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For activist investors, it's all about who has the power

A priority of a watchdog group is to see slate voting ended in Canada, JANET McFARLAND writes

From Thursday's Globe and Mail

Canadian investors are pushing companies and regulators for reforms to bolster their powers to fight shareholder battles, highlighting weaknesses in Canada's shareholder democracy system.With a growing focus on shareholder activism, investors are also increasing their demands for more powers to protest against unpopular corporate moves or improve weak boards of directors. Major shareholders say some top priorities for reform are shareholder voting rights, access to nominate directors and disclosure of voting information.

Michael Wilson, chairman of the Canadian Coalition for Good Governance (CCGG), which represents 35 of Canada's largest institutional investors with more than $550-billion of assets under management, says one priority for his group is to see slate voting eliminated.

Slate voting requires shareholders to vote for a company's directors as an entire slate, but investors say they want the right to cast a vote for each director individually. This allows them to single out directors who have poor credentials for the job, or who have bad attendance records or inadequate ownership of shares in the company.

"Some people say that as a matter of principle there should be slate voting because a board has to have congeniality," Mr. Wilson said. "But I think if someone on a board is not pulling their weight, individual director voting encourages people to be more industrious or to step down. We have a long way to go in this area."

The issue received more prominence this spring, when investors complained that slate voting at Molson Inc. made it difficult to protest against the nomination of Hollinger Inc. executive Dan Colson to Molson's board.

"It matters a lot, because if you see a [nominee] that you don't like, you can really give a powerful message," said Claude Lamoureux, chief executive officer of Ontario Teachers Pension Plan Board.

"There are names of people we see over and over, and they don't do things we think are right."

Indeed, Mr. Lamoureux said he would like to see individual director voting become mandatory for all companies in Canada.

A Report on Business review of corporate governance in Canada found that 46 per cent of companies in the benchmark S&P/TSX composite index allowed individual director voting in 2004, while 54 per cent had only slate voting.

But David Beatty, managing director of the CCGG, said only 16 per cent of companies actually list each director by name on the ballot with a box to vote "for" or "withhold" for the nominees. Many others provide written instructions that a rejected director's name can be written into a space provided, or crossed out.

He said these options are not clear enough.

"It's not conducive to understanding that you actually have a choice. So we just took a hard-line position: I want this to be the same way a ballot is."

In a similar vein, Mr. Lamoureux said he also would like regulators to toughen the requirement for companies to report the results of shareholder votes, allowing no more than five days to publish the numbers. The current rule says results must be reported "promptly" following the annual meeting, but many companies have waited weeks and even months to disclose their numbers.

"A lot of companies take so long it's ridiculous," Mr. Lamoureux said. "There should be a more specific rule. And if they don't do it, the securities commission should do something."

Shareholders are also championing an array of other reforms to improve other types of information disclosure. For example, many are asking companies to boost disclosure of executive compensation policies, and especially executive pension costs. Mr. Lamoureux said companies should also publish the names of their outside compensation consultants, much the way they identify their auditors, since they have such a major role in companies' executive pay policies.

More broadly, investors are also beginning to increasingly ask for the right to propose director nominees for a board.

This so-called access to the proxy has been a hot topic in the United States, where the Securities and Exchange Commission last year proposed new rules that would allow shareholders to add names to the ballot under certain circumstances. The proposal has been put on hold following huge protest from public companies, and the SEC is reportedly trying to broker a compromise.

In Canada, the idea is far more nascent, and regulators have not moved to introduce changes.

Bill Mackenzie, president of shareholder advocate Fairvest Corp., said the board appointment process should be opened up to accept nominations.

Currently, boards propose a slate of nominees equal to the number of seats to be filled, but only shareholders with clout can influence the names that are put forward, and only through private negotiations.

Mr. Mackenzie said that for most shareholders, director voting is a hollow process in which there is no real choice.

"The whole board, in my experience, has been really insulated from shareholders," he said.

Companies have complained that giving shareholders the right to propose nominees would result in poor-quality directors, such as special interest candidates with narrow views. But Mr. Mackenzie argues that any nominee would still have to attract many votes to be elected.

"None of these guys are going to get voted on unless they are primo directors," he added. "Are you going to put some quack on? That would be crazy."

Daniel McCarthy, research director for the Canadian branch of the United Brotherhood of Carpenters and Joiners of America -- whose members oversee $38-billion (U.S.) in pension fund assets -- said the union is interested in proposing board nominations.

