Approval of shareholder-sponsored proposals: Evidence from Canada

International Review of Financial Analysis 16 (2007) 136 – 151

Approval of shareholder-sponsored proposals: Evidence from Canada Angela Morgan ⁎, Jack Wolf College of Business and Behavioral Science, Clemson University, Clemson, SC, USA Received 10 March 2006; received in revised form 10 July 2006; accepted 17 July 2006 Available online 18 August 2006

Abstract Little is known about shareholder voting at firms incorporated outside of the United States. Proposals sponsored at such firms and the voting patterns and factors associated with these proposals should conceivably be similar to those in the U.S. if the legal and governance structures of the countries are similar. We examine 264 shareholder proposals sponsored at Canadian firms between 2001 and 2005 in order to determine if differences created by the Canadian governance system, being more voluntary than that of the U.S. system, lead to differences in shareholder voting. We find many similarities between voting at the Canadian firms and those found in the literature for their U.S. counterparts, including some types of frequently submitted proposals and factors impacting the level of shareholder approval. However, unlike the concurrent literature on U.S. firms, we find very few majority approved proposals and a much lower overall level of affirmative voting returns. © 2006 Elsevier Inc. All rights reserved. JEL classification: G32; G34 Keywords: Proxy voting; Shareholder proposals; Governance; Canada

1. Introduction While significant attention has been paid by researchers to shareholder voting at U.S. firms, little is known about voting at firms incorporated in other countries. Shareholders at non-U.S. firms should conceivably be concerned about issues similar to those found to hold for U.S. firm shareholders especially for companies operating under similar financial systems. However, there is the possibility that these shareholders view matters differently than their American firm counterparts especially if governance or legal requirements differ between countries. ⁎ Corresponding author. Tel.: +1 864 656 4486; fax: +1 864 656 3748. E-mail address: [email protected] (A. Morgan). 1057-5219/$ - see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.irfa.2006.07.001

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We wish to examine whether results found for shareholder voting in the United States can be used as broad generalities for other countries as well. We choose to focus on Canada for two reasons. First, while many aspects of U.S. governance have recently become legally mandated under Sarbanes–Oxley (SOX) and exchange listing requirements, Canadian corporate governance is still for the most part voluntary. Canadian firms must disclose whether they choose to comply with the recommendations of a set of best practices from the Dey Report but they are not legally obligated to comply with the recommendations. This has led to what Li and Broshko (2006) describe as a “principles-based” Canadian governance system. This differs from the U.S. “rules-based” approach where every firm must comply regardless of an individual firm's characteristics or circumstances. These differences in both governance systems and attitudes toward governance could potentially lead to differences in shareholder voting. Second, Canada has disclosure requirements and a similar corporate law structure to that of the U.S. which allows for meaningful comparisons of our results to results of studies on voting for U.S. companies. We seek to determine if the types of proposals sponsored, the factors leading to greater voting support, and the voting patterns associated with the proposals appear to be similar to that found in earlier research on U.S. firms. We examine the submission of and voting on shareholder-sponsored proposals in Canada for the period 2001 to 2005 since this period is timely, exhibits greater numbers of proposals sponsored through time, and corresponds with the implementation of SOX and NYSE listing requirements in the U.S. and Canadian Securities Administrators (CSA) requirements in Canada. We find that board, governance, and compensation related items are the most prevalent proposals for our time period and that most proposals receive low levels of voting support. Consistent with research on U.S. firms, we find that voting support for shareholder proposals is negatively related to officers' and directors' ownership and firm size. Also, key items (as defined by Davis & Kim, 2006) receive greater voting support. We find that shareholders vote more favorably for some resolutions such as separating the chairman and CEO positions and expensing stock options. While we do find many similarities between our findings for Canadian firms and the previous research on their U.S. counterparts, we also find some differences. First, we do not observe any antitakeover-related resolutions for our sample of Canadian proposals although this type is a common type of proposal in the U.S. Second, we find that the mean level of voting support and the number of majority approved (receiving at least 50% of the votes cast) proposals are lower than that found in the United States. Third, we find some differences in factors impacting voting support. These suggest that previous results found for U.S. shareholder voting may not be completely generalizable for voting at firms based in other countries. 2. Literature review, corporate governance in Canada and cross-listings 2.1. Recent literature Several papers have examined the submission of shareholder-sponsored proposals in the United States. Gordon and Pound (1993) finds that higher managerial ownership, larger firm size, and lower 1year stock price performance lead to lower voting support while greater outsider holdings lead to greater support; they also find that the type of proposal is related to voting support. Gillan and Starks (2000) examines whether shareholder activism by institutions is more successful than that by individuals and finds a positive relation between voting support and institutional holdings; both Gordon and Pound (1993) and Gillan and Starks (2000) find that sponsor type affects the level of affirmative voting outcomes. Bizjak and Marquette (1998) find evidence that poison pills are more likely to be rescinded or restructured following a successful poison pill resolution especially if sponsored by a union.

