressure to do more than pay lip service
to the importance of diversity within their organizations. Actionable steps are
needed in the wake of regulators' threats that more stringent requirements,
including targets, may be introduced if companies fail to take the issue more
Women remain significantly
Over the past several years, our Davies Insights28 reports have discussed the
heightened focus by investors and regulators on improving gender diversity in
Canadian public companies. Those prior editions detailed the background and
developments in this area, citing studies and research supporting the business
case for improving diversity. In Davies Governance Insights 2015, we provided
extensive data and analysis about issuers' progress in improving gender
diversity, as well as the relative strengths and weaknesses of their practices
following the increased comply-or-explain disclosure requirements implemented
by the Ontario Securities Commission (OSC) and most other Canadian securities
regulators in 2015.
Comparing issuers' practices from year to year, we can clearly see that progress
remains slow. Women remain under-represented among boards and executives
of Canadian public companies relative to their proportion of the population, the
number of women graduating from university and other metrics. In addition,
Canada is still lagging behind many other advanced economies, falling from 6th
place (in 2009) to 15th (in 2015) out of 23 industrialized economies in terms of
gender diversity on corporate boards, according to a report from the Canadian
Board Diversity Council. And much of the blame is alleged to lie at the feet of
can expect to
face increased
pressure to do
more than pay
lip service to
the importance
of diversity
within their
It's Time to
Get on Board
It's Time to
Get on Board
Canada's resource-centric economy, where women typically have the lowest
levels of representation in leadership.29
Against this backdrop, what really are the key trends that Canadian boards
and general counsel need to know? First, improving gender diversity has been
a major focus of the federal and provincial governments, securities regulators
and institutional investors for years. Why? Simply put, women hold a relatively
small proportion of board and executive positions among public companies,
despite constituting over 50% of the overall population. That reality has become
unacceptable to many. Second, market participants' focus on the issue is not
waning — in fact, it continues to grow and Canadian issuers now face even
greater pressure to implement formal processes and procedures to both improve
upon and monitor their progress in achieving diversity goals. Finally, the focus
on diversity is not likely to stop at gender differences; there will be increasing
pressure to improve diversity more generally. If companies are struggling today
to increase the number of women in leadership positions, they can expect
greater challenges ahead as calls to improve racial, ethnic and sexual orientation
diversity loom on the horizon.
For these and other reasons, doing nothing is no longer acceptable — Canadian
companies need to accept the call to action, and many Canadian issuers must
take more meaningful steps.
If the current trends continue with only marginal year-over-year improvements
in the number of women represented on boards and executives, we can expect
more stringent requirements. These may include mandatory targets and
formal board renewal mechanisms, eliminating the flexibility that companies
currently enjoy in crafting an approach to diversity that best suits their and their
stakeholders' needs.
Investors and regulators are
demanding more action in light of
issuers' slow progress
As we reported in Davies Governance Insights 2015, while some progress has
been made each year in improving gender diversity among Canadian corporate
leaders, women remain significantly under-represented relative to their
male counterparts. In addition, the majority of Canadian issuers have yet to
implement a formal board diversity policy, which is perhaps the easiest way to
set the tone at the top and advance female representation. Moreover, few issuers
have established targets to promote women's advancement, yet another area in
which securities regulators remain displeased with the performance of Canadian
issuers. The selected comparative data in Table 5-1 for the 2016 proxy season
show that progress in this area remains slow compared with that in the two prior
Diversity progress/measures 2014 2015 2016
Women holding board seats of Composite 12.3% 15.1% 17.7%
and SmallCap Index issuers
Women holding board seats of TSX 60 20.1% 23.1% 24.6%
Composite and SmallCap Index issuers with 8.6% 37.1% 48.0%
written diversity policies
TSX 60 issuers with written diversity policies 20.0% 65.0% 70.0%
Composite and SmallCap Index issuers with 3.2% 3.7% 4.4%
female board chairs
Composite and SmallCap Index issuers with 3.2% 11.1% 16.1%
TSX 60 issuers with targets 10.0% 28.3% 35.0%
These metrics, for many, highlight the poor performance of Canadian issuers
in this area. So what is the reason? In the first year of securities regulators'
increased comply-or-explain disclosure requirements, many issuers that
disclosed they had not adopted a written board diversity policy or implemented
formal processes (such as targets or other measures designed to increase
diversity) most frequently stated that they did not do so because nominations
and appointments to the board and executive positions are based on merit.
Many also indicated that they had not adopted a policy or targets because
they needed to maintain flexibility in their processes. However, governments,
regulators and investors are questioning just how or why merit and flexibility
would be compromised by processes that are typically designed to be flexible.
Issuers can and should seek ways to promote the advancement of women
by implementing clearer processes and goals that would expand the pool
of candidates from which boards and executives are traditionally selected,
while ultimately still making appointments based on merit. Failing to do so is
particularly surprising when, almost yearly, studies are released showing that
the presence of women in corporate leadership positions may in fact improve
economic performance. For example, in February 2016, the Peterson Institute for
International Economics released the results of a global survey of 21,980 firms
Issuers should
seek ways to
promote the
of women via
that expand
the pool of
candidates, while
still making
based on merit.
It's Time to
Get on Board
It's Time to
Get on Board
in 91 countries, indicating that the diversity of skill offered by women benefits
these firms.30
If the numerous studies released over the past decade outlining the business
case for having more women in leadership are not sufficiently persuasive,
perhaps the fact that many investors subscribe to these findings and expect to
see greater diversity in the companies in which they invest will be. Diversity is
one of several areas that some institutional investors have identified as being
key to making their investment and voting decisions.
Consider also the rise of "impact investing" funds that include diversity as a key
strategy. In early 2016, State Street Global Advisors announced the introduction
of the SPDR Gender Diversity Index ETF (ticker symbol "SHE"), with the goal of
achieving market-rate returns by investing in U.S. companies that are leaders in
advancing women through gender diversity on boards and in management. The
SHE fund tracks an index of 125 to 150 stocks culled from the Russell 1000 Index
issuers that score high on a scale of gender metrics. In April 2016, the Bank of
Montreal became the first Canadian mutual fund dealer to offer a mutual fund
that invests exclusively in companies with female leadership: the fund will invest
only in companies that have 25% female directorship or have a female CEO.
BMO cited not only consumer demand as a reason for introducing the product
but also sound investment strategy. According to BMO's chief investment officer,
"companies with diverse boards or women CEOs actually outperformed others."31
We have also witnessed a significant rise in the number of Canadian issuers
that are facing demands by their investors to improve their leadership diversity.
Increasingly, a broader range of companies in various industries are facing
shareholder proposals or less formal calls to implement formal diversity
measures. For example, in the 2016 proxy season, eight Composite and SmallCap
Index issuers faced shareholder proposals aimed at improving these issuers'
leadership diversity in some manner — and none of these were Canadian
financial institutions, historically the main targets of shareholder proposals. This
compares with only three issuers in those indices that faced diversity-related
proposals in 2015. Prominent examples of companies subject to shareholder
proposals in 2016 included Restaurant Brands International Inc. and BCE Inc.;
others, like Dollarama Inc., faced less formal investor demands to increase
the number of women on their boards.32 And while no such proposal has been
passed by shareholders to date, we see the level of shareholder support for
these proposals rising in comparison with prior years. For more information
about shareholder proposals, see "Shareholder Proposals: Canadian Issuers Face
Shareholder Proposals on a Variety of Topics" above.
Shareholder initiatives like these can be expected to continue, with more
issuers facing greater pressure to adopt written diversity policies, implement
targets and take other steps such as implementing formal recruitment and
advancement policies and renewal mechanisms to increase diversity. Based on
Catalyst's research, done in conjunction with the Rotman School of Management
and outlined in its 2016 report to the Ontario government, boards with higher
renewal rates are more diverse, issuers with board term limits are more gender-
diverse than those without, and boards that explicitly state they consider women
when recruiting new board positions are more diverse than those that do not.33
Based on these findings, in 2016 Catalyst developed recommendations to the
Ontario government designed to accelerate the pace of diversity in Ontario.
These include setting specific targets for female directors by the end of 2017,
establishing at least one type of board renewal mechanism, putting in place
a written board diversity policy and addressing gender equality at all levels
of organizations. All of the Catalyst recommendations have been accepted
by the Ontario government, which has created a Women in Business Steering
Committee to monitor and oversee companies' progress. Specifically, the Ontario
government is pushing for 40% targets for government agencies and 30% for
all other companies. The federal and Ontario governments and the OSC have all
intimated that targets or even quotas may be the next step if issuers do not start
showing meaningful improvements in their level of diversity.
In June 2016, U.S. SEC Commissioner Mary Jo White said at a conference that
her agency would propose a rule requiring issuers to disclose more information
about board diversity. According to White, the proportion of minority directors
has stagnated at 15% for the largest public companies in the United States.
While there has been no indication of what regulations may be put in place,
White has called the current level of board diversity in the United States
"unacceptable" and appears to be focused on making the issue a priority before
she leaves office next year.
Targets or
quotas and
more stringent
may be on the
horizon if issuers
do not make
progress in
It's Time to
Get on Board
It's Time to
Get on Board
General counsel and the nominating and governance committees of Canadian
public companies have an important role to play in advancing diversity among
their organizations and in communicating those strategies to their stakeholders.
Doing so will help demonstrate compliance with the OSC's comply-or-explain
disclosure model and may alleviate investors' and regulators' concerns about the
lack of progress in this area. It may also improve company-wide performance.
Here are the top five steps that, in our view, should be taken, or at least
discussed and evaluated, over the next year by the board of directors or a
designated committee with the input and involvement of senior management.
