Proxy voting is a key part of RBC Global Asset Management’s (RBC GAM) engagement process; it provides an important way for us to learn how management and boards are addressing risks and opportunities, and allows us to convey our own views. Most companies in developed markets hold their annual general meetings during the spring and, as a result, this is when the bulk of proxy voting activity takes place ­­– often referred to as “proxy-voting season.”

This report will take a look at updates to our 2020 Proxy Voting Guidelines, and considers key factors that we expect will shape the upcoming proxy voting season, and how these factors tie into our investment teams’ engagement activities.

RBC GAM proxy voting guideline updates for 2020

Throughout the year, RBC GAM’s Corporate Governance & Responsible Investment (CGRI) group monitors ongoing developments in corporate governance. The CGRI group’s observations serve as a starting point for our annual updates to the RBC GAM Proxy Voting Guidelines (Guidelines), which also incorporate the views of our investment teams. This ongoing review process ensures that our Guidelines always reflect current best practices and emerging trends. Some of the most notable updates made for 2020 are summarized below.

• Since 2015, when we first provided details on shareholder proposals we will generally support, we have stated that RBC GAM will generally support shareholder proposals that request enhanced disclosure on a company’s impact on communities, including Indigenous communities. We still agree with this Guideline, but furthermore, RBC GAM believes that Indigenous groups have distinct rights that should be addressed separately from those of other community groups. As such, we have updated our Guidelines to address Indigenous Peoples and their specific rights, such as those set out in the United Nations Declaration on the Rights of Indigenous Peoples (UN DRIP).
• At RBC GAM, we believe that directors should have diverse backgrounds and experience to enhance overall board effectiveness. As a result, we have continuously updated our Proxy Voting Guidelines on board gender diversity to encourage greater diversity on the boards of our investee companies. Updated for 2020, if a board has less than 25% women directors and lacks an adequate gender diversity policy, we may vote against certain board members.

Trends for the 2020 upcoming proxy voting season

Virtual meetings

Virtual-only annual general meetings have historically raised governance concerns because of the potential to adversely impact shareholder rights (for example, shareholder questions can be vetted).  However, this year companies are grappling with holding their annual general meeting during the COVID-19 pandemic. In many cases, companies are adhering to local government restrictions to ensure the health and safety of employees and shareholders by moving to virtual-only meetings.¹

Globally, regulators including the UK Financial Reporting Council (FRC)², the U.S. Securities and Exchange Commission (SEC) ³, and Canadian Securities Administrators (CSA)⁴ have announced guidance for conducting virtual-only annual general meetings due to COVID-19 concerns. For example, the SEC and CSA are permitting companies to hold virtual-only annual general meetings after they have mailed and filed their proxy materials. These companies must announce the change in a press release, file the announcement on electronic forums (e,g., EDGAR and SEDAR), and take "all reasonable steps necessary" to inform all stakeholders of the changes.

Proxy voting season impact

This year we expect to see an unprecedented number of virtual-only meetings during proxy voting season due to COVID-19. Although a change of process is required in light of COVID-19, shareholders need to monitor the situation closely as companies may use this shift to virtual-only meetings as the new standard for future meetings, causing a long-term risk to shareholder rights. 

How we approach this issue at RBC GAM

In our view, a virtual meeting experience is not directly comparable to an in-person experience for all shareholders. For example, one of the concerns is how the company may vet shareholder questions.  Generally, we would withhold our support from the Corporate Governance committee if the company adopted a virtual-only meeting format and the resulting meeting format negatively impacted shareholder rights, but in light of COVID-19 we continue to monitor the situation carefully.

Board diversity

As regulations and disclosures continue to evolve, board diversity is top of mind for investors coming into this proxy voting season. For example, with the passing of Bill C-25 in Canada, new diversity disclosure requirements are in effect for federally incorporated companies governed by the Canada Business Corporation Act, which includes almost half of the country's largest publicly traded companies.⁵ Annual meetings held on or after January 1, 2020, will require these corporations to report on the representation of, at minimum, the following four groups on their boards and at senior executive levels: women, Indigenous peoples (First Nations, Inuit, and Métis), persons with disabilities, and members of visible minorities.⁶ Companies are required to disclose information about their policies and targets for the representation of the designated diversity groups, or explain the absence of a policy and/or targets.⁷ This requirement is akin to a “comply or explain” rule.

Proxy voting season impact

This proxy season, we expect to see more engagement from boards of Canadian federally regulated companies on their diversity disclosures and practices. Investors may push to make changes through engagements or formal shareholder proposals if they do not believe there is enough action being taken by the corporation. Because this is the first year of required disclosure, this push may come in 2021 as investors adjust to disclosure practices.