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There has been a renewed interest in the literature in voting on shareholder proposals. Thomas and Cotter (2005) uses an updated U.S. sample, 2002–2004, and finds the type of sponsor garnering the highest voting support has changed to become private institutions and individual sponsors; they also find more majority approved proposals and more willingness by boards to implement these items. Davis and Kim (in press) focus on six key proposal types (cumulative voting, separate CEO and chair positions, vote on poison pill, vote on golden parachute, declassify the board, and expense options); they find that mutual funds with business ties to the firm tend to vote with management more than funds without business ties. Not much literature exists in the area of non-U.S. shareholder voting. De Jong, Mertens, and Roosenboom (2004) examines voting at general meetings in the Netherlands and finds that management sponsors all proposals at the meetings and that voter turnout is around 30%. Rejections of proposals are extremely rare. They conclude that shareholders have little, if any, voting power in the Netherlands. In additional research, Baums surveys the regulations concerning proxy voting in countries comprising the European Union (Baums, 1997) and Germany (Baums & Schmitz, 1999). 2.2. Corporate governance in Canada Canada's approach to corporate governance is largely voluntary with firms choosing to comply with a set of best practice guidelines. This “principles-based” approach to corporate governance was adopted in 1995 when the Toronto Stock Exchange (TSX) began requiring Canadian firms to report their corporate governance practices in reference to guidelines in the Dey Report. The Dey Report, commissioned by the TSX in 1993 as Canada's equivalent of the UK's Cadbury Report, is a nonbinding list of 14 governance guidelines, mainly related to board independence. Unlike recent requirements affecting U.S. firms (whether from exchange listing rules or from SOX), the Dey Report requirements are not mandatory. Firms listed on the TSX must simply state annually whether or not they comply with the Dey Report guidelines and specify why they have chosen not to comply if they have chosen not to do so. These best practice guidelines adopted in 1995 are very similar to the listing requirements proposed by the NYSE and NASDAQ in 2002 and approved by the SEC in 2003. One guideline recommends that the majority of directors be “unrelated”. Another guideline recommends that each firm have a nominating committee, comprised completely of outside directors. Each firm is recommended to have an audit committee comprised solely of unrelated directors who are financially literate. Additionally, the guidelines recommend that the board of directors be able to function independently of management. In 2002, the TSX proposed updates to several guidelines. These updates narrowed the gap between the then-proposed requirements in the U.S. and the best practices in Canada. However, they were never finalized since authority to oversee corporate governance matters passed to the CSA in December 2002. In 2004, the CSA adopted Multilateral Instrument 52-110, specifying mandatory requirements for audit committees that were in line with the SOX requirements. National Instrument 58-101 and National Program 58-202 tightened some definitions, such as what constitutes “related,” and added some additional suggestions and became effective for fiscal years ending on or after June 30, 2005 (after our sample). 2.3. Canadian firms cross-listing in the U.S. Many Canadian firms are subject to some U.S. securities regulations because they are crosslisted on U.S. exchanges. Prior to the enactment of SOX in 2002 and the adoption of the NYSE and

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NASDAQ corporate governance listing requirements in 2003, there were no U.S. requirements similar to those outlined in the TSX guidelines. However, after the implementation of these items, foreign companies cross-listed in the U.S. may have to meet certain additional requirements. Companies listed in the U.S. are required to comply with SOX, regardless of country of origin. Companies listed on the NYSE may also be subject to additional regulations.1 These requirements are similar to the TSX guidelines with the most notable difference being that the NYSE normally requires shareholder approval of equity compensation plans. The NYSE permits foreign issuers to follow home country practices with foreign issuers disclosing how their governance practices may differ from the NYSE standards. Even foreign companies that are not cross-listed may have incentives to comply with U.S. standards. Anand, Milne and Purda (2006) theorize that firms may voluntarily adopt corporate governance standards of foreign countries, particularly if they anticipate attempting to access the capital markets in that country at some point in the future. It is important to note that while many of the governance mechanisms in place for Canadian firms may resemble those of U.S. companies, they are there largely by choice rather than imposed externally by a regulator. 3. Research questions While significant research has focused on shareholder voting in the U.S., little has been done on firms incorporated in other countries. Conceivably, shareholders should be concerned with similar issues regardless of the home country of the firm. However, differences in government and regulatory environments could result in differing views by shareholders. We examine whether the current literature on shareholder voting in the U.S. can be used as a broad indication of shareholder voting support in other countries. We seek to examine what items appear to be important to shareholders of Canadian firms during the past 5 years both in terms of what they chose to place on their ballots and what they chose to vote affirmatively for.2 We then wish to determine if these findings are similar to those found in previous literature examining U.S. firms. We choose to focus on Canada for two reasons. First, its legal structure (along with that of the UK) is most similar to the U.S. structure on which previous research has focused and because information on Canadian firms is readily available. This similarity in legal structures should allow us to directly compare our findings to those in the previous research. Second, while the legal structures of the two countries are similar, the governance structures may not be. The Canadian governance environment is largely voluntary, while the U.S. environment is now largely mandated. In essence, the voluntary nature of the approach in Canada suggests a different attitude towards corporate governance. Firms are encouraged to conform with a set of best practices but are allowed some latitude to select mechanisms that fit well with their individual circumstances. In contrast, the “rules-based” approach of the U.S. insists that all firms comply with SEC regulations, SOX, and the listing requirements of their exchange. These differences in approach may create differences in both the attitude toward and the actual corporate governance structures of the firms incorporated in the two countries. Another potential difference is related to the timing of suggested and mandated changes; the Dey Report guidelines were put into place prior to the NYSE and SOX requirements, suggesting a move toward improved 1

NASDAQ's listing requirements are similar to the NYSE with respect to corporate governance, including the exemption for foreign issuers. 2 We are not suggesting that all shareholders of Canadian firms are Canadian; rather, we are interested in whether the country of incorporation affects what proposals are sponsored and the level of voting support.