Adopt a written board diversity policy. Develop and adopt a board
diversity policy and take meaningful steps to implement it, establish
measurable objectives under it, and continue to monitor its effectiveness.
The policy does not need to compromise a company's flexibility in
pursuing its strategies and objectives but rather should complement those
efforts. Most policies adopted by issuers to date remain fluid and provide
guidance and objectives, rather than fixed regimes, while still ensuring
that appointments are based on skill and merit. Consider updating your
nominating and appointment policies to lay out how gender and other
diversity criteria are considered in recruiting, identifying and selecting
board and executive nominees. For example, some companies require that
female-only board recruits be identified and interviewed before their male
counterparts, while others require that a certain percentage of female
candidates be included among the pool of nominees.
Consider adopting targets. Even issuers that have adopted a diversity
policy should consider establishing targets for the representation of women
at the board level and/or among executive ranks; even if aspirational,
targets can evolve over time and help drive change. For example, consider
establishing an achievable objective for female representation by some
future date, and increase the targets over time (e.g., "Our goal is to have at
least 25% of the board represented by female candidates by the year 2018,
and 30% of the board represented by female candidates by 2020").
Establish a skills matrix and robust board assessment practices.
While many issuers disclose that they have "robust" director assessment
processes in place, the reality is that these processes often lack definition
and are little more than annual questionnaires and one-on-one meetings.
Developing skills or competency matrices to identify the balance of
skills and expertise needed by your board to be effective stewards of the
company, and carefully reviewing directors' performance against those
requirements, provides a good starting point for assessing the relative
diversity of your leadership, as well as identifying where gaps lie. Also
consider whether the skills matrix has built-in biases — for example, given
the multitude of issues faced by boards, it is not necessarily the case that
all director candidates need to have CEO or corporate board experience to
be effective; consider other skills relevant to your organization that may
facilitate improving the diversity of candidates considered.
Assess gender equity at all levels. General counsel and senior
management should work together to better understand the diversity
of their executive team and larger workforce and identify the relative
strengths and weaknesses of programs in place. Consider working closely
with your human resources team and others in the organization to do a
deep dive into the organization's policies and practices relating to internal
and external recruiting programs, management training, mentoring, pay
equity, maternity and paternity leave, community outreach, and diversity
and inclusiveness training. Doing so will assist you in determining what level
of diversity is appropriate for your organization and where there may be
barriers to advancing diversity.
Provide clear public disclosure about your diversity practices. Clear
disclosure is critical to providing transparency about your company's efforts
to enhance diversity and is also key to effective shareholder engagement,
another area under scrutiny by investors. In-house counsel should take the
lead in crafting disclosures that go beyond boilerplate statements by clearly
describing, among other things, the directors' diverse attributes (e.g., by
using and disclosing a skills matrix) and providing concrete examples of how
gender diversity initiatives tie into director and executive identification,
selection and advancement (i.e., don't just say you consider women in
these appointments; explain how they are considered). Issuers should
also monitor and disclose, at least annually, the steps taken to improve
the representation of women in leadership positions (e.g., recruiters are
required to include at least 50% of women in the candidate pool, external
search firms are used to identify candidates outside of the board's existing
network, etc.).
CompensationIssues and Sayon-
Issues and
anada's largest issuers continued
to face shareholder discontent
about executive pay practices in
2016. This discontent is exacerbated
by the reluctance of some boards to
meaningfully engage with shareholders
regarding compensation. Canadian issuers
are not required to have say-on-pay votes
to determine shareholder support for their
compensation practices, but the majority
of issuers now voluntarily hold an annual
say-on-pay vote. Although the outcome
of a say-on-pay vote is not binding, if the
results are weak, most boards will make
changes — sometimes significant — to their
compensation program design.
Adoption of "say-on-pay" by
Canadian issuers continues to
The number of say-on-pay resolutions put forward by issuers to their
shareholders continued to grow in 2016 — for the first time, a majority of
TSX-listed issuers now hold say-on-pay votes. Among TSX 60 issuers, 83%
put forward say-on-pay resolutions in 2016 (compared with 78% in 2015). The
percentage of issuers putting forward say-on-pay votes was 61% in 2016 (2015:
50%) on the Composite Index and 29% (2015: 17%) on the SmallCap Index.
Given the intense media scrutiny say-on-pay votes receive, as well as mounting
pressure from various shareholder groups, we can expect the number of
Canadian issuers adopting say-on-pay votes to continue to rise in the coming
Say-on-pay trends in 2016
Consistent with prior years, say-on-pay resolutions tabled by Canadian issuers
typically enjoyed strong support in 2016. On average, these resolutions
put forward by TSX issuers were supported by about 92% of shareholders,
consistent with the average shareholder support in 2015. Canadian issuers on
the TSX 60 recorded median support of about 95% on their say-on-pay votes to
date in 2016, again consistent with last year.
For those companies that had perceived deficiencies in their compensation
program design or misalignments in pay for performance, shareholders and
proxy advisory firms are not hesitating to express their discontent by voting
against say-on-pay resolutions and, in some cases, directors serving on the
compensation committee. In 2016, 22 TSX-listed issuers holding say-on-pay votes
received approval levels under 85%, compared with 18 TSX-listed issuers in 2015.
The issuers receiving less than 85% support in 2016 are listed in Table 6-1.
Issues and
Issuer Say-on-pay ISS
approval (%) recommendation
Crescent Point Energy Corp. 31.0% Against
Ultra Petroleum Corp. 39.4% Against
Canadian Pacific Railway Limited 49.9% Against
Copper Mountain Mining Corporation 61.8% Against
Valeant Pharmaceuticals International, Inc. 62.4% Against
Alamos Gold Inc. 65.3% Against
Sherritt International Corporation 65.9% Against
Aralez Pharmaceuticals Inc. 66.7% Against
RioCan Real Estate Investment Trust 67.1% Against
Ballard Power Systems Inc. 72.5% For
Ensign Energy Services Inc. 73.6% For
Baytex Energy Corp. 74.1% For
Teck Resources Limited 74.8% Against
Aimia Inc. 76.9% For
Manulife Financial Corporation 77.4% For
Goldcorp Inc. 77.7% For
BlackBerry Limited 78.1% Against
Element Financial Corporation 80.3% For
SunOpta Inc. 81.1% For
Ritchie Bros. Auctioneers Incorporated 82.6% Against
Stantec Inc. 82.7% For
Magna International Inc. 83.4% For
Source: ISS Voting Analytics Database.
CEO compensation continues to
Consistent with trends we observed in prior years, in 2016, CEO compensation at
Canadian public companies continued on the rise. In addition to increases in base
salaries, bonuses and stock option grants, awards of share-based compensation
also increased significantly. The following are the median pay changes for CEOs
of Canada's 100 largest companies in 2015 over 2014:34
base salaries up 7%
bonuses up 0.4%
salary and bonus combined up 2.5%
share-based awards up 20%
stock option grants up 11%
total compensation up 12.6%
Given the decrease in total shareholder returns of Canadian public companies
in 2016 and the average increase in CEO pay packages, it is not surprising that
shareholders have continued to express their discontent by voting "No" on sayon-
pay resolutions. While CEO pay typically tracks total shareholder return at the
majority of Canada's largest 100 companies, the companies that received lower
levels of support for their say-on-pay votes in 2016 have tended to be those
that had a disconnect (often significant) between pay and performance. For
example, Teck Resources Limited disclosed a 26.5% increase in its CEO's total
direct compensation while total shareholder return for the company decreased
by 65%.
As discussed in greater detail in Davies Governance Insights 2015,35 the
discussion relating to compensation issues continues to focus mainly on
the alignment (or lack of alignment) between executive pay and company
performance — that is, whether there is an appropriate balance between
short- and long-term incentives and whether those incentives are aligned with
maximizing shareholder value.
Issuers that are perceived to have excessive or overly risky compensation
programs and/or pay-for-performance misalignments can expect to continue
to face negative voting recommendations from ISS and Glass Lewis, in light of
the proxy advisers' increasingly strict quantitative tests, as well as lower levels
of shareholder support on say-on-pay resolutions. Directors serving on the
compensation committees of companies with these perceived compensation
Issues and
investors are
advocating for a
greater portion
of directors'
to be in the
form of share-
based awards,
tied to longterm
deficiencies can also expect to be at a higher risk of receiving "Withheld" votes
against their re-election to the board.
Director retainers continue to
grow, replacing meeting fees
On average, and consistent with the trends we have observed in prior years,
director compensation, and particularly retainer amounts, for all issuers on the
TSX indices we track continued to rise in 2016, as shown in Table 6-2.
2016 average retainer 2015: average retainer
amount amount
Composite Index $112,966.56 $92,787.43
Completion Index $93,452.76 $77,314.73
SmallCap Index $64,359.17 $52,348.31
The impetus for the continued increase in director compensation, specifically
retainer fees, is largely attributable to the expanding list of issues and
responsibilities faced by directors of Canadian public issuers, which has led to
a substantial increase in the time required for a director to do his or her job
properly. This trend also reflects a shift away from paying meeting fees in favour
of the retainer-only option. A retainer-only program for compensating directors
is often preferable from a governance perspective, given that directors' duties
and responsibilities arise throughout the company's fiscal year, not just at board
We expect we will continue to see a rise in total directors' fees in the coming
years. While there are many legitimate reasons justifying this rise in fees, boards
should carefully consider the components of their director compensation
packages. Increasingly, Canadian institutional investors are advocating for more
of directors' compensation to be in the form of share-based awards, which tie
directors' compensation to long-term company performance. Many investors and
other market participants are also becoming more supportive of requiring that
directors acquire and maintain some minimum equity ownership in the issuer
(usually formulated as a multiple of their annual retainers), for as long as the
director serves on the board.
