Activists' agenda and the banks
by James Langton
There is no crystal ball when it comes to issues of corporate governance, but the big banks' proxy circulars often give a preview of the future. This year, shareholder resolutions abound.
The banks are the chosen targets of shareholder proposals. As large, diverse companies, they give shareholder activists the widest possible audience for their agendas. And while the banks routinely argue against the shareholder resolutions, the issues the resolutions raise often set the tone for ever-evolving governance standards in Canada.
For example, last year the banks were hit with proposals demanding better disclosure of the pension benefits their executives receive. The idea caught on with mainstream governance advocates, and this year the banks have improved benefits disclosure. Now, the issue is spreading, and the regulators have taken up the cry.
In mid-January, the Canadian Securities Administrators issued a notice on how firms should go about providing enhanced benefits disclosure. The notice suggests that such disclosure is best delivered in the proxy circular, and set out the sort of information that should be included and the types of warnings and caveats that should accompany such disclosure. It also notes that the regulators themselves may start to mandate reporting on this subject.
At this point, executive benefits disclosure remains voluntary. But shareholders are demanding it - and issuers are delivering - partly as a result of last year's campaign. The regulators pledge to monitor developments in this area, says the CSA notice: "...and may decide in the future that amendments to executive compensation disclosure requirements are warranted."
So what is on the agendas of this year's annual general meetings? Shareholder advocates - primarily the Montreal-based Association for the Protection of Quebec Savers and Investors Inc., its founder Yves Michaud and advocate Bob Verdun of Kitchener, Ont. - are after the banks with a new round of proposals. As of late January, only five of the six largest national banks had released their proxy circulars (TD Bank Financial Group is the exception), but it looks as if the banks face a heavy list of shareholder resolutions at their annual meetings in the coming months.
Bank of Nova Scotia has nine shareholder proposals on its agenda; there are eight targeting Bank of Montreal; Royal Bank of Canada and CIBC are each facing seven; and National Bank of Canada has just five proposals. Even without TD and Laurentian Bank of Canada, the 36 proposals before the banks so far this year exceed last year's total of 32 (according to data from Toronto's Fairvest Securities Corp.).
In mid-January, the Canadian Securities Administrators issued a notice on how firms should go about providing enhanced benefits disclosure. The notice suggests that such disclosure is best delivered in the proxy circular, and set out the sort of information that should be included and the types of warnings and caveats that should accompany such disclosure. It also notes that the regulators themselves may start to mandate reporting on this subject.
At this point, executive benefits disclosure remains voluntary. But shareholders are demanding it - and issuers are delivering - partly as a result of last year's campaign. The regulators pledge to monitor developments in this area, says the CSA notice: "...and may decide in the future that amendments to executive compensation disclosure requirements are warranted."
So what is on the agendas of this year's annual general meetings? Shareholder advocates - primarily the Montreal-based Association for the Protection of Quebec Savers and Investors Inc., its founder Yves Michaud and advocate Bob Verdun of Kitchener, Ont. - are after the banks with a new round of proposals. As of late January, only five of the six largest national banks had released their proxy circulars (TD Bank Financial Group is the exception), but it looks as if the banks face a heavy list of shareholder resolutions at their annual meetings in the coming months.
Bank of Nova Scotia has nine shareholder proposals on its agenda; there are eight targeting Bank of Montreal; Royal Bank of Canada and CIBC are each facing seven; and National Bank of Canada has just five proposals. Even without TD and Laurentian Bank of Canada, the 36 proposals before the banks so far this year exceed last year's total of 32 (according to data from Toronto's Fairvest Securities Corp.).
Admittedly, the banks get more than their fair share of shareholder proposals. Fairvest's Corporate Governance Review reports that in 2004, 27 companies tabled a total of 67 shareholder proposals, while another 51 proposals were withdrawn before making it onto the proxies. Still, that's an average of less than three per firm that actually made it onto issuers' proxies.
Of the 36 proposals targeting the banks so far this year, none are receiving the support of management. This is not unusual, however. Last year, BMO was the only bank to support a shareholder proposal.
As well, most shareholders tend to side with management. Fairvest reports that overall support for other shareholder resolutions in 2004 was at its lowest in five years - at just 13.6%, down from 23.3% the previous year.