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governance in Canada well before that in the U.S. A difference in the governance environments could lead to a difference in what shareholders view to be important and the differing attitude may affect how shareholders of Canadian firms exercise their proxy voting rights. Furthermore, since one of the criticisms of the mandates surrounding governance in the U.S. is that a “one-size-fits-all approach” may not be the most efficient system of governance, the Canadian system may work more effectively.3 We seek to determine what types of shareholders proposals are common in Canada from 2001 to 2005. If shareholder proposals represent items important to sponsoring shareholders, examining the types of resolutions proposed should allow us an overview of what is important to all shareholders. We also seek to address whether these proposals are similar to those found for the U.S. by comparing our findings to those of concurrent working papers focusing on the U.S. Thomas and Cotter (2005) find that the most prevalent shareholder sponsored proposals for their 2002–2004 U.S. study are compensation and anti-takeover-related resolutions. We also examine voting support for shareholder-sponsored proposals to establish what items are most important to shareholders and to determine what factors influence this support. We expect that these factors may be similar to those found for U.S. firms; however, if the Canadian environment is significantly different, we may find different relations. Areas of interest include how the governance structure such as ownership holdings and board composition, financial structure including items like firm size and past stock performance, and proposal specific items such as sponsor and proposal type affect voting support. Last, we are interested in overall voting levels. The voting environment in the U.S. has moved over time from one where few if any shareholders proposals received majority approval by shareholders (see Gordon & Pound (1993)) to one where many proposals receive majority approval. We wish to examine whether overall voting levels and patterns are similar to those found currently in the U.S. 4. Proposal types, sponsors and descriptive statistics Our sample of shareholder sponsored proposals at Canadian firms comes from the Shareholder Association for Research and Education's website (www.share.ca) and covers meetings occurring from 2001 to 2005. (For 2005, we collect the most recent data (through June 2005) as shown on the SHARE website.) Of the 448 proposals listed in the SHARE database, 132 are subsequently withdrawn or omitted and 50 are missing voting data. We further require that stock return and financial statement data are available. These requirements leave us with a sample size of 264 proposals for 38 firms. Panel A of Table 1 provides information on the breakdown of proposals by year and by firm. As can be noted from the table, the number of proposals sponsored for Canadian firms tends to increase over time from 33 in 2001 to 74 in 2005 (the greatest number is 77 in 2003). The number of firms receiving proposals is highest in 2003 and 2004 (22 and 23) and lowest in 2001. Firms tend to receive more than one proposal during the 5-year period; the median number of proposals for a firm is two and the average is 6.9. Royal Bank of Canada receives the greatest number of proposals (33) during the period. Sixteen firms receive only one proposal each. The largest numbers of proposals for a firm in a single year is Royal Bank of Canada with 13 proposals in 2003. Previous research on U.S. firms has found that the type of sponsor submitting the proposal can play a role in shareholder voting. We define five sponsor types: institutional, union, individualactive, individual-occasional, and religious. Panel B provides a breakdown of our sample by sponsor type and year. The most common sponsor types are institutional and individual-activist (with 129 3

See Bainbridge (2006), Linck, Netter and Yang (2006) and Romano (2005) regarding the consequences of the Sarbanes–Oxley Act.

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Table 1 Sample of shareholder proposals received by Canadian firms between 2001 and 2005 Panel A: Distribution of sample by year and number of firms

Number of proposals Number of firms

2001

2002

2003

2004

2005

33 9

25 10

77 22

55 23

74 18

2003

2004

2005

Panel B: Distribution of sample by year and by sponsor type 2001

Institutional Union Individual-activitist Individual-occasional Religious

2002

n

%

n

%

n

%

n

%

n

%

22 0 10 1 0

66.67 0.00 30.30 3.03 0.00

8 2 15 0 0

32.00 8.00 60.00 0.00 0.00

34 11 27 4 1

44.16 14.29 35.06 5.19 1.30

36 12 0 7 0

65.45 21.28 0.00 12.73 0.00

29 5 25 13 2

39.19 6.76 33.78 17.57 2.70

Panel C: Distribution of sample by year and by proposal type 2001

Routine business Board Governance Compensation Social/human rights Economic Health/environmental

2002

n

%

0 11 7 12 2 1 0

0.00 33.33 21.21 36.36 6.06 3.03 0.00

n 5 5 2 5 2 6 0

2003

2004

2005

%

n

%

n

%

n

%

20.00 20.00 8.00 20.00 8.00 24.00 0.00

0 14 20 35 2 0 6

0.00 18.18 25.97 45.45 2.60 0.00 7.79

1 14 6 28 3 0 3

1.82 25.45 10.91 50.91 5.45 0.00 5.45

3 33 8 19 0 7 4

4.05 44.59 10.81 25.68 0.00 9.46 5.41

Panel D: Distribution of proposals of a given type proposed by a given sponsor type during the 5-year period

Routine business Board Governance Compensation Social/human rights Economic Health/environment

Institutional

Union

n

%

n

1 36 24 44 8 6 10

0.4 13.6 9.1 16.7 3.0 2.3 3.8

0 0 11 19 0 0 0

% 0.0 0.0 4.2 7.2 0.0 0.0 0.0

Individualactivist

Individualoccasional

n

%

n

7 39 4 26 0 1 0

2.7 14.8 1.5 9.8 0.0 0.4 0.0

1 2 4 10 1 7 0

% 0.4 0.8 1.5 3.8 0.4 2.7 0.0

Religious n 0 0 0 0 0 0 3

% 0.0 0.0 0.0 0.0 0.0 0.0 1.1

Our sample consists of 264 shareholder proposals received by Canadian firms between 2001 and 2005 with complete proposal, voting, financial and governance data. Panel A shows the number of proposals and the number of firms by year. Panel B provides the number of proposals by year and by sponsor type. Panel C shows the number of proposals by year and by proposal type. Panel D shows the distribution of proposal types by sponsor type.

and 77 proposals, respectively) while the least common is religious. Institutions are common sponsors in all years and sponsor the proportionally greatest number of proposals in 4 of the 5 years. Individual-activists are the most common sponsor type in 2002 and the second most prolific type in three of the remaining 4 years. Individual-occasional resolutions are more common in the later years. This is different from the results of earlier work finding that individuals were by far the most common sponsor type.

