In late September, two of Canada’s largest banks became the first large issuers in the country to allow major shareholders to nominate directors to serve on their boards. This move took aim at a significant weakness in Canadian shareholder democracy: the inability of shareholders to put forward director nominees in uncontested annual meetings (known as proxy access). It was a step in the right direction, but there is a lot more work to be done in Canada.
Shareholder democracy in Canada, particularly compared to that of the U.S., has had its challenges for years. Its flaws were illuminated by Carol Hansell’s seminal white paper in 2010, and have been raised repeatedly by the Canadian Coalition of Good Governance (CCGG) and others since. Along with proxy access, empty voting, non-binding “say on pay” votes and the inordinate influence of proxy advisors are also frequently cited as other drags on the system
It should thus come as no surprise that, in Canada, trust in business and the underlying governance of public companies is historically low. In the 17 years that Edelman has studied trust, 2017 marked one of the sharpest year-over-year declines in trust in business.
On October 5th, Edelman introduced an expansion of its global trust survey to include the investment community in 14 countries, including Canada, specifically examining the factors that influence what institutional investors trust (or don’t trust) about public companies. Given the aforementioned systemic challenges, and that institutional ownership represents over 50 percent of Canada’s total stock market capitalization, this new survey is particularly relevant for Canadian investors.
Some of the data is intuitive: 94 percent agree that trustworthy companies deserve a larger premium. By the same token, trust in a company is the most important determinant when considering investments (followed closely by ethical standards and valuation relative to peers).
More telling is the data tied to shareholder democracy: 77 percent of respondents agree that “providing equal voting rights to shareholders impacts trust in a company.” In addition, the majority of investors surveyed view themselves as agents of change, and 87 percent will support a reputable activist investor if they believe change is necessary at a company they either invest in or would recommend doing so.
This sentiment aligns with the notion that increasing institutional ownership in Canada “has created a class of investors with the sophistication and economic incentive to use its influence to improve governance practices.” Those are the words of former Ontario Securities Commission Chair Howard Wetston from a 2015 speech to the CCGG, and they proved to be prescient. TD and RBC were certainly listening.
Canada will not solve the shortcomings of its shareholder democracy overnight. But the Edelman data does light the way for issuers looking to retain (or win back) the trust of their owners. An issuer’s ability to keep investors well informed is a key determinant of trust (93 percent say that keeping investors consistently well-informed impacts trust); conversely, 58 percent believe that current disclosure requirements are not doing enough to maintain trust.
All of this speaks to the need for an issuer to invest in its relationship with investors, to communicate regularly and effectively, to deliver on its promises, and to behave well (both socially and environmentally, as the trust data also ascribes greater importance to companies being good corporate citizens).
The downside of ignoring this: 80 percent of those surveyed believe companies are ill prepared to effectively handle being targeted by an activist investor. Proxy contests in Canada may be down from their zenith in 2012, but it’s clear that Canadian investors value trust in the companies they invest in and are increasingly emboldened to take action if they feel that trust is violated.
David Ryan is senior vice president and national practice leader, financial communications, Edelman Canada.