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Report finds major flaws in shareholder votes

|Written By Michael McKiernan

When Carol Hansell became chairwoman of the corporate governance committee of the American Bar Association, the senior partner at Davies Ward Phillips & Vineberg LLP took a tour of New York City to canvass her corporate contacts for their concerns about governance.

Carol Hansell hopes interest in the paper will put shareholder voting issues on regulators’ agendas.

There was one issue that kept recurring: the proxy voting system for shareholders. One person, in fact, told the Toronto-based lawyer she should be looking closer to home.

“This person told me, ‘The Canadian system is no better. We send our votes up there and there’s no telling what will happen to them,’” she says.

Nearly two years later, Hansell, along with six of her colleagues at Davies, has released a new report on the quality of shareholder votes in Canada, a 200-page tome that delves into the relatively uncharted waters of problems with the system that affect the direction of the country’s corporations.

The paper highlights issues, such as over-voting, empty voting, and a general lack of transparency, that blight company meetings across the country.

According to Hansell, the complexity of the shareholder voting system means very few players understand how it works from start to finish. She hopes the paper will fill in the blanks by explaining it better so that all of those who work in it can get on with talking about how to fix it.

“This is a well-acknowledged issue that seems to be too big for people to get their heads around,” Hansell says. “We think this is a really good road map and it’s intended to help everybody get there.”

Sylvia Groves, a corporate governance consultant based in Calgary, says the people least likely to know about issues with shareholder voting are the ones with the most at stake. “People think they go in, like their local or federal election, they cast their vote, and the vote gets counted.

But that’s not the way it works. They have no idea that their votes don’t count.”

During her time at Nexen Inc., a major share issuer in Canada, shareholder votes could end up totalling as many as 20 million more than the number of shares issued, she notes.

The investor-issuer relationship is fractured immediately in most cases by the fact that institutional and individual investors typically hold their shares through intermediaries.

Shareholders have to give their intermediaries instructions on how to vote at shareholder meetings, and their intentions are passed on to the issuer.

The relationship becomes even further complicated by Canadian investors’ right to hold “objecting beneficial owner” status, which allows them to hold stock anonymously.

Many investors use this provision to stop people from replicating their trading patterns, but the report suggests the time has come to reconsider it.

In turn, intermediaries hire third parties to mail election materials and tabulate voting instructions. With each step, the chance for technological or administrative error increases, which makes vote confirmation virtually impossible.

Almost all Canadian intermediaries contract out their proxy voting services to one American company, Broadridge Financial Solutions Inc.

Hansell says that while Broadridge has helped streamline the proxy voting system, the company isn’t regulated in Canada. “Issuers and investors can’t see how Broadridge has handled the voting instructions for any particular meeting.”

As a result, Hansell says it’s impossible to know how many votes have been affected by faulty votes and whether they could have changed the decision. Cases tend to come to light only when a large shareholder becomes suspicious about whether their vote was counted, she adds.

The paper notes several examples of voting errors. In 2006, B.C.-based Gateway Casinos Income Fund approved a transaction with a 52.4-per-cent vote in favour.

A press release later admitted that a number of votes, both for and against the proposal, weren’t counted. The transaction remained valid, although the company didn’t reveal what the real result should have been.

In 2004, Toronto-based IAMGOLD Corp. rejected a proposed merger by 16 million votes. Just one day earlier, the company had discovered and discounted an over-vote of 26 million shares.

Stephen Griggs, executive director of the Canadian Coalition for Good Governance that represents the interests of institutional investors, says the report will be an invaluable resource for his members.

In his view, it marks an important turning point by transforming countless anecdotal complaints about faults in the system into a professional and exhaustive account.

“When company votes do not reflect the votes cast, it’s a fundamental problem. It’s basic bookkeeping and for some reason it’s not working,” he says, noting that doubts about the integrity of the system are damaging to corporate governance.

“Investors fear the potential for abuse and whether a company can somehow skew the numbers to get the result they want.”

Groves, meanwhile, says the efficiency with which issuers make dividend payments through intermediaries shows it’s possible to fix the system. “It’s the same group of shareholders, but there’s no incentive for the intermediaries to have the same kind of rigour to the voting process,” she notes.

After a week online at, the paper Hansell helped write had already attracted significant interest, something she hopes will force the issue onto regulators’ agendas.

“We certainly need regulatory involvement to get anywhere,” she says.

“We hope people will appreciate the importance of this issue and reach out to the regulators and say, ‘We need to find a solution here.’”

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