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Similar to sponsor type, previous research on U.S. firms has found that the type of proposal impacts shareholder voting with governance and anti-takeover items normally receiving higher affirmative voting rates than social issue proposals. We define seven proposal types: routine business, board, governance, compensation, social/human rights, economic, and health/environmental. Panel C provides a breakdown of our sample by proposal type and year. Compensation, board, and governance related proposals are the most common (99, 77, and 43 proposals, respectively) while routine business and social/human rights proposals are the least common. The percentage of compensation proposals peaks in 2004 (50.9% of the proposals from that year), while the percentage of board-related proposals peaks in 2005 (44.6% for that year). Health/environmental proposals become more prevalent in the later years, while social/human rights proposals become less common. Interestingly, we do not see any anti-takeover-related items sponsored for our sample. This may in part be due to poison pills in Canada being less poisonous.4 Other than the lack of antitakeover-related proposals, our distribution of proposal types is similar to Thomas and Cotter (2005) except that they document a greater proportion of social responsibility proposals. Since the type of proposal is often related to the sponsor of the proposal, we note the number of proposals of a given type for a given sponsor type in Panel D. Similar to previous research, we find that institutions tend to sponsor board, governance, and compensation-related items while religious sponsors propose health/environmental related items. The types of proposals sponsored by individuals who do not frequently sponsor proposals (individual-occasional) tend to be a more diverse mix of proposal types. Individual-activists focus primarily on board and compensationrelated resolutions. For our sample, unions sponsor mainly compensation-related items as well as some governance proposals, consistent with earlier studies on U.S. firms. Sources of data include the Share website (proposal types, sponsors and affirmative voting levels (calculated as the percentage of affirmative votes out of the total votes cast)), corporate management information circulars (information on ownership and board structure and information on the proposal) filed on the SEDAR website, COMPUSTAT (financial accounting data), Bloomberg (stock return data) and Targeted, Inc. (institutional ownership levels).5 One noticeable difference is that Canada uses a 10% blockholding disclosure threshold instead of the 5% level used in the U.S. We calculate firm size (measured as total assets), market capitalization, book-to-market ratio, price-to-earnings ratio, prior 1-year's sales growth, and leverage using COMPUSTAT. We define leverage as the ratio of debt (long-term debt and the current portion of long-term debt) to assets. We compute 1-year prior buy-and-hold market-adjusted stock returns for the period ending 1 month prior to the meeting date using the TSX300 with dividends as the market index. Table 2 provides summary statistics for the firms in our sample. (For the purpose of this table, a firm may be included more than once if it has more than one proposal in the sample.) Firms average C$186,049m in size based on total assets and C$20,271m based on market capitalization; the largest firm in our sample has C$429,196m in assets while the smallest has C$273m. Average book-to-market, price-to-earnings ratio, 1-year sales growth, and leverage ratios are 54.2%, 11.2%, 2.7%, and 16.4%, respectively. Corporate governance statistics are generally similar to those found in the U.S. Average officers' and directors' ownership is 6.5%; the highest amount of managerial holdings for our sample is 84.5% while the least is less than 1%.6 The mean percentage of outside directors (out of 4

Under Canadian business law, all poison pills with a term greater than 6 months must be approved by shareholders. See www.targeted.ca for more information on Targeted, Inc. 6 Quebecor World includes 84.4% affiliated holdings owned by Quebecor Inc. The lowest quartile of officers' and directors' holdings are all less than 1%. 5

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Table 2 Mean, median, and standard deviation summary statistics for 264 shareholder-sponsored resolutions sponsored at Canadian firms Variable

Mean

Median

Standard Deviation

Officers' and directors' holdings Institutional holdings Percentage of outsiders on the board Outside 10% blockholdings Firm size (assets) Market capitalization Book-to-market ratio Price-to-earnings ratio Leverage Prior 1-year stock performance Prior 1-year sales growth

6.47% 24.67% 84.71% 15.35% C$186.049 C$20.271 54.23% 11.18% 16.38% 13.71% 2.67%

0.44% 24.26% 87.50% 13.60% C$252.864 C$18,942 51.34% 13.74% 15.89% 6.17% 0.67%

18.51% 10.95% 10.28% 9.23% C$130,778 C$11,907 24.20% 39.37% 8.99% 28.64% 17.85%

Our sample consists of 264 shareholder proposals received by Canadian firms between 2001 and 2005. Officers' and directors' holdings (including affiliated holdings), percentage of outsiders on the board, and outside 10% blockholdings are gathered using filings from the SEDAR website. Institutional holdings are calculated using data provided by Targeted, Inc. Firm size, market capitalization, book-to-market ratio, price-to-earnings ratio, leverage, and 1-year sales growth are collected using COMPUSTAT. Firm size is measured as total assets and leverage is calculated as the ratio of debt (longterm debt and the current portion of long-term debt) to total assets. Prior 1-year stock performance is the market-adjusted buy and hold return calculated for the period ending 1 month prior to the meeting date using the TSX300 as the market index. Dollar amounts are in millions.

total board seats) is 84.7% which is higher than that found for the U.S. and may be related to the Dey Report. Outside 10% blockholdings are rare with only 7.2% of our firms having an outside blockholder (average blockholdings for these firms is 15.4%). Average institutional ownership is 24.7% with institutional holdings ranging from 1.1% to 65.1%. Canadian corporate governance may be impacted by the Dey Report as mentioned above. For our sample of 38 companies, almost all meet all of the recommendations for best practices. Only three companies in our sample do not meet all the requirements and list small board size as the rationale behind not complying fully with the recommendations. Many Canadian firms also raise capital in the U.S. and are cross-listed on U.S. exchanges, which could result in their being impacted by additional regulatory and listing requirements. Of our sample of 38 firms, all are cross-listed in the U.S.: 51.3% are listed on the NYSE or AMEX, 10.5% are listed on NASDAQ, and the remaining 38.2% are sold over the counter. This is consistent with the firms in our sample being some of Canada's largest (proponents are likely to target larger firms in order to gain more press for their causes). 5. Voting outcomes and explanatory factors 5.1. Voting results Voting support for shareholder proposals is a key area of interest since it indicates what shareholders feel is important both in terms of what they sponsor and what they support. Earlier studies focusing on U.S. data find that voting support for shareholder proposals, while small initially, has been increasing with time, especially for governance-related items; majority supported (receiving at least 50% of the votes cast) shareholder proposals have also become more common with time.