Additional information about how CEOs and directors are compensated and past
years' key trends, which continued in 2016, can be found in Davies Governance
Insights 2015.
Canadian issuers and their boards can expect to continue to be held to a high
standard in making and explaining their compensation decisions and ensuring
those decisions are aligned with performance. Boards should be aware of the
following key trends from the 2016 proxy season.
Votes against say-on-pay due to poor corporate performance. The
weak revenue and earnings performance in 2016 did not lead to lower
total annual compensation. Shareholders have continued to express their
frustration with the lack of nexus between pay and corporate performance.
Canadian Pacific Railway Ltd. recorded 50.1% shareholder votes "Against"
its perceived excessive executive pay practices in the wake of its fallen
share price. Goldcorp Inc. had 22.3% of votes cast "Against" its executive
pay practices for 2015, while Teck Resources Ltd. recorded a 25.2% "No"
vote.36 Boards that experience low say-on-pay approval levels should
carefully re-evaluate the company's executive compensation practices;
merely providing increased disclosure in the following proxy year is unlikely
to adequately address shareholder concerns.
Increased scrutiny of performance metrics. Rather than simply relying
on the voting recommendations of ISS and Glass Lewis, more shareholders
have started analyzing performance metrics and goals in-house to
ensure that corporate performance is not lagging behind executive pay.
Shareholders are becoming increasingly wary of any deviation from
previously established performance criteria, including lowered performance
goals and waivers of performance thresholds. Shareholder misperception
regarding a correlation between pay and performance can be avoided by
providing expanded disclosure and engaging with shareholders, particularly
where the compensation committee or board has overridden previously
established performance criteria.
Issues and
Taking the long-term view. Shareholder dissatisfaction with executive
pay is rarely limited to a single one-year period. Many proxy advisers
and institutional investors focus on a longer time horizon to evaluate
the relationship between pay and performance. Despite strong share
performance in the applicable proxy year, a "No" vote may still be
cast if executive compensation has risen during a prolonged historical
period of poor share returns. Boards should ensure that the disclosure
regarding compensation governance is robust and adequately explains the
compensation committee's decision-making process, including the historical
context for performance-related bonuses.
Executives as owners. Shareholders are putting greater pressure on
companies to restrict key executives from selling shares awarded to the
executive throughout the term of his or her active employment and for
a period of up to two years after termination of employment. When a
company implements restrictions on the sale of shares, executive interests
will be better aligned with those of its long-term shareholders. Boards
may wish to consider implementing restrictions on the sale of shares by
executives to ensure the company's compensation practices are aligned
with shareholder preferences.
Voting: Lower
Tolerance for
Voting: Lower
Tolerance for
he year 2016 saw the first cases of
boards of directors accepting the
resignations of directors who failed
to get a majority of "For" votes under
their majority voting policies. The historical
practice of Canadian issuers allowing
directors to remain on the board despite
receiving less than majority shareholder
approval is waning. When directors
receive less than majority shareholder
support for their re-election, boards should
carefully consider whether "exceptional
circumstances" truly exist; boards will
increasingly be required to accept that
director's resignation.
Undersupported directors leave
the boardroom
Majority voting replaces the historical practice of electing directors on a plurality
basis, where in an uncontested election a director could be elected even if more
shares are "Withheld" than voted "For" the nominee. Under a majority voting
policy, that director nominee would be required to tender his or her resignation
for consideration by the board of directors.
Davies has been monitoring developments in majority voting since our first
edition of Davies Governance Insights in 2011. Until the 2016 proxy season, in
all cases when a director did not receive the requisite shareholder approval, he
remained on the board.37 Even when the issuer had majority voting policies, as
required by the rules of the TSX for issuers other than controlled companies,
and the undersupported director tendered his resignation, the resignation was
ultimately rejected by the board. In so doing, boards have relied on a typical
provision of majority voting policies that allows a director to remain on the
board if "exceptional circumstances" exist.
The so-called exceptional circumstances (sometimes referred to as "special
circumstances") have been the subject of some debate, as discussed in Davies
Governance Insights 201538 and our prior years' reports. Critics have claimed
that a board's unilateral reliance on this exception renders majority voting
policies quite meaningless. In fact, it is one of the primary reasons that many
institutional investors, shareholder advisory firms and governance watchdogs
have continued to push for stricter requirements under the TSX rules and
amendments to corporate statutes in Canada in order to either eliminate such
exceptions altogether or, at minimum, prescribe those limited exceptional
circumstances in which it would be permissible for boards to override a
shareholder vote to the contrary.
In the wake of this debate, 2016 saw the trend reversed. There have been two
reporting issuers on the TSX Composite and SmallCap indices whose directors
received less than 50% of votes "For" their election (two directors of Nobilis
Health Corp. and one director of Performance Sports Group Ltd.). In both
instances, the undersupported directors tendered their resignations. In each
case, the board reviewed, considered and accepted the resignations, pursuant to
the terms of the issuer's majority voting policy.
We view these results as a positive development and consistent with the ultimate
goal of true majority voting: to establish a mechanism by which directors
who receive a majority of "Withheld" votes are removed from the board in
accordance with the will of the shareholders. This is not to say that there will
never be "exceptional circumstances" in which a director who fails to achieve a
Boards that
relatively lower
levels of support
for one or
more directors
should carefully
consider the
voting results
and engage with
Voting: Lower
Tolerance for
majority "For" vote should remain on the board. There may be legitimate cases
where independence requirements or the balance of skills on an issuer's board
would be compromised by the immediate removal of a director, or where the
strategies or strategic relationships of an issuer could be undermined as a result
of the loss of a director.
In all cases, boards that experience less than majority votes in favour of one
or more directors should carefully consider the voting results and engage with
shareholders to understand the reasons underlying them. In fact, as we discuss
elsewhere in this report under "Shareholder Engagement: Boards Must Set
Priorities and Establish a Framework", engaging with shareholders in advance
of AGMs to obtain their views on the board's composition and effectiveness and
the performance of individual directors can be effective in preventing low or
inadequate levels of support for individual directors. Doing so can also help to
communicate important messages about why a potentially poorly supported
director remains critical to a board in the company's short or long term.
Directors who receive less than a majority of "For" votes for their election
should no longer expect to have their resignations rejected and to continue
serving on the board. Boards should give careful thought to the circumstances
in which it would be reasonable to reject a resignation tendered by an
undersupported director and should interpret the "exceptional circumstances"
in a narrow manner consistent with the underlying goals of majority voting and
investor expectations.
If your board faces low levels of support or less than majority votes "For" a
director's election, you should engage with your shareholders to understand
why and try to resolve the issue. In some cases, it may be appropriate to allow
the director to remain on the board for a fixed period of time (e.g., one more
year). During that transition period, the board can engage in a robust director
identification and selection process to find a replacement who brings the
necessary skills and expertise to the company. This process will allow for an
orderly changeover on the board while still being responsive to the views of
the shareholders. In conjunction with your board succession plan and majority
voting policy, boards should also consider the following measures.
Develop an "evergreen" list of directors. Maintaining "evergreen"
lists of potential director candidates, drawn from different sources and
comprising individuals with different skills and experiences relevant to the
company's needs, is a prudent practice. Evergreen lists should be reviewed
and updated, at least annually. Consider creating a process for significant
investors to offer up nominee names for consideration on those lists.
Consider in advance what sort of "exceptional circumstances" might
justify keeping an undersupported director on the board. Boards
should discuss, before faced with an undersupported director, what sort
of exceptional circumstances might warrant allowing that director to
stay on the board. For example, are there contractual provisions in place
that would be breached if the director were removed? Would the loss
of just one independent director render the company unable to comply
with independence and audit committee requirements? Does a particular
director have a key relationship, the loss of which would be materially
adverse to the business? Having a sense of what those circumstances might
be, and communicating those circumstances to shareholders in the proxy
circular or within a majority voting policy itself, may better position the
board to make a decision and fulfill its duties if one or more directors fail to
achieve majority shareholder support for their election.
Engage with shareholders. Ideally, consistent with trends we discuss
elsewhere in this report, issuers should designate one or more independent
directors to engage with shareholders and obtain their views on the
board's composition and each director's effectiveness. Identify whether
there are investor concerns and, if so, develop a plan to respond to them.
Engagement will become particularly important, if not essential, if a director
does not obtain majority approval for his or her election.
Conduct robust board assessments. Ensure your organization has an
appropriate board and director assessment process in place. This typically
includes, at minimum, annual director questionnaires, peer reviews and oneon-
one meetings between the chair and each director. When assessments
reveal problems, boards should be prepared to take action to rectify the
situation. In some cases, external "board doctors" or consultants can help
identify where problems may lie and assist with developing solutions
Forum Selection
Bylaws: Making
Their Way Into
Bylaws: Making
Their Way Into
espite much criticism for the
practice, forum selection bylaws
are starting to make their way
into Canada, as a tool to restrict
investors' ability to bring certain types of
shareholder claims in jurisdictions not
favoured by the issuer. Boards considering
adopting a forum selection (or exclusive
venue) bylaw should carefully weigh their
pros and cons, including the likelihood that
ISS and Glass Lewis and their investors may
not support or approve the practice.
What are forum selection bylaws?
"Forum selection" or "exclusive venue/forum" bylaws are a mechanism for
companies to limit shareholders' choice of legal venue by specifying the
jurisdiction in which certain types of shareholder claims must be litigated.
