October 11, 2011

TSX Proposed Amendments to Company Manual Regarding Director Elections

This letter is submitted in response to the invitation to comment on the desirability of amending the TSX Company Manual regarding director elections in the manner set forth in the request for comments published in the bulletin of the Ontario Securities Commission dated September 9, 2011.

Members of the ICD share the interest of the TSX in corporate governance and the continued evolution of best practices. We appreciate the opportunity to comment on the areas identified in the TSX Request for Comments. Before commenting on those issues, we would like to make three general comments.
First, we believe that in most instances corporate governance in Canada is best advanced through identification of best practices and their development in the market as opposed to the imposition of prescriptive rules and regulations. Prescriptive rules and regulations can be rigid, have unintended consequences and may be insensitive to the diversity of issuers which will be subject to them. We believe that issuers must have the flexibility to develop an approach to corporate governance that reflects their own particular circumstances. It is trite but true that in the corporate governance arena “one size does not fit all” and caution must be exercised before promoting universal standards or prescriptive rules.
Secondly, we provided comments to the OSC in our letter dated March 28, 2011, (“OSC Letter”), in response to OSC Staff Notice 54-701 dated January 10, 2011 regarding shareholder democracy issues. The OSC Letter can be found on the website of ICD at www.icd.ca. We express consistent views in this letter and welcome the TSX clarifying in the TSX Request for Comments that any initiatives adopted by the TSX will be complementary and not conflict with positions that the OSC might take. To the extent new rules are being proposed, such rules should also be consistent with the positions taken by the Canadian Securities Administrators as well. Issuers and directors should be subject to consistent and non-conflicting requirements. Ideally all of these rules would be found in one instrument as opposed to a variety of instruments from a variety of regulators and stock exchanges.
Thirdly, our OSC Letter expressed concerns about the integrity of the proxy voting system and the role of proxy advisory firms in the voting process. These concerns should be considered by the TSX in the context of the proposed amendments to the Manual set out in the TSX Request for Comments.

Slate voting and majority voting for uncontested director elections  

TSX has identified several issues under this heading and since terminology is often used inconsistently when these issues are discussed, we think it is important to separate them. The first issue under this heading relates to whether shareholders are given the option of voting for or voting to withhold on the entire slate of director nominees (slate voting) or whether shareholders are given the option of voting for or voting to withhold on each director nominee (individual voting). 
The second issue, which only arises if individual voting is made available to shareholders, is whether if any one or more director nominees fail to receive more votes in favour of their election than votes withheld from their election the directors either may be required by board policy to resign (a majority voting policy) or are not treated as having been elected (a majority election standard).

Slate Voting versus Individual Voting for Directors

 We support individual voting for directors. The ability to vote on the election of directors is a fundamental right of share ownership and we agree with the view that a shareholder should not be placed in the uncomfortable position of voting ‘for’ some directors that the shareholder does not support, or withholding votes from all candidates when, in fact, the shareholder may support the election of many, or even most, of the director nominees. We support the view that where shareholders are able to vote for directors individually, they would feel more involved in the election process. We also acknowledge that individual voting for directors may provide some shareholder feedback on director suitability – since shareholders who disapprove of a particular director nominee or the decisions of a particular committee of directors can make their dissatisfaction known by voting to withhold for that nominee or the members of that committee. 
We note that individual voting for directors is a common practice, does not impose any significant additional costs and, because it does not adversely affect the election process, does not give rise to the same concerns regarding board composition as does majority voting for directors. We would support the proposed TSX amendment set forth in Section 461.2 of Appendix A of the TSX Request for Comments.

Majority Voting Policies and a Majority Election Standard

Whether adopted as a majority voting policy or majority election standard, majority voting raises concerns that (i) it would result in “failed elections” – i.e. that no directors are elected or that an insufficient number of the directors are elected who have the attributes necessary to meet statutory director residency requirements or requirements to have an audit committee comprised of at least three independent directors or (ii) would result in the loss of directors with a particular skill set which the board believes is necessary or desirable. These concerns are heightened where majority voting is implemented via a majority election standard. 
The ICD supports the adoption of a majority voting policy as a best practice. The ICD does not support a majority election standard. A majority voting policy allows a board to manage the consequences of a failed election in the best interests of the Corporation and having regard to the board’s accountability to shareholders. A majority election standard can result in failed elections without a proper process or procedure in law or equity to deal with the consequences.
We support the comply or explain approach to majority voting policies set forth in Section 461.3 of Appendix A of the TSX Request for Comments.

Annual Director Elections

We generally favour annual director elections and note your statistic that 98% of issuers in the index hold annual director elections. Accountability to shareholders is enhanced with annual elections.
Having said that, staggered boards are permitted under corporate law and can allow for longer term succession planning regarding board of director composition. Corporate Canada and shareholders are increasingly being criticized for short-termism and are being encouraged to take a longer-term perspective. Before the TSX effectively mandates annual elections it should be satisfied that the benefits of effectively making this a mandatory requirement outweigh the negative or unintended consequences it might create. Stated differently, it appears that the market may be self-regulating in an appropriate fashion already. We would encourage the TSX to carefully consider the foregoing prior to making the amendment set forth in Section 461.1 of Appendix A of the TSX Request for Comments.

Advising TSX

Proposed Section 461.4 of the Manual would provide that:

“Following each meeting of security holders at which there is a vote on the election of directors, a listed issuer that has not adopted a majority voting policy must provide notice to TSX by email to disclosure@tsx.com if a director receives a majority of “withhold” votes.”

The role that the TSX would play in this scenario is unclear to us and we question the wisdom of TSX involvement in this way. If this amendment is pursued we note that concerns have been expressed about the accuracy of proxy voting. Thus, the issuer should be provided with sufficient time to be able to confirm the accuracy of the voting result before being required to make this disclosure to the TSX.


We share the interest of the TSX in practices which contribute meaningfully to the improvement of corporate governance practices of Canadian companies. We support the proposed amendments to the Manual that we have indicated in this letter. 

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