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Table 3 Voting distributions Panel A: Distribution of voting results by year and voting range Approval rate (%)

Full sample

2001

2002

80–100 6 0 2 60–80 3 0 0 40–60 17 1 1 20–40 31 6 1 Less than 20 207 26 21 Mean 14.43% 14.98% 15.94% Mean (not including 12.62% 14.98% 8.72% management supported)

2003

2004

2005

2 3 11 14 47 22.43% 20.83%

2 0 4 9 40 14.79% 11.77%

0 0 0 1 73 5.08% 5.08%

Panel B: Distribution of voting results by proposal type and voting range Approval rate (%) 80–100 60–80 40–60 20–40 Less than 20 Mean Mean (not including management supported)

Routine business 1 0 1 0 7 17.57% 8.40%

Board

Governance Compensation Social/ Economic Health/ human rights environmental

1 3 0 0 5 4 10 7 61 29 12.27% 20.98% 11.13% 15.51%

1 3 5 8 82 14.09% 13.41%

0 0 1 2 6 18.60% 18.60%

0 0 0 0 14 3.94% 3.94%

0 0 1 4 8 14.36% 14.36%

Our sample consists of 264 shareholder proposals received by Canadian firms between 2001 and 2005. Voting support is measured as the number of affirmative votes cast for an item divided by the total number of votes cast. Panel A provides a distribution of the number of proposals receiving voting support for each range of voting results broken down by year. Panel B provides distribution information broken down by proposal type.

We begin by examining voting distributions. Panel A of Table 3 provides voting distributions broken down by year and voting range for our sample of 264 Canadian firm shareholder proposals. Most proposals fall into the lowest (less than 20%) range while only 2% of the sample (6 proposals) receives voting support in the highest (greater than 80%) range; only 26 of the 264 proposals receive voting support above the 40% level. Of these, six are recommended by management and account for all proposals receiving voting support in the highest range.7 Mean voting support for our sample is 14.4%. Voting support varies widely by year with mean support in 2005 being only 5.1%; mean support peaks in 2003 at 22.4%. Voting support in the other 3 years averages around 15%. When we exclude proposals recommended by management, the average level of voting support drops to 12.6%. The greatest voting support for a proposal is 99% (auditor fee disclosure) while the least is 0.5% (report on renewable energy). Only 12 proposals receive majority approval (average voting support is 78.0%). One key difference between our results and the results of concurrent papers studying the U.S. is the scarcity of majority approved proposals for our sample as well as the low levels of mean voting support. The 14.4% overall mean voting support for our sample is much 7

Resolutions include expensing options, disclosing all boards that directors have served on in the past 5 years, oral reports at the annual meeting, reporting environmental liabilities, and disclosing auditor fees.

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lower than the mean voting support level for Thomas and Cotter (2005) of 28.4%. Additionally, only 4.5% of the proposals in our sample are majority approved compared to 23.5% of Thomas and Cotter's U.S. sample. Since voting support has been shown to be strongly related to the type of proposal for U.S. firms, we show summary voting distribution data in Panel B for our proposal subsets. For the proposals receiving support greater than 40%, most are board, governance, or compensation-related. Governance proposals receive the largest mean voting support overall (21.0%) while economic-related proposals receive the lowest voting support (all proposals of this type receive support of less than 20% of the shares). We find some notable differences between the Canadian results and that of the U.S. found by Thomas and Cotter (2005). Both social/human rights and health/environmental proposals receive higher levels of average voting support for Canadian firms (18.6% and 14.4%, respectively, compared to approximately 10.8% as a group in the U.S.). Canadian compensation proposals, on the other hand, receive much lower levels of support (14.1% vs. 27.5%). Governance proposals receive similar levels of support to that found for the U.S. We do not see any anti-takeover-related proposals in our sample. This category has traditionally experienced large levels of voting support in the U.S. Thus, the lack of anti-takeover-related proposals in Canada could explain a portion of the difference in overall voting support. While our low levels of mean voting support may suggest that shareholder do not normally support shareholder proposals of any type for Canadian firms, it is important to remember that many different types of proposals can be included under a broad classification heading. We discuss specific proposal types and their mean voting support levels in the next section. 5.2. Common proposals Another area of interest is what proposal types have been common in Canada and the associated voting support for these types. Since proposal types can vary widely within a given classification, we provide a summary of the most common proposals sponsored for our sample (defined as having had at least six items of the same type presented during the 5-year period) in Table 4. Along with the number of submissions of each type of proposal, we also provide information on the type of sponsor normally proposing the item and the mean voting support for the item. The most common proposal types are to provide for cumulative voting and auditor independence both of which are proposed 14 times (together they represent 10.6% of our sample and are both normally sponsored by institutions). Proposals to provide cumulative voting receive average voting support of 11.1% while auditor independence receives 9.3%. Common proposals receiving greater levels of voting support are to disclose value of pension benefits (24.8%), to separate chairman and CEO positions (36.6%), and to expense stock options (69.0%).8 Less popular in terms of voting support are resolutions related to tax havens (4.1%), supermajority requirements in elections (2.0%), and requiring advance notice of executive security sales (4.8%). Of the 18 common proposal types, three (cumulative voting, separate chairman and CEO, and expense stock options) are addressed as part of the six key proposal types studied by Davis and Kim 8 One expense stock options proposal was recommended by management to be supported and received 81.1% voting support. Voting support for expense stock option proposals not supported by management averaged 66.6%.

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Table 4 Common proposal types and frequency of resolutions Proposal type

Classified as

Provide cumulative voting Auditor independence Eliminate stock-option plans

Board 14 Governance 14 Compensation 12

5.3 5.3 4.5

Resolution related to tax havens Limit independent directors' terms to 10 years Disclose total value of executives' pension benefits and related costs Replace options with restricted stock Prohibit CEO from serving as director of other unrelated companies Directors must be elected by 75% of shareholder vote Directors who change occupation must resign

Economic 12 Board 9 Compensation 9 Compensation Board

Executives give 10 days notice before trading company shares Impose penalties as well as incentives in compensation package Option plan linked to performance Change threshold for shareholder nomination of directors Separate positions of CEO and Chair of Board of Directors Cap executive compensation Expense stock options Chair and Board Committees report orally to the AGM

Frequency % of sample

Normally proposed by

Mean voting support (%) 11.07 9.25 13.00

4.5 3.4 3.4

Institution Institution Individualactivist Institution Institution Institution

4.06 5.76 24.84

9 8

3.4 3.0

Institution Institution

6.63 3.01

Board

7

2.4

2.03

Board

7

2.7

Compensation

7

2.7

Individualactivist Individualactivist Institution

Compensation

7

2.7

Compensation Board

7 6

2.7 2.3

Board

6

2.3

Compensation 6

2.3

Compensation Governance

2.3 2.3

6 6

Individualactivist Institution Individualactivist Individualactivist Individualoccasional Union Institution

1.79 4.81 7.39 9.54 5.68 36.56 6.67 68.99 44.94

This table provides information on the most common (defined as appearing on at least six different ballots) proposal types for our sample of 264 shareholder proposals received by Canadian firms from 2001 to 2005. For each proposal type, we provide information on how we classify that type, the number of times that proposal is submitted, and what sponsor type normally proposes that item. Mean voting support is provided for each common proposal type.

