Public Submissions on Governance Issues

October 11, 2011

Re: Proposed Amendments to Part IV of the Toronto Stock Exchange (“TSX”) Company Manual (the “Manual”) – Request for Comments

We welcome the opportunity to provide this submission concerning proposed amendments to certain governance standards and disclosure requirements regarding the director election practices of TSX-listed issuers, as contained in the Manual (the “Proposed Amendments”).  Our Board takes matters of corporate governance very seriously and Power Financial Corporation (“Power Financial”) and its affiliates are active participants in the public dialogue regarding corporate governance in Canada.

As a general comment, while we strongly believe that sound corporate governance practices are essential to the well-being of a company, the imposition of “one‑size‑fits‑all” governance measures is inappropriate in our view since issuers should have the flexibility to adopt governance practices that they believe are the best suited for their particular needs and circumstances, subject to compliance with applicable corporate law. 

The Power Group

Power Financial (TSX: PWF) is a diversified international management and holding company that holds interests, directly or indirectly, in companies that are active in the financial services and other business sectors in Canada, the United States and Europe.  We are major long-term shareholders of companies, including Canadian public company subsidiaries, such as Great-West Lifeco Inc. (TSX: GWO)[1] and IGM Financial Inc. (TSX: IGM)[2].  In addition, Power Financial is the principal asset of Power Corporation of Canada (TSX: POW), which holds an approximately 66% voting interest in Power Financial.

Appropriateness of this TSX Initiative

Director election practices are currently, and have been historically, the subject of carefully considered and well-developed corporate law.  While the TSX plays a vital role, particularly in the areas of continuous disclosure and matters concerning changes in capital structures, we respectfully submit that the TSX should not regulate areas outside of its primary and historical jurisdiction and area of expertise[3], which, in the case of listed issuers, relates almost primarily to the disclosure of material information and issuances of securities. 

Majority Voting

Although the Proposed Amendments do not mandate majority voting or the adoption of a majority voting policy[4], it is our view that the proposed comply-or-explain model necessarily implies that adoption of a such a policy is a best practice for all companies, with corollary negative implications for companies with legitimate explanations for non-adoption. 

Governance Differences for Controlled Companies[5]

Since 2007, our shareholders have had the ability to vote for or withhold from voting for each individual nominee proposed for election to our Board of Directors.  As both a controlled company and a controlling shareholder, it is our view that, as concerns majority voting, the current regime in respect of the process for the election of directors under corporate law is appropriate and that no changes are desirable or necessary.  We are in compliance with corporate laws in respect of director elections and would respectfully point out that Canadian corporate law in this regard is the result of over a century and a half of careful consideration by both the courts and the applicable legislatures. 

Requiring controlled companies to adopt a majority voting policy would be an illusory shareholder democracy development at best and would not serve a concrete purpose since the controlling shareholder would necessarily cast a majority of the votes to be cast in an election of the company’s directors.  In such a context, it is unclear how a majority voting policy would provide “a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors”. [6] A controlling shareholder would be expected to have an active dialogue with the controlled company through its board and nominating committee and, as a practical matter, would not choose the casting of votes at a shareholder meeting as the forum for raising its displeasure with any board nominees.  Accordingly, imposing such requirements on a controlled company would serve no purpose and would be misleading to shareholders (given it can have no possible practical effect). In addition, it would only serve to increase the costs and complexity of the process for electing directors and would not be in the best interests of the shareholders as a whole. Finally, taking into consideration the specificity of controlled companies is all the more warranted considering that approximately 18% of the firms listed in the S&P/TSX Index are controlled companies.[7]

Acknowledgement of Governance Differences for Controlled Companies

On October 11, 2011, the Canadian Coalition for Good Governance (“CCGG”) published its Policy Regarding Governance Difference of Controlled Corporations (the “CCGG Guidelines”).  While we do not agree with all aspects of the CCGG Guidelines, they reflect the culmination of CCGG’s consultative research of equity controlled companies, undertaken in order to understand such companies’ unique governance issues.[8] The CCGG Guidelines recognize that certain of the governance guidelines contained in CCGG’s 2010 Building High Performance Boards “may not apply equally to equity controlled companies” and, accordingly, supplements those guidelines to take into account “the legitimate governance differences of equity controlled corporations”.

