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2. Day One – Shareholders’ Panel

PANEL SUMMARY:

This session focused on the shareholder’s economic and governance roles, policy objectives, expectations of the proxy voting process and perceived opportunities for improvement. Specific topics included the approaches employed by the panelists’ organizations in the lead-up to proxy voting, issues surrounding share lending and the possibility of over-voting, and the need for increased transparency in the proxy voting system as a whole.

Danielle LaRivière – Partner, Operations and Compliance, Jarislowsky Fraser Limited (JFL), Montreal. Ms. LaRivière has been a partner at JFL since 2004, following a 16-year stay at the CN Investment Division (Pension Fund), first as a research analyst and finally as portfolio manager. In her current role within operations and compliance, Ms. LaRivière is responsible for the proxy voting process at JFL, ensuring that voting is executed in accordance with the firm’s policies and are properly documented.

Paul S. Schneider – Senior Investment Associate, Corporate Governance, Ontario Teachers’ Pension Plan (OTPP). Mr. Schneider joined the OTPP in January 2010 and is currently responsible for the Fund’s global corporate governance initiatives, including corporate governance policy development, shareholder engagement and proxy voting activities. Prior to joining OTPP, he spent six years at the Canadian Coalition for Good Governance (CCGG), where he contributed to the Coalition’s policies and guidelines on a wide range of governance-related issues.

Jason J. Milne – Manager, ESG Policy and Research, Philips Hager & North. Mr. Milne is the current in-house expert on environmental, social and governance issues as they relate to the investment process. His current responsibility at PH&N is overseeing proxy voting, and prior to joining PH&N he worked as a mutual fund accountant in the corporate finance department of a national brokerage firm.

DISCUSSION:

Setting the Stage for the Panel (Bill Mackenzie)

• This group represents the money at the table and any solutions must include the input of shareholders
• So often it used to be that voting proxies was a secondary concern of shareholders.
• There has been an encouraging shift on the part of institutional shareholders to make voting a primary responsibility.
• There are three baskets of change this summit should be concentrating on

1. Confidence in the proxy voting system.
2. Ensuring a simple, efficiency and effective system.
3. The representation and protection of shareholder rights.

TOPIC 1- How does the panel undertake proxy voting?

Danielle LaRivière:

• Jarislowsky Fraser (JF) takes proxy voting seriously, and clients will often request that JF vote on their behalf.
• The Investment Strategy Committee reviews all investment decisions or upcoming proxies and seeks to ensure that no outstanding questions are left on the table.
• Decisions are reached in part using research provided by Glass Lewis and ISS reports, as well as new information from issuers and the market.
• Proxy voting personnel work to be consistent and any votes against the recommendations of management are well documented throughout the process.

“The Investment Strategy Committee reviews all investment decisions or upcoming proxies and seeks to ensure that no outstanding questions are left on the table. Decisions are reached in part using research provided by Glass Lewis and ISS reports, as well as new information from issuers and the market.”

- Danielle LaRivière,

“The OTPP uses Glass Lewis (owned by OTPP) as an input into the entire system of proxy decision-making but they are not beholden to Glass Lewis’ recommendations, which are only one part of the information gathering process.”

- Paul Schneider,

Ontario Teachers

“PH&N votes based on its internal proxy guidelines. As of this year, PH&N is using ISS, but ysed previously the ProxyEdge platform through Broadridge, with research provided by Glass Lewis.”

- Jason Milne,

Philips Hager & North

Paul Schneider:

• The Ontario Teachers Pension Plan votes through an internal process, based on its proxy voting guidelines.
• These guidelines are made public on the OTPP website and are a guiding framework for voting, not a set of rigid rules.
• If the OTPP votes against management or against their guidelines (based on case by case analysis), a commentary provided as to why the OTPP chose to vote the way it did.
• The OTPP publishes votes slightly prior to the meetings it votes in.
• The OTPP uses Glass Lewis as an input into the entire system of proxy decision-making but they are not beholden to Glass Lewis’ recommendations; those recommendations are only one part of the information gathering process.
• As well, Glass Lewis adheres to its conflict of interest policy when advising OTPP, given that OTPP now owns Glass Lewis.
• In addition to its own analysis, the OTPP belongs to international governance networks (CCGG, ICGN, etc.) to understand emerging trends in corporate governance and best practices, but not to get voting advice from other institutions.