(in press) for U.S. firms. We refer to these item types as key items.9 The other three types studied by Davis and Kim (declassify the board, put a poison pill to a vote (or rescind the pill), and vote on severance packages) do not appear in our sample. 5.3. Multivariate analysis In order to determine how multiple factors may impact voting support for shareholder-sponsored proposals at Canadian firms, we run OLS regressions, reported in Table 5, with the affirmative voting rate out of votes cast as the dependent variable.

9 We do not specifically study proposals related to the Dey Report due to the low frequency of such proposals. Of the 14 guidelines in the Dey Report, the only one commonly addressed in our sample is to separate the chairman and CEO positions which we already examine under our common proposals section.

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We choose the variables for these regressions based on factors found in previous research on U.S. firms to be important gauges of shareholder voting support. Variables can be grouped into three categories: proposal-specific, governance-related, and financial variables. Proposal-specific factors include the broad classification type of the proposal and sponsor type of that resolution. Studies on U.S. firms have found that voting support varies significantly depending on both the type and sponsor of the proposal. We include dummy variables for proposal types and sponsor types (individual-occasional and routine business are used as our base cases). Next, we also include governance variables including officers' and directors', institutional, and outside blockholder ownership and board composition. Studies on the U.S. have found that managers are likely to vote against shareholder proposals while institutions, acting as independent monitors, tend to vote for shareholder proposals. Third, we include financial performance variables including firm size (log of total assets), leverage, book-to-market, price-to-earnings ratio, and 1-year prior stock return.10 Previous research has found that shareholders may be less likely to take an active role against management at larger firms and may be more likely to do so when prior stock performance has been poor. For each regression, we include the proposal-specific, governance, and financial variables described above. We also include a dummy variable set to one if the item is one of the key items as defined by Davis and Kim (in press) as important for mutual fund voting. Last, because the governance structure of Canadian firms, and thus shareholder reaction to proposals, could have been affected by changes in governance guidelines over time, we include dummy variables for each year in our sample. We choose to focus on a year-by-year basis since the relevant regulations were enacted at different points during our sample. Since the sponsor of a resolution and the type of resolution proposed may be related and since different classifications of proposal types could affect our results, we run four different regression models. Model 1 of our regressions controls for the sponsor type, Model 2 controls for broad proposal type, and Model 3 controls for both simultaneously. Due to the wide range of possible proposal types under the broad proposal classifications, we control in Model 4 for the 18 common proposal types using dummy variables (all other proposal types are the base case).11 We exclude from our regressions the six proposals that management recommends that shareholders vote for. We find that key items receive greater levels of voting support than non-key items (roughly 13–15% higher) and that officers' and directors' holdings are negatively related to voting support.12 This is consistent with management choosing to vote against proposals that they recommended against and with the previous research for U.S. companies. Our other governance and financial variables are normally insignificantly related to the level of affirmative votes. (Firm size is significant in Models 1 to 3 and 1-year prior stock returns are positively related to the level of voting support in Model 4.)13 When we use 2003 as our base case, some (or all) of the years (depending on the specification) have lower voting support than in 2003 which is consistent with our findings in Table 3. It is not surprising that votes held during this period of substantial press coverage on corporate governance 10

Crutchley, Jensen, Jahera, and Raymond (1999) find that leverage, dividends, insider ownership, and institutional ownership may be determined simultaneously. 11 We also run a firm fixed effects specification which has similar results to those shown in Table 5 except for the officers' and directors' holding, outside blockholders’ holdings and firm size, which change substantially and lose significance. However, the high levels of correlation between these variables and the fixed effects dummy variables suggests that these coefficients may be biased, and therefore hard to interpret properly. 12 We do not include the key items dummy variable in Model 4 since this variable is comprised of three of our common proposal types. 13 This is different than expected (Gordon and Pound, 1993, find an inverse relation between stock performance and voting support while Thomas and Cotter, 2005, find an insignificant relation) although the significance level is marginal.

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Table 5 Factors leading to shareholder voting support for shareholder-sponsored proposals submitted at Canadian firms (1)

(2)

(3)

(4)

Intercept

0.3741⁎⁎⁎

0.3708⁎⁎ (0.0150) 0.1486⁎⁎⁎

0.1076 (0.3236)

Key items

(0.0040) 0.1297⁎⁎⁎

0.4697⁎⁎⁎ (0.0010) 0.1553⁎⁎⁎

(0.0001)

(0.0001)

(0.0001)

Sponsor Institutional Union Individual-activist Religious Type of proposal Board Governance Compensation Social/human rights Economic Health/environment Common proposal types Provide cumulative voting Auditor independence Eliminate stock-option plans Resolution related to tax havens Limit independent directors' terms to 10 years Disclose total value of executives' pension benefits and related costs Replaced options with restricted stock Prohibit CEO from serving as director of other, unrelated companies Directors must be elected by 75% of votes Directors who change occupation must resign Executives give 10 days notice before trading company shares Common proposal types Impose penalties in compensation packages Option plan linked to performance Change threshold for shareholder

0.0264 (0.3116) 0.0839⁎⁎

0.0292 (0.3014) 0.0914⁎⁎

(0.0297) 0.0147 (0.5962) 0.0437 (0.5748)