Historically more common in the United States, forum selection bylaws are now
making their way into Canada, albeit slowly.
Canadian issuers are successfully
adopting forum selection bylaws
Following in the footsteps of Yamana Gold Inc., which was the first Canadian
company to adopt and obtain shareholder approval for a forum selection bylaw,
three more Canadian issuers put this practice forward for a vote and had them
approved by their shareholders in 2016.
Dundee Corp. had its proposed forum selection bylaw approved by show of
hands at its AGM in June 2016, despite a negative recommendation from
ISS. ISS cited the absence of a compelling rationale for limiting shareholders'
litigation rights to the province of Ontario as the basis for its recommendation.
ISS acknowledged that there is merit to the notion that Ontario judges are best
suited to apply Ontario law to companies headquartered in Ontario, incorporated
under the Business Corporations Act (Ontario) and holding significant assets
in Ontario, and that an exclusive forum bylaw would likely help reduce the
potentially high legal costs that would otherwise be incurred in litigation outside
of the province. Nevertheless, ISS concluded that the bylaw would curtail
shareholders' right to select any proper forum of their choosing, a restriction
that was not supported by evidence of a "compelling company-specific history"
or of "unusually substantial harm" from litigation brought by shareholders in
non-Ontario courts.
ISS also recommended that shareholders vote against forum selection bylaws
proposed by Avivagen Inc. and Enerplus Corporation. In both cases, the bylaws
were approved by the companies' shareholders despite the negative ISS
recommendation (with a 54.72% "For" vote in the case of Enerplus, and an
undisclosed vote in the case of Avivagen).
Three more
Canadian issuers
had forum
selection bylaws
approved by
in 2016, despite
negative ISS
Bylaws: Making
Their Way Into
exclusive venue
should be done
cautiously, and
with the benefit
of legal advice.
ISS and Glass Lewis remain
unsupportive of exclusive venue
ISS's negative recommendations in these and past Canadian cases have been
based on its U.S. proxy voting guidelines (discussed in more detail in our Davies
Governance Insights 2015 report),39 since the proxy adviser has yet to adopt
Canada-specific guidelines on the topic.
Glass Lewis, on the other hand, addresses forum selection in its 2016 Canada
Proxy Paper Guidelines. In those guidelines, Glass Lewis recognizes that
companies may be subject to frivolous and opportunistic lawsuits, particularly
in connection with a merger or acquisition, that are expensive and distracting,
but it takes the view that provisions limiting a shareholder's choice of legal
venue are nevertheless not in the best interests of shareholders as they may
effectively discourage shareholder claims by increasing their associated costs
and making them more difficult to pursue. Based on this, Glass Lewis will
generally recommend that shareholders vote "Against" any bylaw or charter
amendment containing an exclusive forum provision. In certain cases, it may
support the practice if the company (1) provides a compelling argument for
why the provisions would directly benefit shareholders, (2) provides evidence
of abuse of legal process in other, non-favoured jurisdictions and (3) otherwise
maintains a strong record of good corporate governance practices.40
In light of these guidelines, Canadian issuers should expect investor resistance,
and likely negative recommendations by ISS and Glass Lewis, if they propose to
implement a forum selection bylaw. Absent compelling evidence of the specific
and substantial harms caused to the issuer by multijurisdictional litigation, which
most issuers are reluctant to provide given the sensitivities of that information,
bylaws such as these that seek to limit shareholders' rights remain unusual and
While slowly starting to make their way into Canada, forum selection bylaws
remain quite uncommon and, for many, controversial. Boards of Canadian
issuers considering adopting exclusive venue provisions should do so cautiously,
only after careful deliberation of their relative pros and cons, and with the
benefit of legal advice. Boards should also expect that ISS and Glass Lewis will
likely recommend that shareholders vote against these provisions, unless the
board can provide compelling arguments of their benefit to shareholders and
can identify specific and substantial evidence of past harms suffered as a result
of litigation emanating from multiple jurisdictions or outside of the jurisdiction(s)
in which the issuer has the closest connection. For most issuers, providing this
level of information is not likely to be desirable.
Furthermore, in contrast to developments in the United States, where courts
have recognized the validity and enforceability of forum selection provisions,
the practice remains untested in Canada. It is therefore unclear whether forum
selection bylaws would be upheld as enforceable if challenged before a Canadian
If your board is considering adopting a forum selection bylaw, think about
discussing the proposal with the company's significant shareholders. As with
many other governance and transaction-related issues discussed elsewhere in
this report, understanding investors' views on these issues, particularly those
that directly impact their shareholder rights, can provide insight into whether
your investor base is likely to approve the practice, even in the wake of negative
recommendations from the leading proxy advisory firms.
Corruption Risk:
Understand How
Corruption Risks
Apply to You and
Establish a
Compliance Program
Mitigating Corruption
Risk: Understand How
Corruption Risks
Apply to You and
Establish a
Compliance Program
isk management, and the numerous
issues it engages, remains an
important priority for Canadian
securities regulators, institutional
investors and proxy advisory firms. Within
risk management, establishing and enforcing
policies to protect against bribery and
foreign corrupt practices, particularly for
larger organizations operating in emerging
markets, remains an important responsibility
for boards, requiring ongoing oversight.
Failure to do so can result in serious adverse
consequences to companies and their
Corruption investigations and
their penalties likely on the rise
With increased globalization, ever-changing legal, political and regulatory
regimes, increased activity by many issuers in emerging markets and the
continued rise in companies' reliance on technology, risk management is an
important and complex area for which boards retain principal responsibility.
Within this area, managing bribery and corruption risks, particularly for larger
organizations carrying on activities in emerging markets or environments
known for corrupt behaviour or through various subsidiaries and/or agents, can
be particularly challenging. In the face of stepped-up anti-corruption laws and
investigations in Canada, the United States and the United Kingdom, boards and
risk management committees of companies should be proactively managing
their corruption risk. Failure to do so can have devastating consequences.
Consider, for example, the following high-profile cases.
This past March, Canadian health sciences firm Nordion Inc. settled charges
under the U.S. Foreign Corrupt Practices Act (FCPA) for lacking sufficient
internal controls to detect and prevent bribes paid by a former employee to
Russian government officials. Nordion settled with the SEC and agreed to pay
US$375,000 in fines.
Nordion appears to have gotten off easy. Penalties under the FCPA have
been as high as US$800 million (Siemens AG) and US$579 million (KBR Inc./
Halliburton). The SEC took Nordion's self-reporting into account, along with its
extensive cooperation with the SEC's investigation and the immediate steps
taken to remedy the situation. While self-reporting can be viewed as a mitigating
factor for companies faced with charges of foreign corrupt practices, it will
not eliminate responsibility for the activities, and companies can still face stiff
Canadian prosecutors reportedly declined to lay charges under the Canadian
Corruption of Foreign Public Officials Act (CFPOA) in the Nordion case. While
fewer than a dozen cases have been prosecuted since the CFPOA came into
effect in 1999, CFPOA prosecutions are likely on the rise, given increased
pressure on Canada to demonstrate compliance with treaty obligations under
the OECD Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions. For more details about past CFPOA and
foreign corruption cases, see our Davies Governance Insights 201541 and Davies
Governance Insights 201442 reports.
In the face of
stepped up anti-
corruption laws
in Canada, the
U.S. and the
U.K., boards
and company
executives should
be proactively
corruption risk.
Mitigating Corruption
Risk: Understand How
Corruption Risks
Apply to You and
Establish a
Compliance Program
Consequences of corrupt practices
can be devastating to a business
and its principals
Allegations of bribery and corruption can be very harmful to a company's
reputation. Investigations divert the attention of management and the board,
significantly drain company funds and can also derail M&A transactions.
Consequences for involved individuals can be devastating and include fines and/
or imprisonment.
In addition to potential criminal and regulatory actions, violating anti-bribery
and anti-corruption laws can have significant collateral consequences. The
$1-billion class action filed against SNC-Lavalin Inc. (TSX:SNC) on behalf of
shareholders is a prime example, commenced years after investigations and
charges were first laid against the company as a result of its alleged corrupt
practices. Plaintiffs claim that SNC-Lavalin and its officers should be liable for
damages (investment losses due to share price collapse) resulting from corrupt
payments made in contravention of SNC-Lavalin's policies. They point to public
statements made by SNC-Lavalin indicating it had sufficient operating controls
that ensured compliance with anti-bribery and anti-corruption standards. They
further allege that SNC-Lavalin's financial statements were materially false and/
or misleading, exposing the company to material risks of criminal and regulatory
actions and severe reputational damages that have compromised SNC-Lavalin's
ability to procure new business, particularly in developing countries.
Although the SNC-Lavalin class action has not yet proceeded to trial, it has
been certified and represents a novel foray of private litigation into Canada on
the basis of foreign corrupt practices. The prospect of potential securities law
liability for bribery and corruption risk disclosure, in addition to the many other
significant penalties triggered by breaches of corruption laws, should serve
to caution officers and directors of Canadian public companies to proactively
manage corruption risk.
Understand how corruption risk
applies to you and establish a
compliance program
The ongoing developments and investigations, both domestic and foreign, in
bribery and foreign corruption cases illustrate the far-reaching implications of
allegations and convictions under these laws. So how should companies protect
themselves? We recommend boards adopt and implement these eight strategies.
Know what bribery of foreign public officials entails. Payments made
to foreign public officials to gain favourable or expedited treatment in
contractual, procurement, licensing, tax and other regulatory processes are
prohibited. A bribe does not have to be paid for an offence to be committed;
even an agreement to give or offer such a benefit could be fatal. The
benefit also does not have to go directly to the public official; it could be an
indirect advantage to family members. Boards and their risk management
committees should ensure they understand the law.
