Participants debated the efficacy of board diversity quotas and wisdom of adopting new technologies for security
Corporate Secretary held its annual Canadian think tank in October at the Toronto Stock Exchange. Shareholder engagement, the influence of proxy advisers, gender diversity on boards and cyber-security risk were among the topics discussed at the invitation-only event.
Jeri Trotter, director of client management and issuer services for Broadridge, opened the think tank with an update on proxy voting in Canada. The introduction of notice and access was big news in 2013, and although only 160 issuers were early adopters, Trotter predicts more firms will be prepared to adopt the practice in 2014. She said there was a 6 percent increase in the number of shares voted in Canada this year. ‘We’re expecting higher adoption rates of electronic delivery of proxy materials [and] increased interest in virtual shareholder meetings next year,’ she added.
A session on shareholder engagement in this new era of activism featured Richard Leblanc, associate professor of law, governance and ethics at York University, David Mason, president of TMX Equicom, and Bassem Shakeel, vice president and corporate secretary at Magna International. Much of the discussion focused on why activists target certain companies and what they can do to avoid possible proxy fights. The panel noted that activists target only firms with weaknesses, so being open to talking to shareholders about issues is paramount.
‘If you are in a situation where you can get on the phone and talk to an activist investor’s people, you can get a head start on these relationships,’ said Mason. You can either work out agreeable solutions in advance or gain intelligence to help prepare counter-messages in case a proxy fight develops. Once activists have begun a campaign, delivering the right message is vital. ‘If you can communicate to the masses that the activists are unlikely to create value any faster or better than you, they may back off and your regular shareholders will support you,’ said Shakeel.
Leblanc noted that investors will be interested in hearing you discuss two issues: your value creation plan and the ability of your board to carry out that plan. ‘If you bring in a new director who will ‘move the room’ or elevate the spirit and effort of the board, it will help the perception that the company is doing something proactive,’ he explained.
Proxy regulation and anti-corruption
Paul Beauregard, chief administrative officer and corporate secretary at MTS Allstream, Frédéric Duguay, senior legal counsel for mergers and acquisitions at the Ontario Securities Commission (OSC), and Carolyn Hadrovic, corporate secretary at Air Canada, led an insightful discussion on whether proxy advisers ISS and Glass Lewis need to be regulated. Regulators have been looking at proxy firms over the last year because issuers have complained about possible conflicts of interests and the inability to correct errors in proxy firm reports.
There were 65 comment letters submitted to Canadian regulators concerning the regulation of proxy advisers, but panelists observed that ‘the letters did not contain a great deal of anger or outrage.’ The panel and participants suggested issuers that had received good reviews were probably not willing to be too critical of the proxy firms for fear of being singled out for heavy scrutiny in the coming proxy season. It was noted that the firms that wrote comment letters tended to be those that already had a problem with ISS or Glass Lewis.
After much discussion, the think tank audience suggested that allowing issuers to attach a response to proxy firm criticisms at the end of each report would be helpful. A vote was also taken and it was decided the OSC should adopt a policy-based approach to proxy firm regulation; crafting strict rules was probably not needed.
Riyaz Dattu, partner at Osler Hoskin & Harcourt, briefed the audience on anti-corruption compliance and enforcement. He reviewed the stepped-up enforcement efforts in Canada, including increased jail terms for some offenses from five years to 14, the holding liable of officers and board members for many violations, the phasing out of all facilitation payments and the increased enforcement of books and records violations.
‘You need to have a compliance program tailored to your situation and to risks,’ said Dattu. ‘Ensure that people understand why compliance is being done, that any legislation can be explained to an employee who is not a lawyer, that examples of what is and isn’t permissible are clearly defined, and follow up with training to provide a full understanding of what to do when you find a violation internally within the company.’
Gender diversity and cyber-security
Jo-Anne Archibald, president of DSA Corporate Services, led the discussion on guidelines for gender diversity, which debated whether Canada should adopt quotas for female participation on the boards of listed companies. Archibald said she was in favor of a quota, ‘but it should be a best practices quota – why not say in five years, there should be 25 percent representation of women on boards?’ she asked, adding that Canadian companies currently have about 13 percent gender diversity on their boards.
While not everyone agreed quotas would be effective, group discussion of gender diversity on boards yielded other possible ways to increase female board numbers. Participants suggested recruiters needed to work harder at presenting female candidates when searches for new board members are conducted, and that greater disclosure of board composition with a mandated ‘comply or explain’ component might pressure companies into increasing the number of women on corporate boards. As women make up roughly 50 percent of the Canadian population, participants said this is an issue that must be addressed very soon.
A session on cyber-security ended the day. Rafael Etges, senior manager of advisory services for Ernst & Young, and Iain Kenny, partner in forensic services at MNP, discussed the risks companies face when trying to keep up with new technologies. The panel noted that Canadian firms have traditionally lagged behind US firms by two to four years when adopting new technologies and management processes. Etges suggested that in many cases this lag is intentional. ‘Canadian companies let US firms implement technologies first and then take some lessons from their experience,’ he said. ‘Adopting new technologies can be risky: if you adopt and it causes problems, it could affect your company security.’
Kenny reminded participants of basic cyber-security protections including making sure all materials kept on laptops are encrypted and refraining from sending important documents via email. He also suggested companies begin thinking about how they can secure key data without using passwords. ‘We are getting to the point where passwords are meaningless because there are computers out there that can crack 15-character passwords in less than 10 minutes,’ he said.