Jason Milne:

• Philips Hager & North (PH&N) takes an active approach to proxy voting and vote based on their internal proxy guidelines
• The guidelines are instructive, but are not meant to be rigid rules, and so they are continually reviewed and updated to account for emerging best practices.

• As of this year, PH&N is using ISS for a voting platform and for vote recommendations, but in previous years they utilized the ProxyEdge platform through Broadridge, with research provided by Glass Lewis.
• Voting recommendation are generated by ISS, but are based on PH&N’s internal guidelines that have been input into the system.
• PH&N is required to vote in the best interests of its clients, and so it will sometimes vote against its own guidelines on a case-by-case basis, though such a vote must be reviewed by PH&N’s Corporate Governance committee prior to being cast.
• Research is currently purchased from both ISS and Glass Lewis to inform the internal voting process.
• Approximately 80% of PH&N’s portfolio is composed of institutional funds and the firm maintains an ongoing dialogue with its institutional clients regarding how they plan to vote and the continued importance of shareholder voting and corporate governance practices in general.

Bill Mackenzie:

• Hermes, the pension plan of British Telecom workers, has had an established department to vote proxies and to be an active owner, for many years.
• What began as a department of 7 people in the UK is now 30 people, but Hermes has expanded beyond BT workers as their sole beneficiaries.
• Hermes votes based on its corporate governance proxy voting guidelines, which are loosely worded, and meant to encourage investigation into what systems are in place at a given portfolio company.
• Portfolio companies are examined on a case-by-case basis with respect to these guidelines prior to a vote being cast.

TOPIC 2- Issues Affecting Shareholders

“Hermes votes based on its corporate governance proxy voting guidelines, which are loosely worded, and meant to encourage investigation into what systems are in place at a given portfolio company.”

- Bill Mackenzie,

Hermes

“Shareholders with broker-held accounts face difficulties in voting because many broker-held platforms lack the necessary fields to send the requisite proxy voting information to us.”

“When a retail investor sets up an account, proxy voting is set up through a custodian who has control over that voting account. Custodian are often a middle office that does not have an expertise in proxy voting, with a high turnover in personnel during proxy season.”

- Danielle LaRivière,

Jarislowsky Fraser

Bill Mackenzie:

• We need to focus on building confidence in the system and what problems are inhibiting that.
• Indiscriminate cutoff dates from custodians and sub-custodians are one of the major problems facing institutional investors.
• As an example, proxy meeting cutoffs through a foreign custodian are 10 days and it is not clear why this is the case and what motivated this rule.

Danielle LaRivière:

• Retail investors face a number of difficulties with respect to voting, and they vary depending on whether the retail shareholder has a broker-held account or a multi-manager account.

Broker-Held Accounts:

• Shareholders with broker-held accounts face difficulties in voting because many broker-held platforms lack the necessary fields to send the requisite proxy voting information to Jarislowsky Fraser.
• These platforms were set up 20 years ago when proxy voting was much less prominent among investors and retail shareholders, and so those shareholders who choose a broker-held account are indirectly waiving their voting rights because the broker platforms do not have the capacity to vote.
• These retail clients represent 20% of all shareholders who want their votes cast by professionals, and if those votes can’t be cast, they want to know why.

Multi-Manager Retail Accounts:

• Managers should be able to aggregate votes by manager, but they are not able to do so in these accounts.
• Managers of these accounts are able to send clients their statements showing the shares they own but they still cannot aggregate for voting purposes.
• When a retail investor sets up an account, proxy voting is actually set up through a custodian and that custodian has control over that voting account.
• The relationship between a manager and the custodian is important as a result

Once the ballot is in, if it is incorrectly coded, then it will not get counted so it is crucial that the personnel in charge of submitting the ballots is checking that everything has been properly executed.

