This article is the first in a series by Adam Adamou that focus on corporate governance issues facing Canadian issuers.
Mr. Adamou has spent more than two decades observing Canadian public companies, private equity and venture capital, and is noted for his early stage public investments into companies such as Research in Motion and SXC Health. Adamou has served as an investment banker and managing director of investment banks, and later as a director of several public companies.
In this series of posts, I’m going to focus on corporate governance issues in general as they relate to Canadian issuers. To be clear, I’m not targeting any specific issuer, I’m talking about corporate governance in general and speaking based on my experience as a director of five or six public companies spanning three or four different exchanges across two countries over twenty years.
The first topic that I will explore relates to the process of choosing the slate of directors for a public issuer in Canada. Canadian businesses are formed under the Canada Business Corporations Act (CBCA) or the provincial equivalent. This article relates to CBCA-incorporated companies. Unfortunately for Canadian shareholders, the news is not good. According to the Canadian Coalition for Good Governance (“CCGG” – and let me take a moment to thank them as I will refer to them repeatedly in this article), under Canadian law voting for directors by shareholders follows a “plurality system” under which a shareholder can either vote “FOR” a director nominee or “WITHHOLD”. Many shareholders believe that this gives them some direct control over what is perhaps the single most important decision that they are asked to make as a shareholder – the selection of the board.
This sense of empowerment is an illusion.
It’s an illusion because the votes “FOR” the slate count, however the election to “WITHHOLD” does not. Because “WITHHOLD” votes do not count, a director requires only a single vote “FOR” to be elected under law – even if the rest of the votes are “WITHHELD”. This is simply outrageous!
To make matters worse, some listed companies take this a step further and provide shareholders with a “slate” of nominees rather than a list of individual directors for a director-by-director vote. Under this system, a slate of directors is put forth as a group to shareholders, who are then asked to vote “FOR” or “WITHHOLD” for the entire group en masse. In this case, a single vote “FOR”, just one share, elects the entire slate! This is clearly not in the best interests of shareholders, and as far as I’m concerned all TSX-listed boards should ban the practice.
I’m not alone in this view. The CCGG “believes that the plurality system for the election of directors is not in the best interests of shareholders as it does not permit shareholders to vote against an underperforming director and allows…” a board to entrench itself over time… “even if they are opposed by a majority of the owners of the company.” Under this system, the only option for shareholders who wish to effectively vote against one or more directors is to undertake a costly and confrontational public proxy fight. To me, there is no valid reason for a public company board to impose such a restrictive voting practice on the owners of the company. In fact, the CCGG takes it a step further by adding that in their view, the board of a public company has a responsibility to ensure that shareholders have the opportunity to vote for each director on an annual basis and that the vote be conducted fairly.
Majority Voting has emerged as the “best practice” for board selection for Canadian issuers listed on the TSX. There are many variants of this in practice and it is my understanding that the securities and corporate law regulators will impose a strict version of this on all TSX listed companies in the very near future. In the meantime, an increasing number of TSX issuers are voluntarily implementing majority voting, not only because it is the right thing to do – but because in its weakest form it requires nothing more than three steps:
1. Agree that individual voting should take place for each director, rather than having the entire group put forth as a “slate”; and
2. Request that each director agree that if a majority of “outside” shareholders chooses to “WITHHOLD” their vote for a particular director, that the director in question will volunteer to resign from the board following the vote; and
3. The board should announce this policy to the shareholders with enough advance notice so that the shareholders may consider their alternatives.
There is simply no reason, as far as I’m concerned, why any director or board of directors would fail to support and implement this common sense policy, particularly since under Canadian law, any director is free to ignore the vote and stay on the board if they so wish, regardless of the vote. The process itself is important, and peer pressure should take care of the risk of a failure to comply with the will of the shareholders.
What are the arguments that I’ve heard “against” this policy? In most cases the arguments are of the “straw-man” type and come in different flavors:
Our company is “too small” for this.
My response is to call BS on this. The “three step” process defined above is anything but onerous, and it is far below the standards recommended by the CCGG. Further, I fail to see how “size” has an impact on the right of the owners to have a meaningful say on the composition of their board. I further argue that smaller less liquid companies run a greater risk of having an “embedded” board develop over time, and, coupled with a lack of liquidity in the trading volumes, the company most likely also has “embedded shareholders”. That’s even more reason to institute this policy.
Director Nominees May Shy Away for Fear of Rejection
If director nominees fear rejection, they should not be selected as nominees, period. I have yet to meet a qualified director who has had any issues with a majority voting policy and many of the most experienced directors demand it. This as another “straw-man” argument and again, I call BS on it.
It May Cause “Instability”
This is simply not true. In most cases, the individuals nominated by the board (often called “management nominees”) are approved, and by a substantial margin by shareholders, so this is verifiably not an issue in practice. The risk of instability is further mitigated because under this system, the board has an incentive to remain engaged with shareholders, to keep them informed and to be responsive to their concerns. How many times have you wondered “what the hell is going on here with this company, or this board…?” Look into it, and chances are that you’ll discover that your company has a plurality system board.
If you own shares in a TSX listed company, take a few moments to leaf through the management information circular, or to give management or the shareholder relations people in the companies in which you own shares a call and politely ask them if they follow a “plurality” system or a “majority voting” system. If the answer is “plurality” – do not accept it! The less say that the board chooses to afford you as a shareholder, the more reason there is for you to be concerned.
You should demand, in writing, that the board institute a majority voting policy – even if it’s just the very weak three step program identified above. There is no reason in law for them to say “No” because all it takes to implement the policy that I’ve outlined is an individual slate and a public promise from directors. Press on and speak to management, to the Chairman of the Corporate Governance Committee or to the Chairman of the Board and ask them why they are choosing to deny you a voice in the selection of the board.
If they continue to resist, then politely inform them that you will follow-up with a policy of your own –if your vote does not matter to them, then as a matter of principle you will “click” on the WITHHOLD button on your proxy rather than the “FOR” slot to send them a message in return: that if your vote does not matter to them, then they will have to elect themselves without your assistance.
Adam Adamou is President and Managing Partner of Caseridge Capital Corporation, a Toronto based specialty investment firm. Mr. Adamou is an experienced investor, banker and advisor to technology companies across Canada, with a principal involvement as a venture capitalist or investment banker in funding numerous Canadian technology companies. Over the course of his career Mr. Adamou has served as a Director on a number of public and private company boards, including Secure Computing Corporation, Border Networks Inc., Softquad International Inc., Nuvo Networks Inc and Taurus Capital Markets Inc. Mr. Adamou is a Chartered Financial Analyst and holds a Bachelor of Commerce degree from the University of Toronto. You con connect with Adam by emailing him at caseridge (at) gmail.com You can also follow him on twitter, where he is known as @grazen