Maintain accurate financial records. Bribes are often camouflaged by
various means, including commissions, marketing expenses, travel and
entertainment expenses, discounts, petty-cash withdrawals, supplier
payments or write-offs. Sometimes, they are simply not recorded at all.
Under the FCPA and the CFPOA, companies are required to maintain
accurate financial books and records, and companies can be more easily
charged when it cannot be proven that a bribe was actually made or paid.
Prevent "facilitation payments". Facilitation payments are relatively small
payments made to expedite or secure performance of routine government
matters within a foreign official's duties. Payments to facilitate granting
licences and permits, processing visas and work orders or providing police
protection could qualify as legitimate. But facilitation payments are not
permitted under the stringent U.K. Bribery Act, and this defence is in the
process of being repealed in the Canadian act. The U.S. Department of
Justice and the SEC take a very narrow view of this defence — the official's
actions must be routine and non-discretionary.
Know the jurisdictional reach of legislation. The jurisdictional reach of the
FCPA (which appears to be broader and deeper than its Canadian and U.K.
counterparts) should be a focus for most companies. It applies not only to
U.S.-incorporated companies but also to cross-listed Canadian companies.
The FCPA also applies to foreign companies engaging in activities that
facilitate corrupt payments on U.S. soil. Sending or receiving a wire transfer
to or from a U.S. bank, sending an email through the U.S. or providing
instructions from a U.S. phone could be sufficient to establish jurisdiction.
Be aware of parent company liability for actions of foreign subsidiaries.
A parent company benefiting indirectly from a bribe made by a foreign
subsidiary or joint venture is unlikely, on its own, to be enough to attach
liability to the parent. But a parent company may be held liable if the parent
directly participated in the bribe or controlled the subsidiary in a way that
made the subsidiary the parent's "agent" at law. Regulators evaluate control
by examining the parent's knowledge and direction of the subsidiary's
Mitigating Corruption
Risk: Understand How
Corruption Risks
Apply to You and
Establish a
Compliance Program
actions, including reporting requirements and approvals. If your foreign
subsidiary is not wholly owned or if you do not have majority ownership, be
aware that the FCPA dictates that parent companies owning 50% or less
of the subsidiary are required only to use good faith efforts to cause the
subsidiary to devise and maintain a system of internal accounting controls
consistent with the issuer's own obligations under the legislation. Minority
shareholders should request periodic confirmation or certification from
the majority shareholder that activities of the subsidiary and majority
shareholder are in compliance with applicable anti-bribery and anti-
corruption laws.
Avoid the "head in the sand" defence. Anti-bribery and anti-corruption
legislation imposes liability not only on those with knowledge of bribery
but also on those who purposefully avoid actual knowledge by being
"deliberately ignorant" or "wilfully blind". Boards cannot insulate
themselves by simply not understanding or monitoring the issues.
Undertake a risk assessment program. Create a program by identifying
(1) key risks associated with the company's industry, business activities,
suppliers, customers and countries of operation; (2) government entities
and representatives the company or its business partners deal with, as well
as employees, agents and consultants who oversee or conduct dealings
with public officials; and (3) sales or payments to government entities,
including state-owned or financed organizations. Pay extra attention to
operations or sales in environments known for corrupt behaviour. The
board, together with senior management, should also engage in continuous
analysis of internal reporting and control structures and critically analyze
the company's reliance on intermediaries for doing business abroad.
Implement a comprehensive compliance process. Establishing adequate
procedures, reasonable internal controls and a strong compliance program,
and maintaining ongoing board oversight for that process, will go a long
way in demonstrating good faith efforts for managing corruption risk. The
process should include, at minimum, four elements: (1) a strong code of
conduct (this is absolutely critical); (2) procedures for dealing with agents;
(3) internal controls; and (4) a system to identify red flags. (For details, see
"Our take" below.)
For information about other important areas of risk management that boards
and senior management should be aware of, see "Other Current Issues and
Trends Relevant for Boards" below.
Even in companies with risk management committees, the board ultimately
retains principal responsibility for all risk management activities. As a starting
point, it is critical to ensure that the board, in coordination with senior
management, understands the local and foreign anti-corruption laws that apply
to their organization and the bribery and corruption risks that arise in the
business. It is also important for boards to establish and maintain oversight of
a comprehensive anti-corruption procedure, including clear policies, internal
controls and a strong compliance program. Doing so will help prevent corruption
and is one of a company's best defences if faced with allegations of corruption.
A comprehensive compliance programs should, at minimum, including the
following features.
Code of conduct C. Internal controls
A strong code of conduct requiring •
Establish controls for petty cash,
compliance with all applicable employee reimbursements and
anti-bribery and anti-corruption cheque authorizations while
laws should be clear and concise. maintaining accurate financial
Disseminate it to all employees and record-keeping processes that
agents and require them to be bound include independent audits.
by it.
Conduct compliance-based
B. Procedures for dealing with assessments of annual employee
agents performance reviews.
Perform thorough background •
Ensure clear reporting channels
checks on your company's agents. and confidential helplines are
Investigate their qualifications, available.
business reputation and
Maintain an up-to-date response
relationships, if any, with foreign
plan for all investigations.
Regularly evaluate and revise the
Understand agents' roles within
compliance program.
your business and how they are
D. Red flag identification
Ensure agent contracts include a Be on the lookout for unreasonably
"right to audit" clause.
high commissions to third-party
agents or consultants, excessive
Regularly exercise audit rights to
gifts, cash payments, consulting
ensure agents' compliance, based
agreements that are vague regarding
on an individual risk analysis.
services performed, and transactions
Require annual/periodic with third parties tied to foreign
certifications of compliance from public officials or their relatives.
Takeover Bid
Code and
Early Warning
Takeover Bid
Code and
Early Warning
n May 9, 2016, the Canadian
Securities Administrators'
(CSA's) previously proposed
amendments to Canada's takeover
bid regime came into force, as did the CSA's
amendments to the early warning reporting
rules, under National Instrument 62-103 —
The Early Warning System and Related Take-
Over Bid and Insider Reporting Issues. As
a result, the relative leverage of targets and
bidders in takeover bids has shifted, and 10%plus
investors now face increased reporting
obligations under the early warning regime.
Amended takeover bid code
The new takeover bid rules are designed to shift the balance of power between
target boards and shareholders by extending the minimum bid period to 105
days and mandating a minimum 50% tender condition.
The three main features of the new rules are as follows:
50% mandatory "minimum tender" condition. Bids must be subject to a
mandatory tender condition requiring more than 50% of target securities
held by persons other than the bidder to be tendered before the bidder can
take up any securities under the bid.
10-day extension. Even once the minimum tender condition and other bid
conditions have been met, bids must be extended for an additional 10 days
to permit undecided shareholders to accept the bid.
105-day bid period. Bids must now remain open for a minimum of 105
days unless either (1) the target board announces that it is reducing the
bid period to a shorter period of at least 35 days, in which case the shorter
period applies to all contemporaneous bids; or (2) the target announces
a friendly transaction, in which case the minimum deposit period for all
contemporaneous bids is automatically reduced to 35 days.
More time and leverage for target
The new 105-day period gives target boards a significantly longer period of time
to evaluate a bid, seek alternatives or make the case for rejection of a bid. This
period also provides a greater degree of predictability for a target board and
its advisers to establish a strategic process, providing a fixed period of time, as
opposed to the variable and shorter durations that securities commissions have
historically allowed for poison pills.
By giving target boards control over the ability to shorten the 105-day bid period,
the new rules incentivize interested bidders to negotiate with target boards,
rather than taking their offers directly to shareholders. A short bid period is
typically key to limiting interloper risk. Under the new rules, bidders will have to
bargain with the target to get that benefit, giving target boards the opportunity
to negotiate for a better price and other concessions in return.
Takeover Bid
Code and
Early Warning
Rights plans
continue to
play a role – in
the 2016 proxy
season, a total
of 81 reporting
issuers in Canada
put rights
plans to their
and the rights
plans were
Minimum 50% tender condition
prevents minority blocking
positions and makes partial bids
more difficult
The new takeover bid rules facilitate a form of collective shareholder decision-
making in response to a bid, a marked departure from the previous regulatory
policy of protecting the rights of shareholders to make individual decisions to
The requirement for a 50% minimum tender condition prevents shareholders
from selling to a bidder if the bid is not supported by a majority of the target
shareholders. In the past, hostile bidders would typically reserve the right to
waive their own self-imposed minimum tender condition. This meant that even
if a bidder was unsuccessful in achieving a targeted majority of shares, it might
seize the opportunity to become a significant minority shareholder (e.g., 40%
owner) by waiving its minimum tender condition and thus achieving a blocking
The rule changes also make partial bids more difficult. Even if a bidder is not
seeking to acquire majority ownership of the target, the 50% minimum tender
condition will apply — meaning that a majority of shareholders will have to be
willing to sell a portion of their shares to the bidder.
The future of poison pills?
The new rules do not address the continued use of poison pills (shareholder
rights plans). In its release accompanying the new rules, the CSA confirms that
it has decided not to amend the existing policy on defensive tactics (National
Policy 62-202). However, the CSA warns that it is prepared to examine the
actions of target boards in light of the amended bid regime to determine
whether they are abusive of securityholder rights. Given the significant
extension of the minimum bid period, we expect that rights plans will not be
allowed to further postpone take-up by hostile bidders.