How we approach this issue at RBC GAM

As discussed, this year we updated our Guidelines to vote against certain board members if a board does not have a minimum of 25% women directors. Our updated Proxy Voting Guidelines contribute to the objectives of the 30% Club Canadian Investors Group, of which RBC GAM is a signatory, and which aims to have 30% women on the boards and the executive management level of all S&P/TSX Composite Index companies by 2022.

Cyber security

Cyber security breaches have increased significantly over the past five years. The World Economic Forum considers cyberattacks to be one of the top 10 most likely global risks of 2020.⁸ Cyberattacks may have substantial reputational and operational impacts and can cost companies millions, or even billions to repair.⁹ It has been widely recognized that cybersecurity is a broad governance issue requiring board oversight.

Over the past year, we have seen proposed regulations and new guidelines globally regarding cybersecurity. For example:

• In February 2019, the United States Senate proposed an amendment to the Securities Exchange Act of 1934. Bill S.592, or the Cybersecurity Disclosure Act of 2019, was proposed to promote transparency of cybersecurity risk oversight at U.S. publicly traded companies. If the act is passed, U.S. public companies will be required to disclose individuals on their boards with cybersecurity expertise.¹⁰
• In June 2019, rating agency Moody’s Corporation and Team8, a leading cybersecurity think tank, announced that they had formed a joint venture to establish a global standard for objectively and independently evaluating and assessing cyber risks facing global corporations.¹¹

Proxy voting season impact

We expect to see investors submitting shareholder proposals requesting enhanced disclosure on corporate oversight of cyber risks. In addition, we may see investors requesting that companies disclose in line with regional or global guidelines or regulations, such as the guidelines established by the Canadian Securities Administrators (CSA) in 2016.¹² Investors may also ask the board to demonstrate board oversight to adequately address cybersecurity issues ahead of the Cybersecurity Disclosure Act of 2019.   

How we approach this issue at RBC GAM

RBC GAM generally votes in favour of proposals requesting enhanced disclosure in an area that represents a real risk or opportunity for the corporation. We believe that cybersecurity is a material risk in certain industries and we will generally support requests for enhanced disclosure on how management is managing and mitigating these risks.

Climate change

How companies are addressing risks and opportunities resulting from climate change is currently a top engagement and proxy voting priority. There has historically been a lack of comparable and consistent disclosure provided by companies, which is required for investors to understand how companies are assessing and managing their exposure to climate change.

To help bridge this gap in comparable and consistent data, we are seeing more reporting in line with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). In July 2019, the Canadian Government’s Expert Panel on Sustainable Finance released a report with recommendations on how Canada can build a stronger, greener, and more resilient economy. One of the recommendations is that companies and financial institutions follow the principles of the TCFD to provide relevant, consistent, and comparable climate-related financial disclosures.¹³ In addition, the TCFD gained traction when, in its 2019 budget, the Canadian federal government expressed its support for the TCFD framework and encouraged its phased adoption by major Canadian companies and federal Crown corporations.¹⁴

In August 2019, the United States Senate introduced a bill to amend the Securities Exchange Act of 1934 called the Climate Risk Disclosure Act of 2019. This bill will allow the SEC to create a set of climate-related disclosures that all U.S. publically listed corporations will be required to provide. Although the disclosures may not be enforced for another two years, we expect that U.S. corporations will begin to provide more detailed climate-related reporting to investors.¹⁵

Proxy voting season impact

For the upcoming proxy voting season, we expect a greater push from investors requesting that companies provide enhanced disclosure on material climate-related risks, especially in circumstances where the company’s current disclosure is largely boilerplate, where companies are lagging relative to their peers, or in industries where climate-related risks are particularly material. In addition, we also expect to see investors requesting that companies disclose in line with global standards such as the TCFD.

How we approach this issue at RBC GAM

We believe that climate change presents both risks and opportunities to a multitude of industries and we encourage companies to provide transparent reporting on how they are managing, monitoring, and identifying material climate change-related risks and opportunities. We will generally vote in favour of shareholder proposals requesting enhanced climate-related disclosure in line with the TCFD recommendations.

Conclusion

Overall, the 2020 proxy voting season seems to be eventful and unprecedented in the midst of a global pandemic. In spite of the current situation, proxy voting will continue to be a key part of how RBC GAM engages with the companies in which it invests. RBC GAM remains committed to exercising the voting rights of the portfolios we manage in their best interests and with a view to enhancing the long-term value of the securities held.