Who Should Pick Board Members? Proxy Access by Shareholders to the Director Nomination Process

The prerogative of boards of directors to nominate the members of the board for election by the shareholders is now challenged by institutional investors determined to acquire the right, under certain conditions, to nominate their own candidates. This challenge to a board prerogative is called proxy access by shareholders to the director nomination process.As a result of amendments to the existing regulations in the United States, there has been a flood of proposals from shareholders to institute rules granting them access to the nominating process. In Canada, a form of access is already provided for by the Canadian Business Corporations Act (CBCA), but the conditions of this access are not perceived – by institutional investors, in particular – as sufficiently congenial because, among other factors, of the differential treatment for candidates put forward by shareholders.Several plausible arguments may be marshalled in support of access to the nominating process by shareholders, such as the enhanced legitimacy of the directors sitting on the board. However, this proposal also raises a host of issues related to the logistics of its application and the potential adverse effects on governance and board dynamics. After an in depth analysis of the arguments for and against proxy access, IGOPP concludes that any process that would grant shareholders the right to put forward candidates for election to the board, whether such a process arises from new regulations or spontaneous proposals from shareholders, is unwise and likely to create serious dysfunctions in corporate governance.We do recommend however that the nomination committee of the board implement a robust consultation process with the corporation's significant shareholders and report in the annual Management Information Circular on the process and criteria adopted for nominating any new director.Given the popularity of proxy access proposals among institutional shareholders, this policy position includes an appendix outlining the typical features, conditions and mechanics proposed for this shareholder access to the director nominating process. All these aspects of the proxy access initiative raise difficult questions to which we unfortunately find few satisfactory answers