On the other hand, we expect issuers will continue to adopt rights plans in
order to have some protection against creeping bids — that is, the practice of
assembling positions over time in excess of 20% of a company's outstanding
shares through acquisitions exempt from the takeover bid rules, particularly
private agreements and normal course purchases. This view appears to be borne
out by recent practice. In the 2016 proxy season, a total of 81 reporting issuers in
Canada (24 issuers in the Composite Index, compared with 17 issuers in the same
index in 2015) put rights plans to their shareholders and the rights plans were
approved. Given that rights plans are continuing to be adopted and approved by
shareholders, the CSA may yet be required to hold hearings on the use of such
plans, particularly in the context of proxy contests.
Securities commissions' focus to
turn to other defensive tactics
Although routine pill hearings in the context of hostile bids are likely a thing of
the past, the new 50% minimum tender condition will result in greater scrutiny
of other defensive tactics, particularly private placements of equity securities.
The minimum tender requirement will give shareholders holding significant
blocks of shares great influence over the success of a bid. In many cases, a single
minority shareholder or a control-block holder could effectively block another
bid from proceeding. The potential for large blocks of shares to frustrate the
minimum tender condition, or to block a bid from proceeding altogether, is likely
to result in continued securities commission involvement in hostile bids.
Hecla Mining Co.'s hostile takeover bid for Dolly Varden Silver Corp. in early July
2016 was the first contested transaction since the new regime came into force
on May 9, 2016. Three days before the takeover bid was launched, Dolly Varden
announced that it would complete an equity private placement. Hecla sought
cease-trade orders from both the OSC and the British Columbia Securities
Commission (BCSC). On July 25, following a joint hearing, the OSC and the BCSC
released separate orders dismissing the application for a cease trade. Reasons
have not yet been released. Although the transaction is a small one, the decision
in Dolly Varden suggests that regulators are unlikely to treat private placements
much differently than they have in the past and their review and assessment
of such placements will be highly specific to the facts. For example, the BCSC's
Re Red Eagle decision in 201543 and the Alberta Securities Commission's 2009
decision in Re ARC Equity Management,44 which allowed private placements to
proceed in the context of contested bids, stand in contrast to the 2012 rulings in
Re Fibrek from Québec and Re Inmet Mining Corp. from British Columbia, where
the private placements were cease-traded.45
Amended early warning reporting
(EWR) rules
At the same time as the new takeover rules were enacted, the CSA also adopted
amendments to the early warning reporting system. Generally, while the initial
10% reporting threshold remains unchanged, other changes are likely to require
more frequent reporting by investors that fall within the regime once they cross
Takeover Bid
Code and
Early Warning
the 10% ownership threshold and will require more detailed disclosure about
their investment plans, as well as their intentions to influence control of the
subject issuer in which they hold securities.
Key changes to EWR and
alternative monthly reporting
(AMR) regimes
Key elements of the new EWR and AMR rules are as follows:
10% threshold remains. The threshold for shareholders to report their
ownership of shares remains at 10% of the outstanding shares. The CSA had
originally proposed lowering the threshold to 5%, consistent with the Rule
13d reporting threshold applicable under U.S. rules. However, the CSA was
persuaded through the comment process that a 5% threshold would not be
appropriate for the Canadian market.
Filers must report ownership changes. Shareholders that fall within the
EWR regime will be required to report both increases and decreases of 2%
or more. They will also be required to report when they have fallen below
the 10% threshold. Under the prior rules, there was no clear obligation to
file reports disclosing decreases in shareholdings.
AMR eligibility tightened up. Eligible institutional investors that rely on the
AMR regime will now lose their eligibility to rely on the AMR system if they
engage in proxy solicitation in opposition to management in connection with
director elections or corporate transactions.
Derivatives not included in threshold calculation. Contrary to the original
proposal, shares underlying cash-settled derivatives, such as total return
swaps, are not included in determining whether a shareholder has crossed
the 10% threshold. However, the CSA has published guidance reminding
investors that they could be deemed to have beneficial ownership of
securities held by a derivative counterparty if investors are able, formally or
informally, to obtain those securities from the counterparty or to direct that
counterparty with respect to the voting of those securities.
Reporting of securities borrowing arrangements. The rules have clarified
investors' reporting obligations with respect to borrowed securities. The
purpose of these changes is to provide greater transparency for borrowing
arrangements and the potential use of borrowed securities to engage
in "empty voting" — that is, the voting of shares by a holder that has no
economic interest in the shares. The rules allow for exclusion of borrowed
securities for the purpose of determining the EWR threshold trigger for
securities lending arrangements that meet certain criteria.
Enhanced disclosure required. The rules now require more detailed
disclosure in early warning reports by shareholders regarding their
ownership of shares and their future intentions regarding the issuer. The
new requirements are similar to the disclosure obligations applicable
to filers of Schedule 13D under Rule 13d of the SEC, although there are
important and nuanced differences.
Filers must now disclose more
detail regarding plans and future
Before the May 9 EWR amendments, the required disclosure regarding the
purpose of the transaction giving rise to the early warning report was prescribed
in National Instrument 62-104 as follows:
Purpose of the offeror and any joint actors in effecting the transaction
or occurrences that gave rise to the news release, including any future
intention to acquire ownership or, or control over, additional securities of the
reporting issuer. [emphasis added]
The new disclosure required for both EWR and AMR filers concerning the
purpose of the transactions is significantly expanded:
Item 5 — Purpose of the Transaction — State the purpose or purposes of the
acquirer and any joint actors for the acquisition or disposition of securities
of the reporting issuer. Describe any plans or future intentions which the
acquirer and any joint actors may have which relate to or would result in
any of the following: [emphasis added; the following is an abbreviated and
summarized list]
additional share acquisitions or dispositions
a corporate transaction, such as merger, reorganization or liquidation,
or a material asset sale
board of directors or management changes, including any plans
or intentions to change the number or term of directors or to fill
vacancies on the board
capitalization or dividend changes
material changes to business or corporate structure
changes to articles of incorporation, bylaws or change of control
delisting of securities
proxy solicitations
The greatest
challenge filers
will face is when,
and to what
degree they
will disclose
their plans and
Takeover Bid
Code and
Early Warning
The wording of the new disclosure requirements is very similar to the U.S.
requirements in Rule 13d but, again, contains some important nuances; in many
cases it is so similar that we anticipate Canadian regulators will expect, and
many filers are likely to adopt, disclosures akin to the U.S. practice. However,
EWR filers are expected to include in their reports significantly more detail about
a wide range of possible transactions and more frequent updates as plans and
intentions develop.
To date, many Canadian filers have failed to strictly comply with the new
requirements, and we are seeing a range of practices develop. Perhaps the
greatest challenge filers will face is when, and to what degree, they will disclose
their plans and future intentions as they attempt to balance compliance with
the new requirements with a general desire to not provide premature or overly
detailed disclosure about potential future actions.
With the new takeover bid and early warning regimes now in place, many issuers
and investors will need to revisit some of their tactics.
Issuers that have a rights plan in place and wish to retain it should consider
whether it complies with the current rules and, if not, update it accordingly.
For issuers that do not have a rights plan in place, the board should consider
whether to adopt one if protection is desired against creeping bids or in the face
of an anticipated bid. Potential acquirers will also need to revisit their takeover
bid strategies, recognizing the increased leverage now held by target boards.
Investors that hold or intend to acquire 10% or more of the shares of a Canadian
public company should ensure they understand their obligations under the EWR
and AMR regimes (as applicable), particularly given the often very short time
frame within which press releases and EWR reports must be filed once the 10%
threshold is passed. Some activist AMR filers may find themselves unable to rely
on the more lenient provisions of that system, depending on their intentions
to influence the issuer. Importantly, EWR and AMR filers alike need to carefully
consider and consult with legal counsel to ensure they are complying with the
enhanced disclosure requirements, particularly those concerning their plans and
future intentions.
Other Current
Issues and
Trends Relevant
for Boards
Other Current
Issues and
Trends Relevant
for Boards
oards and their committees
face a continued increase in the
number and complexity of issues
for which they are ultimately
responsible, making performing director
duties more time consuming and onerous
than ever. From governance issues, to risk
management, to long-term strategy, boards
must ensure they maintain an appropriate
diversity of skills and competencies to tackle
the issues and maximize the effectiveness of
their decision-making in today's markets.
In addition to the top governance issues already discussed in this report,
2016 has seen a number of other important developments that boards and
senior management should stay abreast of. Boards now face a multitude of
issues, requiring significantly increased time and attention from the directors
in carrying out their duties, including CEO oversight and succession planning.
Largely as a result of the rising number of issues that boards are responsible
for, directors also face more stringent "overboarding" restrictions from ISS
and Glass Lewis, reducing the number of public company boards that directors
may sit on. We also discuss in this chapter another important risk management
function of boards: protecting against cybersecurity risks, still a challenging area
for many boards and now becoming a "hot button" for securities regulators.
Finally, we provide a brief update on the ongoing initiatives to improve Canada's
proxy voting infrastructure.
CEO succession planning: Boards
should take a proactive, hands-on
Without a doubt, one of the most important responsibilities of the board is hiring
and firing the CEO. This year, as in past years, we continue to see very different
approaches to CEO succession planning. Some companies are proactive and
have a succession plan in place before the loss of their CEO, thereby facilitating
a smooth transition. In other cases, companies have found themselves with no
plan in place, leaving the issuer without its top leader or any identified internal
or external recruits who may be a suitable replacement when faced with the
unexpected resignation or firing of the CEO.
