Canada’s securities regulators are trying to make shareholder democracy a little more efficient, although it seems the system has bigger problems.

The Canadian Securities Administrators had proposed some changes to the proxy-voting system in April that aim to enhance the efficiency of the proxy process by allowing issuers to provide notice of, and access to, voting materials rather than automatically sending materials to all shareholders — many of whom don’t bother to vote.

The CSA’s objective is to cut some of this unnecessary waste and save money. The trade-off is that some shareholders — particularly, retail investor shareholders — may be less likely to vote if they have to navigate a new process and if they don’t have the impetus of physical materials demanding their attention.

Indeed, a “notice and access” model has been in place in the U.S. for a couple of years now — and one apparent result has been a lower incidence of retail investor shareholder voting. The CSA acknowledges this and indicates that its proposal deliberately differs from the U.S. model, partly in the hope of avoiding some of that drop-off in retail investor voting.

Some industry stakeholders worry that avoiding this drop-off won’t be easy. According to the Vancouver-based Shareholder Association for Research and Education’s comment: “We do not believe that the differences between the U.S. provisions and the proposed requirements for Canadian issuers will produce a significantly different result.”

SHARE’s comment points out that after N&A was introduced in the U.S., retail investor voting dropped by about 50% — and the voting rate was significantly lower among those receiving the notice alone rather than the full proxy package. SHARE’s comment says the N&A proposal should be scrapped in its current form as it’s not in shareholders’ best interests.

The Canadian Foundation for the Advancement of Investor Rights, a Toronto-based investor advocacy group, says in its comment that the impact on voting rates should be the primary consideration: “In our view, this aspect [of potentially reduced retail investor participation] outweighs all others in importance. While we do not dismiss the potential benefits of cost savings, or the environmental factors of producing less wasted printing (and, therefore, paper, ink and the like), any change to shareholder communications with beneficial shareholders will only be successful if it does not reduce retail shareholder participation in corporate democracy.”

Many other comments assume that it will lower voting rates, as that has been the experience in the U.S. And, whether it does or not, several comments suggest that it’s not the method of calling a meeting that most impacts retail investor voting; it’s the fact that in the current system, many retail investors aren’t informed about meetings at all.

Several comments point out that the bigger problem impeding retail investor voting is the fact regulators do not require issuers to pay for the delivery of proxy notifications and materials to shareholders that hold their securities in Street name and don’t have their identities disclosed to the company. (Issuers either implicitly shift that cost to securities dealers or simply let these shareholders go without notification.)

According to Broadridge In-ves-tor Communications Corp. data, about 37% of Canadian companies currently refuse to pay for the delivery of proxy materials to shareholders who want to remain anonymous. And this group now accounts for the majority of shareholders — 51%, up from just 20% in 2002.

The Investment Industry Association of Canada reports in its comment that in the latest proxy season, dealers paid for mailings to about two-thirds of these clients, but the remaining one-third “were effectively shut out” of the process.

It is often assumed that dealers can just pass these costs along to shareholders, the IIAC’s comment says. However, that often isn’t the case: “Dealers are reluctant to charge small mailing fees to individual clients (even if these small amounts add up to large amounts in the aggregate) because they do not want to be perceived as ‘nickel and diming’ clients in a highly competitive environment.

“Dealers are also under a great deal of pressure to provide clients with high rates of return on investments, and have been facing recent criticism from government and regulators on the fees that they charge their clients,” the IIAC comment adds, noting that small, independent dealers are particularly challenged in their cost-cutting.

Moreover, shareholders shouldn’t be penalized for protecting their privacy, says the IIAC comment, which echoes the view that issuers should be required to pay for proxy delivery to all shareholders.

Allowing companies to avoid paying for proxy delivery, London-based Hermes Equity Ownership Services Ltd. says in its comment, “has become a serious deficiency in our proxy system.”

Although regulators are proposing required disclosure from firms that refuse to pay for delivery, the Hermes comment points out this may not do much because affected shareholders probably won’t learn of the company’s decision, which will be “disclosed in the proxy circular that [they] will not receive” until after the meeting.

The Hermes comment continues: “In our view, securities law should require issuers to send proxy related material (through [N&A] or otherwise) at their expense to all of their shareholders, irrespective of whether they choose to protect the privacy of their personal information. We urge the CSA to ensure that at least [N&A] cover all shareholders.”

