Originally posted by the Financial Post
By Anita Anand, Alexander Dyck, Cristie Ford, Richard Leblanc, Randall Morck and Stéphane Rousseau
The Financial Post has offered various pieces of commentary that argue against Bill C-25 introduced by the federal government. The bill proposes to implement a requirement of majority voting for all public companies incorporated under the Canada Business Corporations Act. In other words, shareholders would follow a common procedure to vote “for” or “against” a candidate, and only those candidates who receive majority support would serve as directors.
Contrary to the gist of previous pieces published on this page, we support the proposed amendments under Bill C-25. They create a common single standard applicable to public corporations on which shareholders can rely. They enhance board accountability by ensuring that directors cannot serve unless they are supported by a majority vote of the shareholders. Canadian shareholders and markets stand to gain from this enhanced accountability, similar to the documented benefits for shareholders in other jurisdictions when they have effectively implemented majority voting.
To understand why these amendments will enhance board accountability, a bit of background is useful. Beginning in 2005, Canadian corporations took their first steps to move voluntarily from an old system with limited investor voice, where investors could only vote “for” or “withhold” their votes, to a form of majority voting. After the majority of TSX firms voluntarily agreed to various forms of majority voting, the TSX passed amendments so that remaining firms would adopt a form of majority voting and set some minimum conditions.
The legacy of voluntary adoptions over a decade resulted in differences in approaches across firms. The TSX amendments were a step in the right direction, but they left open an “exceptional circumstance” loophole, which has the potential to render majority voting less meaningful.
Bill C-25 would alleviate concerns about misuse of the “exceptional circumstance” loophole by limiting the power of boards to override the wishes of shareholders. A board would be permitted to appoint a defeated director in only two circumstances: to ensure compliance with CBCA requirements that at least 25 per cent of directors be resident Canadians and to ensure that at least two directors of the public corporation are not officers or employees of the corporation or its affiliates.
Bill C-25 would also eliminate the potential for abuse of board discretion following these elections and would restrict directors to one-year terms. By requiring individual elections instead of slate voting and limiting terms to one year, Bill C-25 would ensure that directors on the board best reflect shareholder wishes. If a candidate is unable to convince shareholders of his or her merit, the candidate would be replaced by a director who is supported by the majority. Shareholder participation in the governance of corporations in this manner gives meaning to the vote and should be promoted.
Bill C-25 will help to create unity as it would bring mandatory majority voting to all public companies covered by the CBCA, including TSX Venture-listed companies. Small and medium-sized firms should not be exempt from reforms to the current plurality and slate voting system.
Some argue that Bill C-25 would cause directors of public companies governed by the CBCA to face “sudden-death elections.” This is an exaggerated claim: There is no reason to believe that countless directors would be voted off boards as soon as Bill C-25 was implemented. Receiving a majority “withhold” vote, under the old regime, or “against” vote in a majority-voting regime, is uncommon. There has been no evidence of alarming resignation levels. Moreover, a board concerned about such a risk could always reach out to its investors beforehand to reduce this risk
We support Bill C-25 and the move towards a true majority-vote system. Absent majority voting, shareholder votes lack practical significance. Bill C-25 will provide much-needed improvements to corporate governance in Canada and should be implemented as soon as possible.
Anita Anand, Alexander Dyck, Cristie Ford, Richard Leblanc, Randall Morck and Stéphane Rousseau are scholars of corporate governance and members of the academic advisory board for the Canadian Coalition for Good Governance.