Voting Problems Dog Corporate Canada

By Janet McFarland
The
Globe and Mail
January 31, 2011

On the eve of a critical shareholder vote more than six years ago, executives at Iamgold Corp. discovered an unusual, and vexing, problem.

The votes on the company’s proposed deal to merge with Wheaton River Minerals Ltd. were flooding in from investors – and they just kept coming. By nightfall on the day before the shareholder meeting, Iamgold had received 125 votes for every 100 shares it had outstanding, a phenomenon known as “overvoting.” And no one could figure out what had gone awry.

“I remember leaving around 2 a.m. and we still didn’t really know what was going on,” recalls then-CEO Joseph Conway. “It was pretty wild.”

Imagine a federal election in which there are more ballots cast than there are registered voters: It would be a scandal of epic proportions. Yet in the corporate world, problems such as the one Iamgold encountered are far from the exception. For decades, people working inside the securities industry have complained about errors in counting shareholder votes on key matters such as takeovers and director proxy battles.

And the situation persists, largely ignored by regulators.

On critical matters, votes have been missed or recorded incorrectly or double-counted. Sometimes, two different shareholders end up casting votes with the same shares. Problems are compounded in the multiple-step system for submitting votes through a host of intermediaries, including brokerage firms and proxy advisory firms. Institutional investors say the system for vote confirmations to shareholders is also flawed and gives them inaccurate information.

Imagine a federal election in which there are more ballots cast than there are registered voters: It would be a scandal of epic proportions. Yet in the corporate world, problems such as the one Iamgold encountered are far from the exception. For decades, people working inside the securities industry have complained about errors in counting shareholder votes on key matters such as takeovers and director proxy battles.

And the situation persists, largely ignored by regulators.

On critical matters, votes have been missed or recorded incorrectly or double-counted. Sometimes, two different shareholders end up casting votes with the same shares. Problems are compounded in the multiple-step system for submitting votes through a host of intermediaries, including brokerage firms and proxy advisory firms. Institutional investors say the system for vote confirmations to shareholders is also flawed and gives them inaccurate information.

Why can’t Corporate Canada count votes?

“We need to blow up the system and rebuild it from scratch,” says Wayne Kozun, senior vice-president of public equity investing at the Ontario Teachers’ Pension Plan, one of Canada’s largest institutional investors.

While insiders have decried the difficulties they face diagnosing and fixing problems in the opaquely tangled system used to tally votes, securities watchdogs have shown little appetite to tackle the issue.

But perhaps that is starting to change.

The U.S. Securities and Exchange Commission took a first step last year, issuing a call for comments from the public on ideas for reform. In the wake of the SEC’s action, the Ontario Securities Commission also asked for reform ideas earlier this month. The effort is at an early stage, and the commission has not proposed any specific changes.

Last year, a group of lawyers from Toronto firm Davies Ward Phillips & Vineberg LLP decided to independently write a report on ways to repair the proxy voting system, arguing they and their clients were fed up after watching errors go unfixed for years. Securities lawyer Carol Hansell, who co-authored the report, said it has been difficult to get enough focus on the problem to “elevate it” to a level where people will actually fix it.

People who work within the system say the problems must be addressed, especially with accurate vote counts becoming more important with the advent of annual “say on pay” votes on executive compensation and changes to voting for directors on boards.

“If you’re working on a proxy fight or a contested takeover, at every single one of those meetings mistakes occur,” says Wes Hall, who tracks and counts shareholder votes as part of his work as CEO of Toronto proxy solicitation firm Kingsdale Shareholder Services Inc.

Mr. Hall is hired by companies to help them lobby shareholders and “get out the vote” on major issues. But a key part of his job is to be what he calls a “plumber” who reaches into the complex mechanics of the shareholder voting system to fix clogs and sort out voting errors. He spends a lot of his time monitoring major shareholders’ voting intentions and checking that the vote has actually been received and recorded properly.

It’s a business model built on an expectation that the system won’t work properly.

“It’s crazy that I have a job,” Mr. Hall laughs. “But it shows why my job exists – or a part of it.” Iamgold realized it had a voting problem as soon as it saw its proxy count come in the night before its meeting in July, 2004. But figuring out the cause of the problem wasn’t nearly so obvious.

The company’s lawyers and others, including Mr. Hall, pored over the voting results to discover that many shares had been voted twice because they had been lent out in securities lending programs run by brokerage firms. They had been voted for by both the lender and the borrower.

After questionable proxies were eliminated, the final count showed that shareholders had rejected the merger with Wheaton River by a margin of 16 million votes. Those 26 million excess shares voted were critical in determining the outcome.

Mr. Hall says Iamgold had the worst case of overvoting he has ever seen in his work. But he says problems with borrowed shares crop up commonly, even though it is supposed to be clear which party gets to vote them.

Overvoting can be hard to fix because most votes are typically cast just before the deal deadline, when it can be too late to get to the root of voting issues that emerge, says Ms. Hansell.

A common last-minute solution to overvoting is to simply “prorate” the excess votes. In simple terms, if there are 10 per cent too many votes cast, everyone’s vote is reduced by 10 per cent, to ensure no more than 100 per cent of shares are voted.

From the perspective of democratic fairness, the solution is “horrifying” for shareholders who voted correctly, Ms. Hansell says.

The Davies report, completed in October, concludes many errors in counting votes occur because of the complex series of hands that votes must pass through before they are recorded and counted. A “waterfall of intermediaries” work for companies and brokerage firms to receive and transmit votes, creating numerous places in the system for errors to occur.

Investors can ask for confirmations that their votes were received. But those confirmations typically don’t confirm specifically how many shares were voted or even which way they were voted, making it difficult for investors to spot errors.

Mr. Kozun at Teachers said institutional investors are adopting codes of conduct that require them to ensure they are voting their shares responsibly. In such an environment, he said Teachers needs proper confirmations that its votes have been cast correctly.

“I can order a book from Amazon in Seattle and I can see it every step of the way – see it cross customs in Vancouver and see it arrive in Mississauga – and this is for a $5 book,” he notes. “But I can’t do this for a vote of a $1-billion shareholding I have.”

Toronto securities lawyer Kevin Thomson, who has worked on many major mergers and acquisition deals, says he often ponders how many “life-changing” votes in Canada have been approved or denied based on flawed voting data, and no one ever knows.

“This is a big issue,” he says. “When you’re completing an M&A deal through a structure that requires a shareholder vote, it goes without saying this is the most important event that will occur in the life of a public company. You’d hope you get that right.”

U.S. securities lawyer Gil Sparks warned last year that vote-counting problems are so systemic that any vote carried or defeated by less than a 10-per-cent margin is questionable. The Davies report says there should be a single computer platform that all participants would use to distribute proxies and record votes, with the ability to audit voting results up and down the chain. The issue, however, is who would pay the significant sums to amend or build it.

Stephen Griggs, executive director of the Canadian Coalition for Good Governance, says public companies should be required to guarantee or certify the accuracy of their own votes. That would give them an incentive to pressure intermediaries to improve their technology.

Mr. Hall, however, says companies don’t have any legal ability to audit the work of outside companies, so it would be unfair to force them to certify voting results. He says brokerage firms and other firms who record votes should be targeted by regulators to improve the processes. Ms. Hansell says she believes regulators need to examine the problems in far greater depth before deciding on a fix. She argues the OSC should set up a task force of experts, including people who understand the technology used in the voting system.

“You can’t get solutions until you really understand the problems,” she argues.

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