Proxy access by law: a U.S. feature that’s coming to a Canadian bank in the near term

A little history will be made at Thursday’s annual meeting of the Toronto Dominion Bank when the first shareholder proposal on so-called “proxy access” is voted on by the company’s owners.

And in the following week that history will be repeated when shareholders of Royal Bank will give their assessment on a similar proposal that has, been part of the U.S. institutional framework for the past seven years, and which affects more that half the companies in the S&P 500 index.

The proposals – that are meant to allow shareholder-nominated director candidates to stand for election provided the shareholders meet certain criteria – have something else in common: both are the work of Lowell Weir, a Halifax-based accountant who over the years has been very active as a bank shareholder.

We were unable to reach Weir but in TD’s bank circular, he said he believes “proxy access is a fundamental shareholder right that will make directors more accountable and enhance shareholder value.”

If the proposal is passed at both meetings, then the two banks in their proxy material will be required to publish the names of those shareholder nominated directors who want to stand and become a board member.

Their names will be included, provided, of course, that the particular shareholders put their name forward. In this way the shareholder will, in effect, be part of a rival directors list. Each nominee is allowed 500 words to support their case.

But only particular shareholders (or a group of them) can apply: For starters the individual shareholder has to own three per cent of the bank and to have owned it or the past three years. And that’s a lot of stock: TD’s market cap is $121 billion, which means a holding of $3.6 billion; RBC’s market cap of $142 billion requires a stake of $4.26 billion.

And guess what: the money management arms of the banks are the largest shareholders of other banks. TD’s largest shareholder is RBC Global Asset Management while Royal’s largest owner is TD Asset Management. Indeed the top five shareholders at both banks are other bank-owned money managers. According to Bloomberg, Vanguard and Fidelity are the largest non-bank shareholders of TD and Royal.

In material mailed to shareholders, both banks oppose the proposal. TD said it didn’t support the proposal “because it mirrors the evolving approach to proxy access in the U.S. without taking into account rights already available to the bank’s shareholders in Canada.” Those rights fall under the Bank Act.

“Given that the proposal is non-compliant with the Bank Act, it cannot be implemented as proposed,” said TD, adding that its “not necessary or in the best interests of the bank.”

Maybe but at least six institutional shareholders, five of which are non-Canadian are planning their support, as is the CPP Investment Board.

And maybe more shareholders would be on side if the two proxy advisory firms. ISS and Glass Lewis had a similar view. ISS supported both proposals whereas Glass Lewis went the other way. ISS argued the board’s “control over the process” means the lack of an even playing field for shareholders to nominate directors.

And the argument from the two banks in 2017 may not hold sway in the future. In a report, Kingsdale Advisors said, after noting recent corporate governance developments (the separation of chair and CEO positions, majority voting, and say on pay,) the largest Canadian banks will be the first to hoist their sails with the rest of corporate Canada to follow, resulting in a “proxy access” inevitability in the near future.”

Financial Post

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