Ongoing Regulatory Outreach on Corporate Governance




Corporate governance moved to the center of U.S. regulators' purview after the "Public Company Accounting Reform and Investor Protection Act" and the "Corporate and Auditing Accountability and Responsibility Act", together known as the "Sarbanes Oxley Acts," were enacted in 2002. With a new emphasis on accountability for corporate management, the Securities & Exchange Commission undertook a series of reforms to enable shareholders and other stakeholders to exercise more effective influence on corporate management and boards of directors. Proxy voting, potentially one of the more powerful levers by which investors could help influence corporate policies, came under scrutiny by Commission staffers. 

Initially, the Commission acted to limit the ability of brokers to vote uninstructed proxies on a discretionary basis. At one time, brokers would routinely cast votes in favor of management on all ballots for shares which the firm held on nominee name. During the era of physical certificates, this practice was an important, but not pivotal source of support for corporate management. However, after the immobilization of share certificates in securities depositories,brokers became nominees for many more shares and, as a result, this autonomous voting practice often resulted in management gaining carte blanche in the affairs of the corporation. The degree to which the regulators disliked broker discretionary voting can be seen in the tenacity with which the New York Stock Exchange worked to strengthen and extend its voting prohibitions:

Outreach Timeline on Broker Voting Constraints
  • October 24, 2006: NYSE proposes to eliminate broker discretionary voting for the election of directors (as a change to Rule 452).
  • May 23, 2007: NYSE amends its proposed Rule 452 change to exempt ‘40 Act mutual funds from the ban on broker discretionary voting;
  • June 28, 2007: NYSE files Amendment No. 2 to the proposed rule change;  
  • February 26, 2009: NYSE files and withdraws Amendment No. 3 to the proposed rule change ("for technical reasons").
  • February 26, 2009: NYSE files Amendment No. 4 to the proposed rule change, to supersede and replace the proposal in its entirety.
  • March 6, 2009: SEC publishes the proposed rule change in the Federal Register and receives 153 comments;
  • July 1, 2009: SEC approves the proposed rule change, as modified by Amendment No. 4.

By 2009, SEC and NYSE reforms had limited the power of brokers to vote discretionary shares in all but the most routine corporate elections. Turning then to the ability of investors to add their own shareholder initiatives on the annual ballot, the Commission moved to impose a responsibility for Proxy Access on corporate securities issuers. Although Proxy Access was later overturned by the courts on a technicality, it was clear that the regulatory apparatus was moving toward support for greater empowerment of shareholders in corporate policy-making by minimizing broker votes. To continue the reform process, the Commission directed the SEC staff to prepare a consultative document and issue a request to the public for comments. 


Subsequently, in 2005 and again in 2012, securities regulators became alarmed at reports of “empty voting” in the North American markets. An academic paper by researchers sponsored by the Wharton School at the University of Pennsylvania began the controversy by alleging that hedge funds were borrowing shares in the securities finance markets so as to manipulate the outcome of votes at corporate meetings. Without taking on any economic exposure, the academics argued that hedge funds could take positions contrary to the wishes of the pension funds who lent out the shares. Even more dramatically, the academics alleged that the practice of “vote buying” was a) widespread in the U.S. securities lending markets, and b) that positions could be created at virtually no cost.

“Is improved Corporate Governance a key driver for sustained market development?”
Panel 2 at the 39th Annual Conference of the International Organization of Securities Commissions (IOSCO), October 2, 2014, Rio de Janeiro

“Everybody agrees that good corporate governance practices are essential to the development of capital markets. Formal mechanisms to control and monitor operational practices and internal processes of market players are ever more relevant to mitigate risks that may become systemic and compromise market soundness. How can capital market regulators act in a more effective manner in this scenario, identifying governance risks and seeking to constantly improve the perimeter of regulation? What are the direct and indirect roles played by regulators in matters relating to the governance of issuers?”


Seven years after the academic paper appeared, a New York hedge fund seemed to prove the empty voting theory in practice. In 2012, Mason Capital attempted to block a share consolidation proposal by Telus, Inc., a major Canadian telecommunications company, through a strategy linked to the securities finance markets.

Mason voted against the Telus proposal after acquiring voting shares with the proceeds of borrowed, non-voting Telus shares sold short. Mason’s vote against the consolidation – a measure whose passage, by all accounts, was supported by the very institutions that had lent the voting shares to Telus – eventually was disallowed by the provincial supreme court on a technicality. However, the empty voting issue was now fully in play: just as the academics had argued in 2005, an investor with no economic exposure to a corporation had acquired overwhelming electoral power at its Annual General Meeting.


Within two years, the U.S. and Canadian regulators had issued consultation documents in reaction to the empty voting controversy. Both regulatory papers requested comments on potential reforms to the process which elicited cautionary responses from various stakeholder groups. Investors advised against reforms which might limit their ability to use derivatives to hedge against economic exposure, while issuers and intermediaries argued that cost-benefit analyses should be conducted before undertaking any radical reforms of the existing processes. However, Carol Hansell, the Toronto lawyer who helped spearhead the proxy voting debate in 2010 and who now runs her own boutique law firm, “There’s definitely enough information for the CSA to consider what the next steps are.”

“We believe that the CSA should focus on the back office mechanisms and practices that track that entitlement to vote – and even in that area, it is not entirely clear what improvements might be required to enhance the integrity of the proxy voting process.” Taylor, Andrea, “IIAC to Canadian Securities Administrators,” Letter, November 13, 2013, p.11, at

In its comment letter, the Council of Institutional Investors was focused more on what was not needed. “The CSA should consider, if it has not already done so, reviewing and responding to the above findings before implementing any changes to the current securities lending system. Such consideration might lead the CSA to determine that present securities lending issues are based less on borrowing for the purpose of empty voting and more on market transparency and informational asymmetries.”