Take, for example, the case of Canadian Pacific Railway (CP Rail), a TSX-listed
company that presented an orderly and well thought-out succession plan for
its CEO. In July 2016, the company issued a press release announcing that the
company had reached an agreement with Keith Creel, the current president
and COO, to take the reins as CEO in July 2017, and that Hunter Harrison would
retire at that time, after serving five years as CEO.46 The press release also noted
that Harrison would continue on with a three-year, post-retirement consulting
arrangement to provide continuity and support. The press release included
quotes from Harrison, Creel and the chair of the board.
What can be learned from this example? CEO succession planning should be
an ongoing item on the board's agenda. The board should assess the CEO's
performance, in camera, at regular board meetings and, through the chair or
lead independent director, provide feedback to the CEO. The board should know
the answer to the question "If the CEO were suddenly unable to serve, who
Boards should
know the answer
to the question:
"If the CEO were
suddenly unable
to serve, who
would step up in
the next 24 hours
to fill his or her
Other Current
Issues and
Trends Relevant
for Boards
More Canadian
public company
will now find
under ISS and
Glass Lewis
would step up in the next 24 hours to fill his or her shoes?" And there is no one
better than the CEO to share his or her candid insights and frank advice in this
regard. The board should also know which members of the senior management
team are being groomed for the top job (and why and how). The current CEO
(and senior HR executive) should be able to explain why those individuals
have been chosen and what their development plans look like. The chair of
the board and the CEO should structure opportunities for non-management
board members to get to know these individuals, so that when the time comes
to choose the next CEO, they have a high level of familiarity with internal
candidates and can effectively evaluate them against external candidates in a
formal process. Evergreen lists of potential external candidates should also be
In sum, strong CEO succession planning requires a proactive, hands-on approach
by the board. It will help the board avoid reactive decisions and properly fulfill
one of its most important responsibilities, while also ensuring an orderly
transition when replacing a company's key leader.
ISS and Glass Lewis tighten up
"overboarding" policies
In late 2015, proxy advisory firms ISS and Glass Lewis updated their proxy
guidelines, reducing the number of public company boards that directors of
TSX-listed issuers can sit on before being considered "overboarded". Under ISS's
amended policy, starting February 1, 2017, ISS will generally issue a "Withhold"
recommendation against a director nominee (1) if the nominee is a CEO of a
public company and sits on more than one outside public company board (down
from two) or (2) if the nominee is not a CEO and sits on more than four public
company boards (down from six) and the nominee has attended less than 75%
of board and committee meetings within the past year without a "valid reason"
for the absences. ISS will include cautionary language in its reports if a director
is overboarded, regardless of attendance.
Glass Lewis also amended its policy for the 2017 proxy season: it will recommend
shareholders vote against executive officers of TSX-listed companies who
serve on more than two boards in total (down from three) and against non-
executive directors who serve on more than five boards in total (down from six).
Unlike ISS's, Glass Lewis's overboarding guidelines are not double-trigger — it
will generally issue a negative vote recommendation for nominees if they are
overboarded, regardless of their attendance records.
In light of these changes, more directors of Canadian public companies are
likely to find themselves overboarded. Directors serving on multiple boards are
also finding it more difficult to devote the necessary time and attention to their
duties in light of the increasing number of issues and responsibilities placed
before them. Issuers that have not considered or addressed overboarding as
part of their director selection and nomination processes or that have not
established restrictions on the number of public company boards a director may
sit on should consider doing so. Annual director evaluation processes should
take into account directors' board and committee commitments (including
additional time required of board and committee chairs) and their impact on
board and committee effectiveness. Doing so can help ensure directors maintain
the necessary time, energy and attention to carry out their duties and will avoid
inadvertent breaches of ISS's and Glass Lewis's policies.47
Cybersecurity risk: Risk
management continues to be a
high priority
In our Davies Governance Insights 2014 and 2015 reports,48 we discussed the
important role that boards play in risk management oversight. Risk management
is a broad area encapsulating many different issues for which directors are
ultimately responsible. Boards must ensure they obtain reasonable assurance
from senior management that they have identified the company's principal
risks and put in place appropriate risk management policies and procedures
consistent with the organization's risk appetite. Those risks will vary by company
and industry and can include legal, operational, geopolitical, economic, market
and disclosure risks. Consider, for example, the risk management issues engaged
by companies facing the possibility of foreign corrupt practices, discussed above
under "Mitigating Corruption Risk: Understand How Corruption Risks Apply to
You and Establish a Compliance Program". Other top risk management priorities
include managing a public company's disclosure risks as well as risks associated
with parent company liability for subsidiary actions.
In light of companies' increased dependence on ever-evolving information
technology, managing cybersecurity risks and their potentially significant
exposures continues to be a top priority for many boards. And we believe it
should remain so in 2016 and beyond, partly because Canadian securities
regulators are paying more attention than ever to the disruptive implications of
cybersecurity breaches. In June 2016, the OSC released its annual priorities for
2016–2017, in which it committed to undertake "initiatives to promote proper due
diligence by market participants in relation to internal breaches and intrusions
from external parties".49 The OSC's action plan includes improving collaboration
and communication with market participants on cybersecurity issues, assessing
risks and their
continues to be a
top priority and
responsibility for
many boards.
Other Current
Issues and
Trends Relevant
for Boards
and issuers
frequently cite
instances of
"over voting" or
missing, rejected
or prorated votes,
as undermining
confidence in
the proxy voting
cybersecurity resilience and providing guidance on expectations for market
participants' cybersecurity preparedness.50
Meanwhile, the United States may be taking a different approach by mandating
disclosure by public companies of whether any board member has expertise in
cybersecurity. In December 2015, the Cybersecurity Disclosure Act to this effect
was introduced in Congress.51 If no member of the board has cybersecurity
expertise, the company would be required to describe what other measures are
in place to ensure cybersecurity risks are appropriately addressed and mitigated.
Directors have a duty to act in the best interests of the corporation and
exercise the care and diligence that a reasonable person would under the
circumstances. While directors are not (yet) required to be cybersecurity experts,
they are required to exercise due care in ensuring that cybersecurity risks are
properly identified and that reasonable processes are in place to appropriately
mitigate them. We continue to recommend the best practices set out in Davies
Governance Insights 2015 to help directors bridge the so-called cyber confidence
Update on flawed proxy voting
infrastructure: Voluntary
"meeting vote reconciliation"
protocols proposed
Flaws in the proxy voting infrastructure in Canada and the need to improve the
accuracy, reliability and accountability of the system by which votes are counted
at shareholders' meetings have been discussed for years, including in various
Davies reports.52 Investors and issuers frequently cite instances of "over-voting"
or missing, rejected or pro-rated votes, undermining market participants'
confidence in the proxy voting system. In response to the various deficiencies,
over the past several years the CSA has conducted a series of consultations,
round tables, shareholders' meeting reviews and working groups, through which
it has identified significant information and communication gaps, as well as lack
of consistency and transparency, in the processes by which shareholder voting is
conducted in Canada — typically through proxies given by beneficial shareholders
through multiple tiers of intermediaries up to a tabulator.
Continuing its efforts, earlier this year the CSA published for comment a set of
four protocols (the Protocols)53 that delineate the roles and responsibilities of
the key entities involved in the meeting vote reconciliation process and provide
guidance on the operational processes that those entities should implement
to make the system more accurate, reliable and accountable. Among other
things, the Protocols contain guidance designed to improve the accuracy of
vote entitlement information provided to tabulators by intermediaries seeking
voting instructions from beneficial shareholders, improve consistency in how
voting entitlements are recorded, create consistency in tabulating and recording
proxy votes and, notably, provide for feedback from meeting tabulators to
intermediaries and beneficial owners whose voting entitlements have been
rejected or pro-rated (including the reasons why). Once finalized, the Protocols
are expected to lay the foundations for moving to electronic vote transmission
and developing an end-to-end vote confirmation capability.
Having sought and received comments on the Protocols, the CSA intends to
publish the final Protocols at the end of 2016. Although compliance is not
mandatory, the key entities involved are encouraged to voluntarily adopt the
Protocols starting in the 2017 proxy season. The CSA will monitor the voluntary
implementation and consider the need for additional rules and policy guidance.
For more information, see ourDavies publication Closing the Loop: Voluntary
Meeting Vote Reconciliation Protocols Proposed for 2017 Proxy Season.54
Database and
Database and Methodology
The quantitative analysis in this report is based on data provided by ISS
Corporate Solutions, Inc. and drawn from the 2016 management information
circulars of 367 issuers on the Toronto Stock Exchange (TSX) that are included
in the Composite Index, the SmallCap Index or both as at May 31, 2016. There are
a total of 2,284 issuers listed on the TSX. Although the 367 Composite Index and
SmallCap Index issuers included in our study represent only 16% of all TSX-listed
issuers, they represent 83% of the total market cap on the TSX.55
Descriptions of the relevant indices discussed in this report are set out below.
Composite Index: The S&P/TSX Composite Index (referred to in this report as
the Composite Index) comprises 234 issuers. It is the "headline index" and the
principal broad market measure for the Canadian equity markets. It includes
common stock and income trust units. Six of the 234 Composite Index issuers
did not issue a proxy circular for the relevant time period discussed; accordingly,
our analysis is based on 228 Composite Index companies.
Two components of the Composite Index are also referred to in this report:
TSX 60: The S&P/TSX 60 Index (referred to in this report as the TSX 60) is
a subset of the Composite Index and represents Canada's 60 largest issuers
by market capitalization.
Completion Index: The S&P/TSX Completion Index (referred to in this
report as the Completion Index) is the Composite Index excluding the TSX
60 issuers. It comprises 174 issuers. (Our analysis includes only 168 of the
issuers on the Completion Index because, as noted above, six issuers did not
issue proxy circulars.)