While the CCGG Guidelines provide that, generally, companies should adopt a majority voting policy, they recognized that for controlled companies[9], adoption of such a policy would rarely lead to the resignation of a director, and therefore a controlled company should instead adopt a policy that commits the company to: (i) allowing shareholders to vote for each individual director; (ii) disclosing the results of director elections promptly after each annual meeting, and (iii) immediately adopting a majority voting policy if at any time the company ceases to be a controlled company.

Further, in National Policy 58-201 – Effective Corporate Governance, the Canadian Securities Administrators (“CSA”) acknowledged that concerns have been expressed in respect of how existing governance policies affect controlled companies and the CSA committed to carefully considering such concerns, and to undertaking a study, with consultation of market participants, to examine the governance of controlled companies and consider whether to change how existing governance policies treat such companies[10].

Conclusion

While we strongly believe that sound corporate governance is essential to the well-being of a company, no single corporate governance model is superior in all respects and the imposition of a “one-size-fits-all” governance measure is inappropriate as it fails to recognize differences among companies, such as the presence of a controlling shareholder. Accordingly, while we do not support amending the Manual to require comply-or-explain disclosure in respect of the majority voting or to mandate that TSX-listed issuers adopt a majority voting policy for uncontested director elections, if any such amendments are forthcoming, our view is that they should not apply to companies where a controlling shareholder holds a majority of the votes to be cast in respect of the election of directors, in recognition of the fact that such controlled companies have unique governance considerations and that a majority voting policy does not serve a useful purpose for shareholders of such companies.

Representatives of Power Financial would be pleased to discuss the foregoing with the TSX if that would be of assistance.

Yours very truly,

Stéphane Lemay

Vice-President, Assistant General Counsel and Associate Secretary

[1] Power Financial and IGM Financial Inc. hold 68.3% and 4.0%, respectively, of Great-West Lifeco Inc.’s common shares, representing, in aggregate, approximately 65% of the voting rights attached to all outstanding Great-West Lifeco Inc. voting shares.

[2] Power Financial and The Great-West Life Assurance Company, a subsidiary of Great-West Lifeco Inc., hold 57.5% and 3.6%, respectively, of IGM Financial Inc.’s common shares, representing, in aggregate, an approximately 61% voting interest in IGM Financial Inc.

[3] On February 22, 2005, the Ontario Securities Commission approved amendments to the Manual relating to corporate governance, effectively ceding regulation of such matters to the Canadian Securities Administrators.

[4] However, Question 4 notes: “Do you support TSX mandating that its issuers have a majority voting policy for uncontested director elections? Please identify potential positive and negative impacts that may result if issuers are required to have a majority voting policy.”

[5] While we acknowledge that a shareholder can effectively maintain control with less than a majority voting interest in a corporation, when used herein, “controlling shareholder” refers to shareholder with at least a 50% voting interest in a corporation and such corporations are referred to herein as “controlled companies”.

[6] We are strongly opposed to any future imposition of a “majority of the minority” voting requirement for director elections as such a requirement would effectively disenfranchise controlling shareholders and expropriate their economic rights without compensation.

[7] See results of the study of voting power in the 253 listed firms in the S&P/TSX Index in July 2008, reported in Policy Paper No.3, “The Independence of Board Members: a Quest for Legitimacy” of the Institute for Governance of Private and Public Organizations.

[8] The CCGG has committed to prepare guidelines for dual-class share companies, which have further unique governance issues, in the future.

[9] As the CCGG Guidelines only relate to those issuers who are controlled through the ownership of common shares, and not to issuers who are controlled by virtue of multiple-voting or dual class share structures, “controlled companies”, in this context, are limited to companies where a shareholder controls 50% or more of the common shares. 

[10] See Section 1.1. We note the importance to investors, large or small, of this undertaking by the CSA and encourage the CSA to continue its review and to proceed with appropriate revisions at an early opportunity.