Thank you.
The CCGG thanks the committee for the opportunity to appear before you and provide you with our perspective on what we think are important changes that should be made to the CBCA.
First, by way of introduction, the Canadian Coalition for Good Governance is a coalition of approximately 45 of Canada's leading institutional investors representing pension plans, investment managers, and mutual fund managers, and our members manage retirement assets of over $1.4 trillion, approximately half the retirement savings of all Canadians.
We promote good governance practices in Canadian public companies, and the improvement of the regulatory environment to align the interests of boards and management with those of their shareholders and to promote the efficiency and effectiveness of the Canadian capital markets.
The changes we're looking for are focused on shareholder democracy. Although we have managed to persuade some companies to adopt democratic reforms that aren't required by law, the CBCA should be updated to require all companies to adopt those reforms. We will be providing you with a written brief that will set out our submissions in more detail after today.
Prior to getting to the changes we would like to see, I'd like to take a minute to talk about why shareholder democracy matters. As the providers of capital and the ultimate owners of the company, shareholders delegate powers to the board of directors, including the power to set corporate strategy, to hire and fire executives who are supposed to implement that strategy, and to deal with risk management and crisis management. Directors really are the cornerstone of good governance for public companies. There's growing evidence that good governance leads to more efficient uses of capital and better returns.
We're looking to improve governance in CBCA companies in two basic ways: first, by requiring basic democratic norms, including a fair process to elect directors, and the ability of shareholders to remove directors, and a voting system that accurately records votes cast; and two, by having the CBCA enforce basic governance norms such as the separation of the chairman of the board and the CEO.
Turning first to basic democratic norms for investors, we'd like to see changes in four main areas.
First, the CBCA should give shareholders the right to vote for each director. Currently it's common practice for companies to propose a slate of directors and require shareholders to vote for all or none of them. This seems to happen simply because the act doesn't prohibit it. Approximately 25% of Canada's largest public companies still have this type of voting, which is referred to as slate voting, and I suspect that percentage would be even higher for smaller companies. The CBCA should be amended to prohibit slate voting.
Second, the CBCA should require directors to be elected by a majority vote. Currently, under the CBCA and securities legislation, shareholders do not have the power to vote for or against directors. Their only right is to vote for them, or to withhold their votes. As a result, a director can be elected if they receive only one vote; and if they are a shareholder, as they inevitably are, that vote can be their own. So as elected representatives, I'm sure you can see that while that system is advantageous for directors, it really doesn't benefit anyone else. What it really means is that a director can lose an election by any reasonable measure--getting less than 50% of the votes, or even getting one vote--and still not have to vacate their seat.
There was an article in the Wall Street Journal at the end of September that was making that exact point, and pointing out that as of the end of September in 2009, 93 board members in the U.S. in 50 different companies had all received less than 50% of shareholder votes, and not one had vacated his or her seat.
We have developed a majority voting policy that provides a framework for companies to get around the law as it stands, and to date our policy has been adopted by 98 of the 209 largest Canadian companies. But in our view, that isn't enough. The law should be changed to require majority voting in all CBCA companies.
Third, the CBCA should require that directors be elected annually. Currently, directors can be elected for up to three years and can be elected for terms of different lengths, referred to as staggered boards. Staggered boards impede the ability of shareholders to change the board because not all directors will come up for re-election at the same time. In our view, the CBCA should be amended to require annual director elections.
Fourth, the CBCA should require that voting results be reported, and Ms. O'Neill has touched on this already. The act provides that voting can be by way of show of hands, unless a shareholder present at the meeting demands a ballot. And if it's done by way of show of hands, companies are only required to publicly report the issue voted on and the result, not the actual numbers of votes cast for a director. We're particularly concerned about this with respect to director elections.
Again, as an analogy to our democratic system, imagine a federal election where the only result reported was the Liberals or the Conservatives won and the electorate was effectively asked to just trust that report.
As Ms. O'Neill also pointed out, the companies already have all the information about votes cast for or withheld in a scrutineer's report, so requiring them to publicly report those results would not impose any additional administrative burden.
We've been urging this as a matter of best practices, and some companies have already adopted it voluntarily, but 38% of Canada's largest public companies still do not report the details of the results of a director election.
We will deal with several other problems with the voting process in our written submissions. For example, shareholders who hold their shares through an intermediary, which almost all of us do, don't receive any confirmation that their votes have been received and tabulated, and that needs to be addressed.
With respect to basic governance norms that should be required, we would like to see two main changes. The CBCA should require the separation of CEO and chair of the board. The role of the board is to oversee management, particularly the CEO. If the chair of the board is also the CEO, it is impossible for the board to properly carry out that supervisory function. Good governance requires the chair to be independent of management.
We have been urging companies to separate the role of the CEO and the chair for some time. Of 157 of the largest issuers in Canada, only 72 currently have an independent chair of the board. The CBCA should be amended to require that the chair be independent of management.
Shareholders should also have the right to approve dilutive acquisitions. Under the CBCA currently, shareholders have a right to approve the sale, lease, or exchange of substantially all the assets of a corporation. Shareholders should similarly have the right to approve significant acquisitions paid for in shares that will dilute the holdings of existing shareholders in excess of 25%. The TSX recently changed its listing requirements to require shareholder approval in those circumstances; in our view, the CBCA should do the same.
The committee might find it interesting that of all three major pieces of legislation that have been introduced in the U.S. after the financial crisis, two of them will call for an end to staggered boards and all three will require a majority voting for director elections and the separation of the chair and the CEO. Internationally, there is an emerging consensus that these reforms are necessary to ensure that companies are well run and boards are accountable to their shareholders. Canada has an opportunity to become a governance leader by enshrining these reforms in the CBCA.
In closing, we would like to see improvement for shareholders in a few areas--for example, changes to minimize the cost to shareholders who seek a remedy under the act, but we will address those in our written brief.
Also, I would like to urge the committee to consider a broader consultation, as the other witnesses here today have. A number of groups would likely have useful input into ways to improve the CBCA, including academics, securities commissions, and other shareholder groups.
And finally, I would like to add that the coalition also supports the proposals put forward by Ms. O'Neill on behalf of SHARE.
Thank you.