(0.0322) 0.0230 (0.4796) 0.0508 (0.5705) − 0.0624 (0.1477) − 0.0194 (0.6688) − 0.0386 (0.3649) − 0.0364 (0.5448) − 0.0662 (0.1451) − 0.0379 (0.4820)

0.0904⁎⁎⁎ (0.0081) 0.0804⁎⁎ (0.0261) 0.0553 (0.3736)

−0.0717⁎ (0.0998) −0.0365 (0.4364) −0.0532 (0.2218) −0.0109 (0.8626) −0.0656 (0.2011) −0.0371 (0.5269) −0.0416 (0.2253) −0.0867⁎⁎⁎ (0.0039) −0.0576⁎ (0.0704) −0.0127 (0.7359) −0.0606 (0.1293) 0.0812⁎⁎ (0.0297) −0.0519 (0.1937) −0.1374⁎⁎ (0.0005) −0.0638⁎ (0.0975) −0.0663⁎ (0.0855) −0.1132⁎⁎⁎ (0.0055) −0.1000⁎⁎ (0.0197) −0.1211⁎⁎⁎ (0.0047) −0.1238⁎⁎⁎

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Table 5 (continued) (1)

(2)

(3)

nomination of directors Separate positions of CEO and chairman Cap executive compensation Expense stock options Chair and Board Committees report Governance structure Officers' and directors' ownership Institutional ownership

(4) (0.0063) 0.1850⁎⁎⁎ (0.0001) 0.0645 (0.1839) 0.4731⁎⁎⁎ (0.0001) 0.1647⁎⁎⁎ (0.0001)

− 0.1701⁎ (0.0128) 0.0579 (0.5113) − 0.3387⁎ (0.0866) 0.1599 (0.1450)

− 0.1398⁎ (0.0300) 0.0865 (0.2943) − 0.3621⁎ (0.0671) 0.1795 (0.1070)

−0.1836⁎⁎⁎ (0.0082) 0.0520 (0.5576) −0.3245 (0.1052) 0.1596 (0.1594)

−0.1017⁎ (0.0811) 0.0016 (0.9822) −0.2246 (0.1445) 0.0750 (0.3820)

− 0.0311⁎⁎⁎ (0.0001) − 0.0538 (0.5687) 0.0199 (0.5921) − 0.0001 (0.6427) 0.0299 (0.2311)

− 0.0354⁎⁎⁎ (0.0001) − 0.0434 (0.6373) 0.0015 (0.9673) − 0.0001 (0.6542) 0.0233 (0.3617)

−0.0268⁎⁎⁎ (0.0024) −0.0487 (0.6150) 0.0166 (0.6663) −0.0000 (0.7045) 0.0239 (0.3515)

−0.0095 (0.1496) 0.0220 (0.7663) 0.0599⁎⁎ (0.0466) −0.0000 (0.8293) 0.0335 (0.0870)

− 0.0655⁎⁎ (0.0165) − 0.0797⁎⁎⁎

− 0.0602⁎⁎ (0.0282) − 0.0755⁎⁎

−0.0604⁎⁎ (0.0289) −0.0852⁎⁎⁎

−0.0093 (0.7581) −0.0993⁎⁎⁎

2005

(0.0051) − 0.0845⁎⁎⁎ (0.0004) − 0.1337⁎⁎⁎

(0.0174) − 0.0749⁎⁎⁎ (0.0016) − 0.1323⁎⁎⁎

(0.0096) −0.0746⁎⁎⁎ (0.0031) −0.1250⁎⁎⁎

(0.0028) −0.0352 (0.1750) −0.0816⁎⁎⁎

Adjusted R-squared

(0.0001) 0.3682

(0.0001) 0.3623

(0.0001) 0.3643

(0.0033) 0.6761

Outside blockholder ownership Board composition Financial variables Firm size Leverage Book to market Price-to-earnings ratio One-year prior stock return Year dummies 2001 2002 2004

This table reports the results of OLS regressions examining the factors leading to shareholder voting support for 258 shareholder proposals received by Canadian firms between 2001 and 2005. The dependent variable is the voting support level for a proposal measured as the number of affirmative votes cast for an item divided by the total number of votes cast. Officers' and directors' holdings (including affiliated holdings), percentage of outsiders on the board, and outside 10% blockholdings are gathered using filings from the SEDAR website. Institutional holdings are calculated using data provided by Targeted Inc. Firm size (log of total assets), book-to-market ratio, leverage, and 1-year sales growth are collected using COMPUSTAT. Leverage is calculated as the ratio of debt (long-term debt and the current portion of longterm debt) to total assets. Prior 1-year stock performance is the market-adjusted buy and hold return calculated for the period ending 1 month prior to the meeting date using the TSX300 as the market index. Key items is a dummy variable set to one if the item is one of the six items studied by Davis and Kim (2006). Institutional, union, religious and Individualactivist are dummy variables set to one if the sponsor of the proposal is that type (Individual-occasional sponsor is the base case). The types of proposal and common proposal type variables are dummy variables set to one if the proposal is of that type (routine is the base case for Model 1 and 3 and all other types is the base case for Model 4). These regressions exclude the six proposals supported by management. Model 1 controls for the sponsor type. Model 2 controls for the broad proposal type. Model 3 controls for both simultaneously. Model 4 controls for common proposal types. p-values are shown in parentheses. ⁎⁎⁎, ⁎⁎, and ⁎ indicate significance at the 1%, 5%, and 10% levels, respectively.