Fairvest itself supported only slightly more than a quarter of the shareholder resolutions that were opposed by management last year. It also found that only three of the 67 proposals that went to shareholders last year received more than 50% support; and management favoured two of those, anyway.
Among the proposals faced by the banks this year are a handful of industry-specific issues, including:
- calls from Michaud to all the banks to close their subsidiaries in tax havens for fear of facilitating tax evasion and money laundering;
- a proposal from Verdun to a couple of the banks demanding that they place the interests of their credit cardholders ahead of merchants;
- a proposal from Vancouver-based Real Assets Investment Management Inc. that Scotiabank report to shareholders its policies and procedures for dealing with the risk to its businesses due to climate change
Several other industry-specific proposals were put to the banks but have since been withdrawn. BMO saw two proposals withdrawn - one from Verdun regarding proxy voting disclosure by the mutual funds managed by the bank's asset-management arm; and another from Vancouver's Ethical Funds Inc. concerning the bank's implementation of the so-called "equator principles" for project financing.
The equator principles are guidelines developed by the World Bank's International Finance Corp. They are designed to help financial institutions manage social and environmental issues when financing projects, particularly in the developing world.
The resolution was withdrawn after BMO pledged to adopt the equator principles by Oct. 31, 2005, its fiscal yearend. CIBC, Scotiabank and Royal Bank have already adopted the principles, along with global banking giants Citigroup Inc., Credit Suisse Group and ING Group.
In its circular, BMO also declares that it's in favour of proxy voting disclosure by mutual funds, pledging to meet or exceed standards required by Canadian regulators. The same proposal was also withdrawn from the slates of resolutions facing Scotiabank and CIBC when they gave similar assurances.
In total, four proposals were withdrawn from CIBC's slate. Apart from agreeing to follow proxy voting disclosure guidelines for mutual funds whenever those rules take effect, it also agrees to defend the rights of credit cardholders from both unfair international agreements affecting cardholders and unethical merchants. And it is going along with Real Assets' demands for better disclosure of its policies regarding risk from climate change. (As has Royal Bank. The two banks have committed to assess those risks and improve reporting on the subject.) And APEIQ dropped a proposal demanding audit fee disclosure, based on the disclosure that CIBC includes it elsewhere in its proxy.
Scotiabank had two proposals withdrawn - the mutual fund voting proposal, and one from APEIQ regarding a prohibition on the bank's auditors providing non-audit related services. The latter was withdrawn based on the bank's compliance with the rules in this area and its disclosure in its annual report and annual information form.
While these few proposals target the banks directly, most of the shareholder resolutions on the table this year deal with corporate governance issues that have broader application, including a salary ceiling on executive compensation; limiting independent directors to 10-year terms; cumulative voting for slates of directors; replacing stock option plans with restricted share plans; a requirement for directors to receive 75% shareholder support in order to be elected; and the need for directors who change their principal occupations to resign.
Given management's opposition to these proposals and the voting record of shareholders, it's hard to imagine that many of these ideas will receive much support. But that doesn't mean these resolutions aren't important. While shareholder proposals may lack votes, they can spark change. Governance practices that are now common - such as separating the offices of chairman and CEO - were routinely rejected in shareholder votes before winning acceptance. Requiring executives to certify their financials is another practice that appeared as a shareholder resolution before regulators adopted it.
Similarly, benefits are now more widely disclosed. That could lead to further change. Now that figures are being disclosed, bank executives are being roundly criticized for loading up on gold-plated pensions when they are already richly compensated.
Some issues have a better chance of garnering support than others. Resolutions that propose interfering with management decisions tend not to do well. And banks have been asked in proxy circulars to abandon tax havens before; the idea garnered minimal support.
But proposals dealing with the construction and operation of boards have a better chance of gaining traction. For example, in a submission regarding proposed amendments to federal corporate law, the Canadian Coalition for Good Governance recommends that companies present their directors for election in ballot form, and that shareholders have the right to vote against a director (and for that vote to be binding if a majority of the votes cast oppose the director's election).
It's hard to say what will catch voters' attention this time around. But, like it or not, the banks are on the leading edge of corporate governance, thanks to the diligence of their activist shareholders.
