Canada: Horns Locked Between Investors And Issuers Over Proxy Advisory Firm Regulation

In our May 2014 Blakes Bulletin: CSA's Light Touch Proxy Advisory Firm Proposal May Disappoint Issuers, we predicted that the Canadian Securities Administrators' (CSA) proposed National Policy 25-201 – Guidance for Proxy Advisory Firms (Proposed Policy) might disappoint Canadian issuers. The proposed guidelines have provoked lively criticism from not only issuers, but also institutional investors and their associations, with both groups locking horns on whether proxy advisory firms should be subject to prescriptive requirements. The comment period was extended to July 23, 2014, presumably to allow for an opportunity for more capital market participants to provide their views.

Issuers' general reaction is that the Proposed Policy is "mild," "unobtrusive" and ought to be more prescriptive to have an impact on the quality of proxy advisory services in Canada. At least one commenter noted that it would be a "lost opportunity" for the CSA and Canadian capital markets if the policy does not adopt a more prescriptive approach. On the other hand, institutional investors and their associations, such as the Canadian Coalition for Good Governance (CCGG), argue that the Proposed Policy – although limited to providing voluntary guidance on proxy advisory practices and disclosure – is unnecessary, inefficient and overreaching. 

As discussed in our last bulletin, the Proposed Policy did not mandate any specific requirements for proxy advisory firms. Instead, it outlined the CSA's general expectations of proxy advisory firms in relation to managing potential conflicts of interest, promoting the transparency and accuracy of their reports, disclosing the process proxy advisory firms follow for developing their voting guidelines, and communicating with stakeholders, including investors, issuers and the media.

The following highlights key reactions from market participants:


Many issuers are concerned with factual inaccuracies contained in proxy advisors' reports and suggest requiring that draft reports be shared with issuers before they are sent to the proxy advisors' institutional investor clients. Issuers would then have an opportunity to correct any factual errors before institutional investors receive the report. Some issuers have called for proxy advisory firms to be more accountable for their reports by certifying or otherwise attesting to the contents.

Some issuers have raised concerns over the qualifications of those preparing the proxy advisory reports, noting that analyzing and comparing a large volume of proxy materials requires a great deal of skill and knowledge of various industries. Further, issuers have noted that non-professionals who prepare proxy advisory reports are not subject to oversight by a professional association and that research or other work outsourced to third parties raise additional quality concerns. As the Canadian market for proxy advisory services is dominated by two firms, a number of issuers believe that this lack of competition may result in lower standards of care and diligence.

One Size Does Not Fit All

A consistent theme of issuers' submissions to date was the CSA's failure to address concerns over proxy advisory firms' "one-size-fits-all" approach, especially with respect to evaluating the quality of issuer corporate governance. For example, it has been suggested that a simple comparative analysis of executive compensation among a group of companies does not take into account a variety of considerations with respect to performance metrics and individual motivation that companies often look to when making decisions on compensation. Similarly, issuers have commented that "over-boarding" is analyzed by proxy advisors based simply on the number of boards and does not take into consideration actual time commitments or personal capacity. Executive compensation specialists who have commented point out that issuers are increasingly designing compensation programs and governance policies to comply with proxy advisors' voting guidelines and may be pressured to adopt practices that are inconsistent with their overall business strategies and policy.

The CSA, while acknowledging the problems associated with a "one-size-fits-all" approach, responded by noting that an issuer can include in its information circular a discussion of its approach to corporate governance when certain "one-size-fits-all" standards may not be suitable due to the issuer's specific circumstances. However, from the issuers' perspective, by the time proxy advisory firms issue their reports, an issuer would have already sent its information circular to its shareholders. Issuers have commented that they would like an opportunity to correct any inaccuracies before the report is disseminated.

Conflicts of Interest and Lack of Transparency

The Proposed Policy contains an expectation that proxy advisors take steps to identify and mitigate actual or perceived conflicts of interest, whereas many issuers prefer an outright prohibition on proxy advisors working for both institutional investors and issuers. Issuers raised other specific concerns related to the incentive of proxy advisors to create complex proxy voting guidelines, as these same advisors sell consultancy services to educate issuers on these rules. Issuers are also encouraging the CSA to require proxy advisory firms to disclose their methodology used to develop guidelines, and in addition whether any research has been outsourced to a third party. Some issuers called for more accountability over both the process in arriving at proxy advisors' voting guidelines and the guidelines themselves. One issuer also suggested that any explanation of the rationale underlying any guidelines should include a demonstrable link to good governance, rather than an arbitrary determination by the proxy advisor such as a maximum number of boards. 


Institutional investors and their associations argue that proxy advisory firms already conform to the practices suggested in the Proposed Policy. CCGG believes the Proposed Policy is unnecessary because it "provides best practices guidance that generally mirrors the policies and practices proxy advisors in Canada already follow." Many institutional investors and their associations believe that transparency concerns are typically without merit since proxy advisors already develop their proxy voting guidelines in consultation with institutional investors and, in some instances, issuers. They also noted that these guidelines and methods for evaluating governance issues are already publicly available on the websites of proxy advisory firms.

Furthermore, institutional investors contend that considering the views of issuers and the general public is unnecessary because proxy advisory firms are not regulators and their relationship with their clients – who are largely institutional investors – is private and contractual. Some suggest that the influence of proxy advisory firms may be overstated by issuers. They also believe that the perceived issues with respect to conflicts of interest are exaggerated as proxy advisory firms already have ethical wall policies and procedures that effectively address these situations. In addition, as CCGG has noted, "if issuers and their advisors believe that institutional investors are inappropriately delegating their voting responsibilities to proxy advisors, then this issue should be taken up with the investor and not the proxy advisor – regulating proxy advisors is not the answer."


A common concern among those opposed to proxy advisory firm regulation is the potential indirect costs associated with meeting requirements. Increased compliance costs could potentially reduce the number of proxy advisors willing or able to serve the Canadian market and indirectly increase the cost for ultimate users, who are the institutional investors. At a macro level, they also question whether this should be a priority for regulatory reform within the proxy voting system, given other issues such as those related to the proxy voting infrastructure. 

Clearly, institutional investors do not share the apparently widespread concerns of issuers. One institutional investor even stated that "the lack of understanding from issuers and other market participants on the role of proxy advisory firms has contributed to the development of unnecessary regulation." The question remains as to whether the pervasiveness and influence of proxy voting reports in the capital markets arena raises sufficient public interest concerns that would warrant prescriptive regulatory intervention in what is otherwise a private, contractual relationship between a proxy advisor and a user subscriber.


The deadline for submitting comments to the CSA on the Proposed Policy will end on July 23, 2014. Issuers, investors, asset managers and other market participants may wish to avail themselves of this opportunity to comment on the proposed policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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