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and SOX receive greater support than previous periods. However, it is interesting that the levels of shareholder support revert to the earlier, lower levels in subsequent periods. These lower levels of support may be partially explained by the difference in distributions of proposal types across time and may also be consistent with Canadian firms shareholders feeling that the firms have become better governed over time (eliminating much of the need for external activism). For proposal sponsors, we find that union sponsored resolutions receive greater levels of voting support. In Models 1 and 3, other sponsor types do not appear to significantly impact voting support. This lack of a significant increase in voting support for institutional proponents is likely due to the fact that they sponsor a wide-range of proposals even within a broad classification subset. Our findings differ from previous U.S. research which finds that institutional and individual sponsors tend to receive greater levels of voting support. When we control for specific proposal types in Model 4, we find that institutional and individual activist sponsors are also associated with more affirmative voting. The influence of the broad classification type of the proposals is much less pronounced with this classification appearing to play little if any role in shareholder voting. When we focus on the 18 common proposal types (Model 4), we find evidence that the specific type of the proposal does impact shareholder voting support. Resolutions to separate the chairman and CEO, to expense stock options, to require oral reports at annual meetings, and to disclose pension benefits all receive greater levels of voting support while several others including to prohibit the CEO from serving on other boards and to limit directors' terms receive lower voting support. 6. Conclusions The current literature on shareholder voting focuses almost exclusively on U.S. firms; however, differences in legal and governance structures could lead to differences in voting patterns and factors influencing voting. Canadian firms operate under a more voluntary corporate governance system than that recently mandated for U.S. firms. We examine shareholder proposals received by Canadian firms from 2001 to 2005 in order to determine what items are proposed, the overall voting support patterns, and the factors leading to voting support for a resolution. We compare our findings to prior research focusing on U.S. data. We find some evidence that Canadian firms experience shareholder proposals similar to those submitted to U.S. firms: we see lower instances of economic and health/ environmental proposals during this period than board, compensation, and governance related items. This is similar to what Thomas and Cotter (2005) find for their U.S. study which overlaps much of our period. However, we do not observe any anti-takeover-related proposals for our Canadian firms although this proposal type is common for their U.S. counterparts. In the area of voting support, we find, similar to research on U.S. firms, that sponsor type, officers' and directors' holdings, and firm size play a role in shareholder voting support. However, we find that union sponsors receive greater amounts of voting support. We find some evidence that the type of the proposal also matters with specific proposal types (not broad types) influencing voting support. Proposals receiving the greatest level of voting support for our sample include items to separate the chairman and CEO positions and to expense options both of these items are included in the key item types studied by Davis and Kim (in press). One key difference between our results and the results of concurrent papers is the scarcity of majority approved proposals as well as the lower levels of mean voting support for Canadian proposals. Overall mean support rates are much lower for our sample than that in recent research on U.S. firms and less than 5% of proposals receive majority voting support. Thus, while proposals sponsored at Canadian firms are generally similar in terms of what is sponsored and the factors leading to voting support, the actual level of affirmative voting support is much lower than that found

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for U.S. firms. These findings suggest that, while shareholders for Canadian firms may be interested in items similar to that of shareholders of U.S. firms, they are less willing to vote accordingly. Our findings are interesting especially given that most of our Canadian firms have governance structures similar to those of their U.S. counterparts. For our sample of Canadian firms receiving shareholder proposals, we find that the majority of the firms are in full compliance with the standards of best practice required by the TSX. Likewise, all the firms in our sample are crosslisted in the U.S. making them subject to SOX. Furthermore, many of them are subject to U.S. exchange listing requirements (albeit these requirements are voluntary for foreign firms). The combined effect of these factors should make the governance systems of the Canadian firms, while voluntary, similar to those of their U.S. counterparts (at least in terms of board composition). It is, thus, even more interesting that we find lower voting results than those found for the U.S. Our research suggests that while many aspects of shareholder voting are similar across countries, the results found from research on U.S. firms may not serve as a complete proxy for international shareholder voting. There is thus substantial room for subsequent research on this area of international governance. Acknowledgement We thank John Rule at Targeted, Inc. for providing the institutional ownership data for the firms in our sample. References Anand, A., Milne, F., & Purda, L. (2006). Voluntary adoption of corporate governance mechanisms, working paper, University of Toronto. Bainbridge, S. (2006). Sarbanes–Oxley: Legislating in haste, repenting in leisure, working paper. Available at http://ssrn. com/abstract=899593 Baums, T. (1997). Shareholder representation and proxy voting in the European Union: a comparative study, working paper. Available at http://ssrn.com/abstract=10705 Baums, T., & Schmitz, R. (1999). Shareholder voting in Germany, working paper. Available at http://ssrn.com/ abstract=185411 Bizjak, J., & Marquette, C. (1998). Are shareholders all bark and no bite? Evidence from shareholder resolutions to rescind poison pills. Journal of Financial and Quantitative Analysis, 33, 499−521. Crutchely, C., Jensen, M., Jahera, J., & Raymond, J. (1999). Agency problems and the simultaneity of financial decision making. International Review of Financial Analysis, 8, 177−197. Davis, G., & Kim, E. (in press). Would mutual funds bite the hand that feeds them? Journal of Financial Economics. de Jong, A., Mertens, G., & Roosenboom, P. (2004). Shareholders' voting at general meetings: Evidence from the Netherlands, working paper. Available at http://ssrn.com/abstract=594974 Gillan, S., & Starks, L. (2000). Corporate governance proposals and shareholder activism: The role of institutional investors. Journal of Financial Economics, 57, 275−305. Gordon, L., & Pound, J. (1993). Information, ownership structure, and shareholder voting: Evidence from shareholdersponsored corporate governance proposals. Journal of Financial Economics, 48, 697−718. Li, K., & Broshko, E. (2006). Corporate governance requirements in Canada and the United States: A legal and empirical comparison of the principles-based and rules-based approaches, working paper. Available at http://ssrn.com/ abstract=892708 Linck, J., Netter, J., & Yang, T. (2006). Effects and unintended consequences of the Sarbanes–Oxley Act on corporate boards, working paper. Available at http://ssrn.com/abstract=902665 Romano, R. (2005). The Sarbanes–Oxley Act and the making of quack corporate governance. Yale Law Journal, 114, 1521−1613. Thomas, R., & Cotter, J. (2005). Shareholder proposals post-Enron: What's changed, what's the same? working paper. Available at http://ssrn.com/abstract=868652