The Toronto Stock Exchange has unveiled a proposed new rule for listed companies that would require corporate directors to tender their resignations if they fail to get a majority of votes in annual board elections, responding to concerns of large institutional investors that current rules are not democratic.
The exchange Thursday unveiled a series of changes to governance rules for listed companies that will require companies to elect all directors individually – prohibiting elections of board slates as a whole – and force companies to publicly disclose the voting results for each director in annual shareholder elections.
The changes, which will take effect Dec. 31, had been flagged by the TSX in a request for comments published over a year ago. But the exchange said Thursday it plans to go beyond its originally published plans to also require all companies to adopt majority voting policies for uncontested board elections.
Because the majority voting proposal was not in the original package of changes, the TSX will seek public comments on the plan until Nov. 5, and said it intends the majority voting rule to come into effect by the end of 2013.
Kevan Cowan, group head of equities at TMX Group Ltd., which operates the TSX, said the package of new requirements – they will also require all directors to be elected each year – will align Canada's practices with those in other countries and bring "additional transparency to the board selection process."
Voting rules in Canada and the United States only allow shareholders to vote in favour of a proposed director or to "withhold" their vote, which means it is not counted. There is no way to vote against directors, which means one could be elected with even a single vote in support.
It is difficult to change the voting structure outright because the rules are proscribed in federal and provincial business corporations acts and would require legislative reforms to amend them.
As a result, the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional investors, has been urging companies to voluntarily adopt rules that would require directors to offer to step down if they don't get a majority of votes, giving shareholders a straightforward way to remove unpopular directors without launching an expensive and timely proxy voting campaign. The CCGG says 61 per cent of companies in the S&P/TSX composite index have adopted the policies.
But the coalition has also urged the TSX and securities regulators to make majority voting policies mandatory for all companies to ensure the strategies are universally adopted. Many of Canada's largest investors also supported the proposal, including the Canada Pension Plan Investment Board, the Ontario Teachers' Pension Plan and B.C. Investment Management Corp.
CCGG executive director Stephen Erlichman said the coalition is keen to see the TSX proceed because it would complete the list of reforms needed to improve shareholder democracy rights.
"It's the fundamental right of shareholders to elect directors, and directors shouldn't be elected unless they receive at least 50 per cent plus 1 [vote] of all the votes cast," he said.
The TSX said majority voting policies do not have to be binding, which means companies do not have to accept a director's resignation if it would create problems such as having too few directors on a board to meet quorum or committee requirements.
The exchange said that "functionally" a non-binding policy is intended to give boards time to reorganize as required, sending a signal that the non-binding rule is not intended to allow companies to ignore voting results.