Indeed, in several comments, one of the fundamental problems with the CSA proposal is that it isn’t broad enough in several respects. The CSA is planning to allow issuers to use N&A for only routine annual meetings. N&A won’t be allowed for “special meetings,” on the basis that these may involve more important items, such as the approval of major transactions. Also, issuers would be allowed to choose to use N&A for some shareholders and not others.
@page_break@Most of the comments argue that N&A should be allowed for all sorts of meetings, and that it should be used for all shareholders equally. In some comments, this is simply a cost consideration. As an N&A model is intended to generate savings for issuers, the more widely it can be used, the greater the savings.

But several comments also point out that limiting N&A to routine meetings will severely undermine its usefulness — particularly for junior issuers, as the rules of the
S&P/TSX Venture Exchange essentially make all members’ annual meetings count as special meetings. As the comment from Calgary-based GG Consulting Corp. explains: “Accordingly, although [N&A] might be more important for small- and mid-cap issuers, no venture issuer can use [N&A] as it is currently set out in the proposed regulations.”

Indeed, Broadridge’s comment warns that the implementation of the N&A proposal may not be economically viable in its current form. Between the fact the model may not be useful for venture-level issuers and the impact of other corporate laws that may limit its use, the Broadridge comment says, the number of shareholders eligible to receive N&A delivery and the number of issuers who can use it is “severely impacted.” The Broadridge comment estimates that only 19% of Canadian issuers could have chosen the new model in the 2010 proxy season, with just 15.3% of investors receiving materials this way.

Moreover, the Broadridge comment cautions that Canadian issuers won’t see cost savings as significant as those enjoyed by U.S. firms because previous reforms to disclosure rules in Canada have already generated some cost savings. The incremental benefit of the N&A model is probably just reduced printing and postage costs and, if N&A applies to only annual meetings, the amount won’t be material. If the savings are insignificant, the comment continues, introducing the N&A model may not be worth the effort.

Others comments object to the proposed narrow application of the new N&A model on more philosophical grounds. SHARE’s comment says that limiting N&A delivery to meetings that are not special meetings “is likely to perpetuate the already too common view that the election of directors and (re)appointment of auditors are ‘routine’ matters that require less attention from shareholders than ‘special’ resolutions.”

Rather, SHARE’s comment adds, the election of directors is “arguably the most crucial matter to be considered by shareholders each year.” And the auditing role is critical, too, it stresses: “Voting on directors and auditors is routine only in the sense that each happens annually. Securities regulation should encourage shareholders to view voting on directors and auditors as seriously as voting on other items.”

Many of the comments also express worry about the CSA’s plan to allow companies to pick and choose which investors to use the new model with. Some comments point out that allowing selective use of the N&A model will give companies an opportunity to “game” the system — using N&A for certain shareholders, on the basis that that is likely to lead to lower voting rates among that group, while soliciting votes from management-friendly shareholders with physical proxies.

According to the submission from Carol Hansell, senior partner with Davies Ward Phillips & Vineberg LLP in Toronto: “We suggest that such selectivity, at worst, introduces an ability to manipulate the proxy voting system to achieve a desired vote result and, at best, adds another complication to an already complicated process and another way that similarly situated shareholders may not be treated equally.”

Hansell’s comment also says the CSA’s initiative doesn’t address many of the common complaints with the proxy voting system.

In fact, a number of the submissions on the CSA’s proposal highlight many of these complaints — chief among them being the lack of certainty in the voting process. Others include overvoting, empty voting and unequal treatment of different shareholders.

Indeed, Hansell is now finalizing a report examining the proxy system in Canada — and is recommending reforms. Her report had not yet been published as Investment Executive went to press.

The Toronto-based Canadian Coalition for Good Governance, for one, says in its comment that an effective proxy voting system is essential to shareholder democracy: “It is of significant concern to our members that a shareholder voting its shares in Canada has no guarantee that those shares will be counted or counted accurately.”

The CCGG comment adds that the CSA needs to address this — and other problems with the proxy voting system — immediately.

Victoria-based British Columbia Investment Management Corp., which provides funds-management services for public bodies, also calls for making the proxy-voting process fully transparent and verifiable. Currently, although the proxy intermediary confirms that it has submitted an investor’s votes as directed, the BCIM comment says, the inves-tor doesn’t receive any assurance that they were voted as instructed: “The consequences of a miscast or missed vote can have serious economic implications,” which could swing the outcome of a merger approval or determine whether a contentious proposal passes. And proxy voting will be an even bigger issue as majority voting for directors becomes a more common practice.

“It is just a matter of time (if it hasn’t already happened without us knowing) until a significant proxy contest is declared lost, when it was really won,” says GG Consulting’s comment. “Unfortunately, under the existing regime, there is no way to show that the shareholders who voted were those entitled to vote, and the rightful shareholders may be stuck with a decision they did not support.” IE