SmallCap Index: The S&P/TSX SmallCap Index (referred to in this report as
the SmallCap Index) includes 212 issuers, 67 of which also meet the market
capitalization eligibility criteria and are part of the Composite Index.56 (Our
analysis includes only 206 of the issuers on the SmallCap Index because six
issuers did not have circulars.)
The number of issuers and specific constituents of the two indices covered in
our study universe change periodically. This is a factor that may in some cases
affect comparisons of data points year over year.
Canadian Coalition for Good Governance, "Shareholder Involvement in the Director
Nomination Process: Enhanced Engagement and Proxy Access" (2015), online at
Online at https://www.dwpv.com/en/Resources/Publications/2015/Davies-GovernanceInsights-
For more details about the ICD Guidance, see our publication "Shareholder
Engagement - ICD Provides Guidance for Canadian Companies", online at https://www.
Online at http://www.governanceprinciples.org/.
PwC, "2015 Annual Corporate Directors Survey: Governing for the Long Term: Looking
Down the Road with an Eye on the Rear-view Mirror" (2015), online at http://www.pwc.
PwC, "Director-Shareholder Engagement: The New Imperatives" (2016), online at
PwC, "Proxy Access – A Key Development in Shareholder Rights" (2016), online at
European Commission, "Proposal for a Directive of the European Parliament and
of the Council Amending Directive 2007/36/EC as Regards the Encouragement of
Long-term Shareholder Engagement and Directive 2013/34/EU as Regards Certain
Elements of the Corporate Governance Statement" (2014), online at http://eur-lex.
DOC_1&format=PDF; Lexology, "Revision of the Shareholders Rights Directive:
It's a Long Way Home" (2015), online at http://www.lexology.com/library/detail.
Proxy contest data from Kingsdale Shareholder Services Inc.
Online at https://www.dwpv.com/en/Resources/Publications/2016/Shareholder
Online at http://www.governanceprinciples.org/.
Myles Udland, "Hillary Clinton thinks corporate America is obsessed with 'quarterly
capitalism' – here's how she'd change that", Business Insider (June 14, 2016), online at
"Focusing Capital on the Long Term" (March 2015), online at http://www.icpmnetwork.
Dominic Barton and Mark Wiseman, "Where Boards Fall Short", Harvard Business
Review (January-February 2015 issue), online at https://hbr.org/2015/01/whereboards-
fall-short. Additional information online at http://www.fclt.org/en/home.html.
Nathan McAlone, "A Silicon Valley Startup Guru is Building a New Stock Exchange
Designed to Stop Destructive Short-Term Thinking from CEOs", Business Insider (June
13, 2016), online at http://www.businessinsider.com/eric-ries-building-a-long-termstock-
Online at https://www.dwpv.com/en/Resources/Publications/2015/Davies-GovernanceInsights-
Online at http://www.ey.com/GL/en/Issues/Governance-and-reporting/EY-fourtakeaways-
Online at http://www.sidley.com/~/media/update-pdfs/2016/06/final-proxy-accessclient-
Online at http://comptroller.nyc.gov/boardroom-accountability/.
Supra note 19.
Online at https://www.issgovernance.com/file/policy/2016-us-summaryvoting-
guidelines-23-feb-2016.pdf and http://www.glasslewis.com/wp-content/
Supra note 19.
CCGG's proposal included the following key criteria: (1) a minimum ownership threshold
of 5% for issuers with market capitalizations of less than C$1 billion and 3% for issuers
with market capitalization of C$1 billion or more; (2) no mandatory shareholding period
(unlike the U.S. standard that has developed); and (3) a maximum cap on shareholder-
nominated directors of three directors or 20% of the board, whichever is less.
Online at https://igopp.org/wp-content/uploads/2015/10/IGOPP_PP_ProxyAccess_
Information for 2015 based on data provided by the Shareholder Association for
Research and Education, online at http://share.ca/?_proposal_agm_year=2015&_
See Davies Governance Insights 2015 (online at https://www.dwpv.com/en/Resources/
Publications/2015/Davies-Governance-Insights-2015); Davies Governance Insights
2014 (online at https://www.dwpv.com/en/Resources/Publications/2014/DaviesGovernance-
Insights-2014); and Davies Insights: Women on Boards (online at https://
Alexandra Posadzki, "Resource economy shares blame for poor gender diversity: CEO",
Financial Post (May 9, 2016), B8.
Marcus Noland, Tyler Moran and Barbara Kotschwar, "Is Gender Diversity Profitable?
Evidence from a Global Survey", WP 16-3 Working Paper Series, Peterson Institute
for International Economics (February 2016), online at https://piie.com/publications/
John Shmuel, "Mutual fund lets Canadians invest more in women", Financial Post (April
See Aleksandra Sagan, "Shareholders crank up the heat on board diversity; Two high-
profile companies face questions on lack of women at table", Financial Post (June 9,
2016), B13, and Aleksandra Sagan, "BCE balks at gender-related targets", Financial Post
(April 29, 2016), N5.
"Gender Diversity on Boards in Canada: Recommendations for Accelerating Progress",
Catalyst (June 2016), online at http://www.catalyst.org/knowledge/gender-diversity
Global Governance Advisors and The Globe and Mail.
Online at https://www.dwpv.com/en/Resources/Publications/2015/Davies-Governance
"Investors vent over executive compensation with say-on-pay votes", Janet McFarland,
The Globe and Mail, May 4, 2016.
With the exception of one director of Spyglass Resources Corp. in 2015, whose
resignation was accepted per his wishes, against the recommendation of the
governance committee and despite the fact that the four other undersupported
directors remained on the board.
Online at https://www.dwpv.com/en/Resources/Publications/2015/Davies-Governance
Online at http://www.glasslewis.com/wp-content/uploads/2016/01/2016_Guidelines_
Online at https://www.dwpv.com/en/Resources/Publications/2015/Davies-GovernanceInsights-
Online at https://www.dwpv.com/en/Resources/Publications/2014/DaviesGovernance-
Red Eagle Mining Corporation, CB Gold Inc. and Batero Gold Corp., 2015 BCSECCOM
44 ARC Equity Management (Fund 4) Ltd., Re, 2009 ABASC 390.
45 AbitibiBowater Inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 17 (CanLII);
Inmet Mining Corporation and Petaquilla Minerals Ltd., 2012 BCSECCOM 409.
Press release at http://www.cpr.ca/en/investors/cp-reaches-agreement-with-futureceo.
For more information, review our publication at https://www.dwpv.com/en/Resources/
See Davies Governance Insights 2015 (online at https://www.dwpv.com/en/Resources/
Publications/2015/Davies-Governance-Insights-2015) and Davies Governance Insights
2014 (online at https://www.dwpv.com/en/Resources/Publications/2014/DaviesGovernance-
OSC Notice 11-775 – Notice of Statement of Priorities for Financial Year to End March 31,
S 2410, A Bill to promote transparency in the oversight of cybersecurity risks at publicly
traded companies, 1st Sess, 114th Congress, US, 2015, s 2(b)(1).
See The Quality of the Shareholder Vote (online at https://www.dwpv.com/en/
in-Canada); Davies Governance Insights 2015 (online at https://www.dwpv.
com/en/Resources/Publications/2015/Davies-Governance-Insights-2015); and
Davies Governance Insights 2014 (online at https://www.dwpv.com/en/Resources/
The CSA's Protocols and related background and next steps are set out in CSA
Multilateral Staff Notice 54-304 – Final Report on Review of the Proxy Voting
Infrastructure and Request for Comments on Proposed Meeting Vote Reconciliation
Protocols, published on March 31, 2016. The Notice was published in all provinces and
territories, except Saskatchewan.
Online at https://www.dwpv.com/en/Resources/Publications/2016/Closing-the-Loop.
As at May 31, 2016.
To qualify for the Composite Index, an issuer must, at the time of determining eligibility,
(1) represent a minimum weight of 0.05% of the index and (2) have a minimum volume-
weighted average share price of at least $1.00. To qualify for the SmallCap Index, an
issuer must have a market capitalization that is at least $100 million, but not more than
$1.5 billion.
We also acknowledge the invaluable contribution of Ivana Gotzeva, Director of
Knowledge Management at Davies, in researching, drafting and providing feedback
throughout the preparation of this report.
Key Contacts
Key Contacts
Researching and writing this report is an annual project undertaken by Davies
Ward Phillips & Vineberg LLP and not on behalf of any client or other person. We
would like to acknowledge Professor Poonam Puri's significant contributions to
this report. Ms. Puri, an affiliated scholar with our firm, is one of Canada's most
respected academics and commentators on issues of corporate governance,
corporate law, securities law and financial regulation. She is a Professor of Law at
Osgoode Hall Law School, York University.57
If you would like to discuss any of the issues raised in this report, please contact
any of the individuals listed below.
William M. Ainley
Jennifer F. Longhurst
Franziska Ruf
Jessica Bullock
J. Alexander Moore
Melanie A. Shishler
Richard Cherney
Patricia L. Olasker
Our Corporate Governance practice is cross-disciplinary and includes many
of our most experienced practitioners. We work closely with domestic and
cross-listed public entity clients in responding to evolving regulatory standards
and corporate governance best practices in a variety of jurisdictions. Crown
corporations and other public sector entities also regularly seek our advice
on their governance structures and processes. We have extensive experience
advising special board committees and independent committees in M&A
transactions. Our practice takes us into complex succession planning for large
private companies and into high-level litigation and reputation management
We provide advice to firms in a variety of industries, including financial services,
mining and resources, manufacturing, real estate, technology, conglomerates
and retail services. Our corporate governance experts can help you stay ahead
of trends and regulations.
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