This article appears in the May 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
On any given trading day, shareholders can vote with their wallets; in proxy season, they vote for real.
Maryland-based Institutional Shareholder Services Inc. (ISS) has adopted its first set of voting recommendations for Canadian companies regarding board diversity. That policy — which takes effect for shareholder votes starting Feb. 1, 2024 — will recommend investors withhold votes for nominating committee chairs of S&P/TSX composite index companies that have no racial diversity on their boards.
In adopting the change, ISS said institutional investors have become increasingly vocal in their demands for greater board diversity on the basis that corporate boards should reflect companies’ customers and the communities in which they operate.
Regulators also are responding to these issues. In April, the Canadian Securities Administrators(CSA) put forth proposals to expand issuers’ disclosure requirements beyond their current focus on gender to include race, sexual orientation and physical disabilities.
The CSA put forward two options for reform, reflecting a fundamental disagreement among provincial authorities on how to enhance the information investors receive about corporate diversity.
The option favoured by the Ontario Securities Commission would require issuers to disclose the proportion of their boards and executive roles comprised of people who belong to designated groups (visible minorities, Indigenous peoples and people with disabilities) in addition to current requirements that apply only to gender.
An alternative approach — favoured by regulators in Alberta, British Columbia, Saskatchewan and the Northwest Territories — wouldn’t mandate disclosure regarding specific groups. Instead, the rules would require issuers to disclose their approach to diversity, including targets and how they plan to meet them.
The regulators’ differing approaches (which are out for consultation until July 12) have the same basic objective, however: ensuring investors have the information they need to make proxy voting and investing decisions — which increasingly include diversity considerations beyond gender.
Proxy voting at the big banks this year indicated investors are increasingly concerned with these and other environmental, social and governance issues.
At the top of the list for bank shareholders this year was racial equity, the subject of shareholder proposals at Royal Bank of Canada and Bank of Montreal. Resolutions calling on the banks to carry out independent audits to identify business practices that produce inferior outcomes for racial minorities and Indigenous people attracted strong support from shareholders of both banks: 42.2% of RBC shareholders voted in favour, as did 37.2% at BMO.
Those resolutions were filed by the Vancouver-based Shareholder Association for Research and Education (SHARE) on behalf of the Atkinson Foundation. “Historically and persistently, banks have exacerbated the racial wealth gap through overt policies and unconscious bias,” said Colette Murphy, CEO at the Atkinson Foundation, in a statement following the votes. “BMO shareholders have joined their peers at Royal Bank in sending a crystal clear message: the status quo is unacceptable.”
Investors pushing for action on racial equity is beginning to affect banks. Previous proposals filed by SHARE and the B.C. General Employees’ Union (BCGEU) prompted Toronto-Dominion Bank, CIBC and National Bank of Canada to pledge to undertake racial equity audits. Those proposals were withdrawn before being put to shareholder votes.
The initial results of TD’s audit — which is examining its workplace policies, including recruitment, retention and talent development — are due by June 30.
CIBC’s audit also is beginning a review of employment policies and will include a review of business practices. The bank said the results of the first part will be reported in its fiscal 2024 disclosures, with the initial results from the second part of the audit to be reported in fiscal 2025. Any reform recommendations will come in fiscal 2026.
National Bank said it will work with SHARE to audit its product, services and HR practices.
“Any racial inequity in banking systems, services and practices will have outsized impacts for racialized and Indigenous people across the country, and for our economy as a whole,” said Kevin Thomas, CEO of SHARE, in response to the shareholder votes at BMO and RBC.
A separate resolution from the BCGEU on Indigenous issues also received meaningful shareholder support at RBC. The proposal calling on the bank to ensure its clients are meeting their obligations to obtain free, prior and informed consent from Indigenous people affected by the bank’s activities was endorsed by 26.7% of RBC’s shareholders.
Outside of diversity and racial equity, the environment — and climate change in particular — also garnered meaningful shareholder support at the banks’ investor meetings.
Resolutions by the Montreal-based Mouvement d’éducation et de défense des actionnaires calling for advisory votes on the banks’ environmental policies were on the ballots at the big banks’ AGMs again this year after garnering meaningful support in last year’s proxy season. In 2022, shareholder support for these proposals ranged from 15% at BMO to 25.4% at TD. Laurentian Bank of Canada was the first to pledge to adopt an advisory vote on its environmental policies.
Shareholder support for the same proposals was similar this year, ranging from 16.1% at BMO to 21.4% at TD.
Other climate-focused proposals did better. A proposal from SHARE and Vancity Investment Management Ltd. at Bank of Nova Scotia’s meeting called on the bank to report the net-zero transition plans of clients with large greenhouse-gas emissions and how the bank evaluates those plans as part of its own net-zero goals. The proposal received almost 25% support from Scotiabank’s shareholders.
“From an investor vantage point, failing to set these expectations could expose Scotiabank to considerable material financial risks,” the firms said in a statement supporting the resolution. Those risks include stranded assets, declining credit quality and loss of goodwill, they said.
A similar resolution from Vancity and Investors for Paris Compliance submitted to TD called for disclosure of specific plans to align financing activities with emission-reduction targets. That proposal attracted support from 23.5% of TD’s shareholders.
Demands for insight into how financial institutions plan to meet their climate goals also are being heard on Wall Street. According to California-based shareholder advocacy group As You Sow, a shareholder resolution at Goldman Sachs Group Inc. asking for the bank’s transition plan received support from 30% of shareholders at its latest meeting, and 28.5% endorsed a similar proposal at Bank of America.