But he said the U.S. branch of the union is still discussing whether to propose alternative director nominees for next year's proxy season, and hasn't reached any final decisions. He said the idea would only follow afterward in Canada.

Mr. McCarthy said it is arrogant of companies to suggest that they always do a better job of choosing director nominees, noting that many high-profile directors have failed to protect shareholder interests.

And despite corporate criticism of the idea, he said shareholders like the Carpenters would use such a power carefully to find top-quality nominees.

"It's counterintuitive that a shareholder would want to put somebody on the board of directors who is not competent," he said.

Mr. Lamoureux said Teachers would like the power, but he expects it would be rarely applied.

"Once you have the power, the threat of the power is more powerful than the power," he said. In other words, he said, if boards know that a nominee is unpopular and may be defeated, they'll back down before a vote is held.

Mr. Beatty, however, said he feels the U.S.-style proposal is too cumbersome, and Canada needs to find a better model.

Under the SEC model, shareholders either have to win a vote on whether proxy access should be allowed, or have to have previously voted at least 35 per cent against a board nominee. As well, a nominee could only be appointed by shareholders who own at least 1 per cent of a company's shares.

Mr. Beatty said a simpler solution exists in Britain and Australia, where shareholders have the right to actually vote against nominees for boards. In Canada and the United States, shareholders can only vote "for" nominees or "withhold" for nominees, but cannot technically vote against them. This means that even a single vote in favour of a candidate assures his or her election, leaving shareholders unable to easily defeat any candidate without launching a proxy battle with an alternative slate.

In Britain, Mr. Beatty said, shareholders can typically see a nominee replaced even before it goes to a vote if defeat seems likely.

"The institutions, if they're totally opposed to somebody being elected as a director, they go to the chairman and say: 'Look, if you propose Al Capone, we're going to oppose him.' . . . And rather than undergo the public humiliation for Al Capone and the company, the chairman will say: 'Fine, I got your message.' "

Meanwhile, shareholders say they are also continuing to protest against the use of dual-class shares in Canada, which typically give one shareholder voting power far beyond the actual number of shares held.

The CCGG said earlier this year that it would target dual-class shares for reform in abusive cases, and the Toronto Stock Exchange is in the process of adopting a new labelling system to identifying subordinate voting shares with special endings on ticker symbols. Some companies with dual-class shares, including Four Seasons Hotels Inc., faced shareholder resolutions this year calling on them to eliminate the special voting shares.

The Report on Business review found that 23.4 per cent of companies in the S&P/TSX index have some form of uneven voting shares, representing almost a quarter of Canada's largest companies.

Brian Barsness, vice-president of fund manager Meritas Financial Inc., said more investors have spoken out on their objection to dual-class shares in the past year than ever before as governance issues have become more prominently discussed.

"It doesn't make sense that you are an investor in a company, and yet a minority investor has more say in how the company is being run. Magna is a key one that got our attention," he said. Meritas voted against directors at Magna International Inc. this year to protest against their dual-class shares.

Mr. Barsness said investors cannot easily avoid all dual-class share companies when they make up one-quarter of the shares in the benchmark index. But he said that if investors such as Meritas feel the power is being abused at a particular company, they will fight back or sell.

Indeed, many large shareholders say they feel they have little choice but to invest in dual-class-share companies because there are so many of them in Canada, but will push for reforms in cases where they believe the power is abused.

Mr. Beatty said dual-class shares are difficult to fight because the holder controls the voting process, leaving investors with "moral suasion" as their only tool for reform.

As a result, he said the CCGG looks at the quality of a company's safeguards to protect minority-investor rights to decide which dual-class shares merit protest.

Ultimately, however, Fairvest's Mr. Mackenzie notes that if lobbying doesn't work, investors unhappy with a dual-class share structure may have no choice but to sell.

"There's nothing else you can do. Either you go along for the ride or you get off," he said.

With files from reporter Elizabeth Church

Of 218 companies in the S&P/TSX index as at June 15 this year, how many have dual-class shares?

23% or 51 companies have dual-class or unequal voting shares

77% or 167 companies have only one class of shares, with equal votes

How many companies allow votes for each director. And how many only for the board as a slate?

46% or 101 companies allow individual voting

54% or 117 companies have only slate voting

Are directors required to own shares to align their interests with those of shareholders?

60% or 130 companies have a mandatory director share ownership requirement

40% or 88 companies do not

Do directors own shares in the company equal to a minimum of three times their base cash retainers?

38% or 82 companies report all directors own shares to this threshold

14% or 30 companies report that four or more directors do not

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