Canada proposes proxy system overhaul

The role of proxy advisory firms and proxy plumbing in Canada could be set for a fundamental overhaul, following the publication of findings by the Capital Markets Modernisation Taskforce (CMMT). 

In a wide-ranging remit, the taskforce has made over 70 proposals, which include giving regulators new powers, reforming shareholder voting and calling for the introduction of clearer ESG reporting standards for Canadian companies.  

The CMMT was formed in February 2020 and reports directly to the Minister of Finance. It was tasked to develop “bold, innovative recommendations” to improve how capital markets function in Canada. 

Twelve of the drafted proposals specifically target shareholder voting and company transparency, with the taskforce identifying an “imbalance” among Canada’s proxy and shareholder voting systems. Several stakeholders raised concerns to the CMMT about the influence of proxy advisors, errors in their reports and potential conflicts of interests where voting recommendations and consulting services were provided to the same businesses.  

To remedy this, the CMMT proposes establishing a new regulatory framework that would provide companies with the right to ‘rebut’ reports from proxy advisors. In addition, the taskforce also hopes to restrict conflicts of interest by limiting the services proxy advisors can offer. 

Several of the other proposals are aimed at reforming and improving the proxy plumbing. For instance, currently in Canada, the majority of shareholder votes are cast via proxies using either the company’s or dissident’s proxy ballot. Unfortunately, this means such proxy cards can look different and often confuse investors. 

Therefore, the CMMT proposes the use of universal proxy ballots to improve standardisation and mandate voting disclosure for each side when a dispute arises.  

At the same time, the taskforce has also proposed introducing rules to prevent over-voting and the requirement for companies listed on the Toronto Stock Exchange to have an annual shareholder votes on executive compensation. In further efforts to improve corporate governance standards, the taskforce proposes further legislative guidance be made around the role of independent directors in a bid to avoid conflicts of interest from arising, arguing that current laws do not fully address the role such directors play. 

Elsewhere, the taskforce wants to reduce the ownership threshold for early warning reporting disclosure in Canadian companies from 10% to 5%. This would bring Canada in line with other major markets, with the CMMT also acknowledging that a shareholder can currently requisition a meeting with a holding of as little as 5%.  

In a bid to improve transparency, the CMMT is also proposing the adoption of quarterly filing requirements for institutional investors of Canadian companies and – in a very encouraging step – the introduction of enhanced disclosure of material ESG information. 

With stronger ESG reporting, Canada would be following in the footsteps of other jurisdictions and create a level playing field for its companies. In particular the taskforce identified the metrics used by the Sustainability Accounting Standards Board (SASB) and Taskforce on Climate-related Financial Disclosures (TCFD) as potential solutions.  

Other CMMT’s recommendations include giving regulators new and enhanced powers when dealing with listed entities. For instance, the taskforce has proposed empowering the Ontario Securities Commission (OSC) to issue no-action letters. This already happens in the US where a company can seek a no-action letter from the Securities and Exchange Commission when it has the basis to exclude a particular shareholder proposal. 

The CMMT has also proposed the introduction of broader remedies for the OSC when dealing with mergers and acquisitions. The taskforce proposes granting the OSC similar powers to those recently granted to the British Columbia Securities Commission, which can now rescind a transaction, require a person to dispose of securities in connection with a deal or even prohibit them from exercising voting rights.  

The consultation closes on 7 September 2020 and responses can be send to CMM.Taskforce@ontario.ca.