Recalling loans is supposed to occur on T+3, but this often does not occur. The system is very manual and it is difficult to get shares back on time, but when shares are not recalled on time, the risk of over voting and empty voting increases.”

- Danielle LaRivière,

Jarislowsky Fraser

“Institutional voting is a major area of concern because proxy voting is growing in prominence and these votes are increasingly visible with 3 areas of concern:

• No confirmation of count or of compliance;

• No reconciliation of shareholder votes and holdings;

• Difficult system mapping.”

- Paul Schneider,

Ontario Teachers

Recalling Shares Out on Loan:

• Recalling of lent securities is supposed to occur on T+3, but this often does not occur.
• The system is, for the most part, very manual and it is difficult to get shares back on time, but when shares are not recalled on time, the risk of over voting and empty voting increases.
• Should there be a discussion to determine if penalties should be levied against those who do not return shares in time?
• We need to consider all options as to how to ensure compliance with T+3.

Paul Schneider:

• Transparency is where, from a shareholder perspective, the confidence issues in the system stem from.
• The institutional vote is now a major area of concern because proxy voting is growing in prominence and so these votes are becoming highly visible.
• The OTPP sees three areas of concern:

1) Lack of an end-to-end confirmation of the vote

• At present, the OTPP can confirm that Broadridge has received a vote, but there is no confirmation that it was counted or if it was entered as instructed.
• SEDAR aggregated results are cold comfort
• This concern becomes more acute, the more contested a meeting becomes.
• It is important for shareholders and issuers to know the vote is coming in properly and accurately, but without end-to-end confirmation, there will remain a nagging question around voting accuracy.
• Voting should not be based on hope, voting should be based on the idea that the vote will arrive as it was intended to.

“We need clarity on a system to say ‘this is where the vote goes when a share is lent out’

OTPP is concerned by how votes are being dealt with by tabulators, specifi-cally First In First Out (FIFO) and pro-rating as corrections for over voting. The problem is one of fairness: Those who get their votes in prior to reaching the number of outstanding shares will have their votes counted, but those who submit afterwards do not.”

- Paul Schneider,

Ontario Teachers

2) Over Voting:

• The main culprit behind over voting appears to be share lending and as of now we have no way to reconcile that shareholder A had X number of shares and voted X number.
• A major question to address is, when a share is out on loan, who has the vote? We need clarity on this issue, and a system around this to say “this is where the vote goes when a share is lent out”
• This concern ties back into the concerns noted earlier about shares being recalled by T+3; the system needs to recall shares fast enough for them to be voted at meetings.
• The OTPP also has a concern with how votes are being dealt with by tabulators, specifically First In First Out (FIFO) and pro-rating as corrections for over voting.
• The problem with FIFO is one of fairness: Those who get their votes in prior to reaching the number of outstanding shares will have their votes counted, but those who submit afterwards do not.
• There is also a lack of transparency as to which method is applied by tabulators to fix over voting as well; both methods disenfranchise voters who have a legitimate right to vote and voters never know which is used.
• These processes only seem to kick in when the number of votes cast exceed the total number of shares outstanding.
• But even if the number of outstanding shares is not reached, over voting remains a problem because there is still the potential for those who should not have a vote to be voting.
• Voters who should not be able to influence the votes are doing so even when the number of votes cast is below the number of shares outstanding.

3) Mapping out the proxy voting system

• The system is very complex, and it is uncertain if all the actors know the roles of each other, and how those roles work together.
• This type of complexity erodes confidence because market actors don’t understand what each other are doing.
• We need to aim to simplify the system.
• Market actors should be able to easily determine who they should be approaching to rectify problems that develop at different points in the current system, but right now that is difficult because of the layers of complexity.

• The materials provided by RBC Dexia may contain a map of the proxy voting system
• ISS did a more complete map of the US system as well, including the direction of money flows through the whole process
• Confidence is key to enforcing the rights of shareholders because it affects the way we think of the system

Jason Milne:

“ Confidence is key to enforcing the rights of shareholders because it affects the way we think of the system”