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Canadian shareholder proposals help lead governance innovations

Jackie Cook is the Director of Proxy Voting Research and Operations at the Shareholder Association for Research and Education (SHARE), a Canadian leader in responsible investment services, research and education. Kevin Thomas is the Director of Shareholder Engagement at SHARE.

Many of Canada's best corporate governance practices have been spurred on by shareholder proposals that were formally submitted for consideration at company annual meetings.

Proposals our organization – Shareholder Association for Research and Education (SHARE) – helped file in 2008, for example, led to the adoption of the first "Say on Pay" votes at Canadian companies, a governance innovation that has helped channel investor feedback on executive compensation for the more than 180 companies that have now adopted the practice.

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Following in that innovative tradition, 2017's most notable shareholder proposals asked Toronto-Dominion Bank and Royal Bank of Canada to voluntarily adopt a "proxy access" bylaw that would enable shareholders to nominate candidates for the board. Those proposals received a 52.2-per-cent and 47-per-cent vote in favour, respectively, and demonstrated that the idea of proxy access – and shareholder democracy more generally – is firmly taking root in Canada.

That is, everywhere except Alberta.

Alberta's current regulations forbid shareholders who hold less than 5 per cent of a company's shares to file a proposal. That's a very high threshold. A shareholder would have to own more than $2-billion worth of shares to file a proposal at Canadian Natural Resources Ltd., for example, solely because it is incorporated in Alberta. Everywhere else in North America, they would only need to own $2,000 worth of shares.

The shareholder proposal process is an important, but often overlooked, part of good corporate governance in Canada. It is an opportunity for a company's shareholders to raise concerns for the board's attention and, if necessary, to hold a vote on the matter at the company's annual meeting. Shareholder proposals are non-binding, but they provide an important signal to the board about the views of the investor base that might otherwise be difficult to ascertain.

At least 69 shareholder proposals were filed at Canadian companies this year. Two-thirds raised governance concerns, while a third brought forward environmental and social concerns. Both types received strong support.

Thirty-per cent of shareholders at Enbridge Inc., for example, voted for a proposal SHARE helped file that asked the company to assess Indigenous rights impacts when investing in new projects after the company became embroiled in the controversial Dakota Access Pipeline project.

Shareholder proposals on board diversity filed by SHARE members at Constellation Software and Canfor Corp., two companies with all-male boards, won 42 per cent and 32 per cent of the vote, respectively, and encouraged both companies to commit to working on a plan to improve gender diversity in the boardroom. The growing investor concern in Canada mirrors a similar trend in the United States, where shareholders at eight companies voted on board diversity resolutions, two of which gained majority support.

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Majority support is unusual, in large part because passive asset managers and/or controlling shareholders often vote with management on the issues without further consideration. However, boards tend to listen even when a proposal receives a relatively small share of the vote. Resolutions achieving more than 30-per-cent support often point to an investor concern that is gaining momentum. It's likely that both gender diversity and Indigenous rights will receive even stronger support from investors in the next proxy season.

Even when a proposal does not go to a vote, it may result in changes. Of the 69 proposals filed this year, 27 were withdrawn after the company's board or management responded to concerns raised by shareholders. This year, proposals advancing improvements in supply-chain human rights due diligence, strengthening environmental responsibility and adopting fair labour practices were withdrawn after successful engagement between the shareholder and the company.

The shareholder proposal process has been proven to be an effective and positive tool in advancing better corporate governance and better corporate citizenship. It has given shareholders a voice to improve the companies in which they invest, rather than having to withdraw investment when concerns arise. Companies with boards that are insulated from shareholder engagement are likely to lose out to companies with boards that are better structured and more proactive around climate change, the role and value of women in the work force, and social licence to operate.

The shareholder proposal process is helping to drive these changes in the rest of North America. If companies incorporated in Alberta want to keep up, the regulatory barriers to filing shareholder proposals in Alberta must come down.

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