Shareholder engagement takes a front seat

By Anita Anand

The boards of the Royal Bank and TD have recently allowed shareholder proposals requesting that shareholders who hold a three per cent stake to nominate a director to the board and to include nominees of the proxy voting form. So-called “proxy access” has arrived in Canada. To be clear, those who favour “proxy access” argue that shareholders should be able not only to elect directors, but also to nominate them for election.[1] They contend that nominees of shareholders should be placed on the same ballot as management nominees with the intended goal being to increase the levels of independence and quality of boards of directors, while providing shareholders a meaningful say in who is able to become a director.[2] Thus, at issue is the nomination process at shareholders’ disposal.

  1. Don’t shareholders already have access?

Shareholders already have statutory rights that enable them to nominate directors.[3] As we are seeing with Royal and TD, the shareholder proposal mechanism can include director nominations.[4] This is part of the broader corporate law process for submitting shareholder proposals to corporations and exists independent of the securities law rules relating to proxy contests. Also, shareholders holding more than 5 percent of the corporation’s shares can also requisition a meeting to nominate a director.[5] But again, this can be an expensive process with no guarantee that management will accept the proposal or requisition. Also for shareholders who hold less than five percent, this legislative provision is not helpful. Third, shareholders can go through the dissident proxy process, but this too is an expensive endeavor that only wealthy shareholders have utilized.[6]

Shareholders’ ability to elect directors has little meaning if they do not have a definite say over which names appear on the ballot in the first place. No statutory provision exists that enables them to do that explicitly and directly.[7] Some may argue that directors nominated by a shareholder will be beholden to the shareholder rather than the corporation as a whole. But this claim is unpersuasive; directors – regardless of who nominated them – have a duty to act in the best interests of the corporation.[8] Current directors continuously face conflicts in the course of discharging their duties, but as fiduciaries, they are obliged by law to rise above such conflicts. To argue that directors nominated by certain shareholders would be unable to rise to the legal standard required of them suggests that these directors, and directors generally, are unable to separate their personal interests from their duty to corporations. Why are shareholder nominees any different from the director population at large, many of whom are employed by or represent related parties, such as controlling shareholders or management?

Some may the contend that according this right to shareholders would lead to one or a group of shareholders taking control of the board over time. Thus some type of cap seems reasonable. One proposal is to allow shareholders, for example if they hold 3-5% of the corporation’s outstanding shares, to have a circumscribed right such as to be able to nominate the lesser of three directors or 20% of the board.[9] Another possibility is to enable minority shareholders who have held a certain percentage of shares over a certain period of time to name at least one nominee on every slate presented to shareholders at annual shareholder meetings, with information about each of these nominees being included in proxy materials containing information on corporations’ nominees.[10]

  1. Advantages of Proxy Access for the Corporation

Reforms that give shareholders the ability to nominate directors by proxy should not be based solely on achieving enhanced shareholder democracy, but also on the benefits these reforms will have on corporations and corporate governance as a whole. In other words, there does not have to be a gap between those who wish to see increased shareholder democracy on the one hand, and those who are concerned about the well-being of the corporation on the other.[11] We turn now to consider some of the advantages of increased shareholder democracy for the corporation.

A number of advantages result from proxy access. First, shareholder presence on the board can be an antidote to ‘groupthink’ norms that suppress innovation and dissent. Some argue that groupthink has been a factor in corporate scandals (example, Enron) and helps to explain the passivity of corporate boards.[12] It is argued that corporations need the shareholders to supply them with directors who will not hesitate to bring different viewpoints to boardroom tables. The alternative – no shareholder direct, non-discretionary input into the nomination process – will do little to dispel the ongoing apprehension regarding management and board entrenchment, and more importantly, will do little to change prevailing corporate governance processes that at times have been at the root of corporate scandals and failures.

Second, shareholder representation can be a way to increase board independence, expertise and effective risk management. Murphy argues that “shareholder participation in corporate governance can help give the chair [of the board] the independence necessary to carry out an effective leadership role.”[13] In addition, shareholder-nominated directors could have a depth of expertise that would allow them to possess the necessary qualifications required to serve on various committees of the board. They will be able to ally themselves with other directors who are independent of management.[14] Finally, greater shareholder participation in the nomination process could help avert having a board that is unqualified.[15]

Third, the evidence that shareholder activism can lead to an increase in a corporation’s value suggests that formally enhancing shareholder participation in the nomination process could also be beneficial to corporations. As mentioned in Part 3, studies demonstrate that shareholder activism has led to increases in corporate value, output and performance. Bebchuk, for example, describes how target companies underperforming during the two years prior to an intervention subsequently recovered in the two years after the intervention without any evidence of adverse long-term effects.[16] Bebchuk’s finding that the positive stock price reaction to interventions in the short and long-term suggests that greater shareholder representation and involvement in nominating directors could benefit corporations.

