The Pension Investment Association of Canada is taking issue with some of the recommendations drafted by Ontario’s capital markets modernization task force, specifically those related to proxy advisory firms.
In a recent letter to Walied Soliman, the chair of the task force, the PIAC disagreed with a proposal to introduce a regulatory framework for proxy advisory firms.
“It serves PIAC members well to understand the potential conflicts relating to proxy advice that they receive and pay for and are supportive of robust disclosure of relationships, transactions or other interests that might result in a conflict between the interests of a proxy advisor and those of shareholders,” read the letter. “We do not believe it is necessary to restrict proxy advisors from providing consulting services to issuers since we have found the disclosures already provided to be adequate and have not encountered significant conflict of interest problems.”
The PIAC also said it doesn’t support the idea of providing issuers with a statutory right to rebut the advice of proxy advisory firms. More participation by issuers would detract from the objectivity that proxy advisory firms aim to supply, it said. “The ability of investment analysts to exercise professional independent judgment is a critical principle of the investment community. Investment analysts are not required to provide opportunities for issuers to review and respond to their recommendations to buy, sell or hold a security because to do so would directly violate an analyst’s independence. We believe this principle holds for proxy advisors as much as it does for other advisors in the investment industry.”
The PIAC further noted that sophisticated institutional investors, such as its members, are capable of assessing how useful proxy recommendations are and can choose whether to follow them. “It is our responsibility, acting in the best interests of our pension plan members, to hold proxy advisors accountable for the recommendations we pay them for. Therefore, it is incumbent upon us, rather than issuers, to provide feedback to proxy advisors regarding the quality of their recommendations.”
In terms of the task force’s other recommendations, the PIAC said it supports, with caveats, the allowance of semi-annual reporting from issuers. “PIAC is of the belief that providing quarterly reporting and guidance may lead some issuers to focus on short-term thinking and to make decisions that are short-term oriented to meet the demands of the market and lead to less than optimal outcomes for shareholders and the beneficiaries of the pension plans that PIAC represents.”
However, less frequent reporting could be detrimental to transparency, it added, noting semi-annual reporting would need to be accompanied by timely disclosures of any material changes to the issuers’ business activities and plans.
The PIAC also said it supports the task force’s recommendations for enhanced diversity disclosures on an annual basis and to require target-setting by issuers at board and executive levels. However, it cautioned against prescribing specific targets, suggesting instead that firms be allowed to determine their own, with five years as a reasonable timeframe.
Noting that a diverse board of directors enhances board performance, the letter said specific diversity policies should be in place to take gender, race and ethnicity into account, inclusive of Black, Indigenous people and other racialized groups. “PIAC encourages the board of directors and senior/executive management to take intentional steps to promote diversity and inclusion and to annually report against any goals the board has set for itself in this regard. Investors rely on the timely disclosure of such information when making both voting and investment-making decisions.”
In another recommendation, the task force suggested the requirement of an annual advisory vote on executive compensation. The PIAC noted its continuing advocacy on the issue of ‘say on pay’ and that Canada remains the only G7 country not to formally require that the issue appear on the ballot. “Globally, ‘say on pay’ is recognized as corporate governance best practice and Canadian investors should be able to benefit from this practice when investing in Canadian issuers.”
Finally, the PIAC expressed its support for the proposed mandating of enhanced disclosures of material environmental, social and governance information by issuers. It agreed these disclosures should align with the Sustainability Accounting Standards Board’s standards, as well as those of the task force on climate-related financial disclosures. “These frameworks provide useful disclosure guidance for comparable and decision-useful information. PIAC believes a phased-in approach such as the one described by Canada’s expert panel on sustainable finance would be appropriate, as would a transitional safe harbour provision to protect against legal liability.”