  1. Updates to Access

Investors at RBC and TD will soon be given the chance to vote on whether shareholders with smaller holdings should have a bigger say in director elections. Management at both banks have urged shareholders to vote against these proposals, arguing that changing existing shareholder mechanisms is “not aligned with the statutory proxy access rules set out in the Bank Act” and “mirrors the evolving approach to proxy access in the U.S. without taking into account rights already available to the bank’s shareholders in Canada.”[17] Nevertheless, it remains to be seen how investors, and other publically traded companies, will react to these shareholder proposals.  Ultimately with regards to proxy access, it is a question of making the existing right of shareholders to elect directors meaningful: what is the point of a right to elect if shareholders do not also have some say in the choice of the person for whom they are voting?


[1] David F. Larcker & Brian Tayan, Proxy Access: A Sheep, or Wold in Sheep’s Clothing?, Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-06 (2010).

[2] Joanna Tochman Campbell, T. Colin Campbell, David G. Sirmon, Leonard Bierman & Christopher Tuggle, Shareholder Influence Over Director Nomination Via Proxy Access: Implications for Agency Conflict and Stakeholder Value, Mays Business School Research Paper No. 2012-72, (2012).

[3] Brett McDonnell, Shareholder Bylaws, Shareholder Nominations, and Poison Pills, Minnesota Legal Studies Research Paper No. 05-06, (2005).

[4]    For example, in National Bank v Weir (2009), the Quebec Superior Court granted a motion by National Bank to exclude 38 proposals by a shareholder in the Management Proxy Circular under the Bank Act proposal provisions – namely, subsections 143(5)(b) and (e), which are virtually identical to the proposal subsections 137(5)(b) and (e) of the Canada Business Corporations Act. The court held that although a proposal may appear to be neutral on its face, it must be read and considered in context. The court found that in light of the timing and circumstances, it was evident that the proposals by the respondent were abusive even though in normal circumstances these “might be considered his rights as shareholder.” The Court also noted that there was not an abundance of case law on this subject since the proposal mechanism was rarely used in Canada until recently.

[5]   CBCA at section 143.

[6]   Canadian Coalition for Good Governance, Shareholder Involvement in the Director Nomination Process: Enhanced Engagement and Proxy Access (2015), available at

[7]   Supporters of “management insulation” will counter this argument and assert that shareholders should not be given the right to nominate directors, since shareholder interests in the corporation are often short-term as opposed to long-term, and in general are motivated by considerations other than enhancing the corporation’s long-term interests. Those concerned with the possibility of increased shareholder power may also argue that shareholder nomination power could lead to the board being “co-opted” and represent the interests of a particular shareholder rather than the corporation as a whole.

[8]   CBCA.

[9]   CCGG, supra note 6.

[10]   This is currently the system in Italy. See Canadian Coalition for Good Governance (2015) for other international examples. See also Skeel (2011) for more details on the Italian system.

[11]   Bratton (2016) makes a similar point – that the existing chasm between those for and against shareholder activism is not necessary – but advances a much different reform proposal. Bratton’s idea revolves around asking the question whether a 5% poison pill can have policy benefits. He states, “Some [companies] are appropriate targets for activist intervention, while others are not…company-by-company dialogue on the point would be a good thing, exploring the possibility that a 5 percent standing pill could trigger useful informational exchanges between managers and institutional investors without simultaneously over-deterring activist intervention.”

[12]    Michael Murphy, Assuring Responsible Risk Management in Banking: The Corporate Governance Dimension, 36 Del. J. Corp. L. 121, (2011).

[13]    Michael Murphy, Restoring Trust in Corporate America: Toward a Republican Theory of Corporate Legitimacy, 5 N.Y.U. J. L. & Bus. 415, (2009).

[14]    Ibid.

[15]    Murphy (2011), supra note 64.

[16]   Lucian Bebchuk, The Myth That Insulating Boards Serves Long-Term Value, 113 Colum. L. Rev. 1637, (2013).

[17] Armina Ligaya, “RBC, TD Bank investors to vote on giving bigger voice to smaller shareholders” (23 March 2017), Financial Post, online: <;.