Canadian Lawyer

w w w . C A N A D I A N L a w y e r m a g . c o m A P R I L 2 0 1 7 15 The Allstate Corporation recently received a shareholder proposal requesting that its board adopt a rule that, wherever possible, its lead director have less than 12 years tenure on the board. The stated rationale for the proposal was a concern that a longer tenure compromises director independence. The independence of directors is a key fulcrum for good governance. There are layers of securities law requirements, regu- latory "best practice" recommendations, proxy advisory prescriptions and institu- tional investor voting guidelines that focus on director independence by addressing board composition as well as service on crit- ical board committees (such as audit com- mittees). Generally, independence turns on factors such as current or recent employ- ment by the issuer and other relationships (professional or personal) that may affect, or may be perceived to affect, the director's ability to discharge her responsibilities in an objective and unbiased manner. The apparent basis for concern about tenure is that long service may tend to result in an overly cozy relationship between the director and long-standing board members and chief executives. This issue has emerged not just in initia- tives such as the Alcatel shareholder pro- posal but in ongoing discussions about director term limits. Although little regu- latory change has yet occurred on this front, director term of service consider- ations are increasingly appearing as rel- evant considerations in voting guidelines of institutional shareholders and gover- nance watchdog organizations. It may be partly a function of my advancing age that the equation of longev- ity with compromised effectiveness does not fully resonate. Putting aside my senior- ity (still unaccompanied by any sign of maturity), there are debatable aspects about tenure-based initiatives. Certainly, arbitrary standards may have the effect of sidelining directors who happen to be very effec- tive. Further, more senior directors may, due to deeper familiarity with the business, accrued standing and credibility and/or the very relationships that lead some to question their independence, be better positioned to fulfil their board responsibilities. One could also argue that there are other means of monitoring board members' effectiveness. For example, boards annually perform a very substantial self-evaluation exercise that seems to be more thorough and detailed with every passing year. A significant fea- ture of those evaluations is assessing board composition and the effectiveness of each member of the board; tenure, and the need for board renewal, should factor into those analyses. More generally, it can be argued that those best positioned to assess the effectiveness and functional independence of board members are the other members of the board who witness each other in action, rather than shareholders not directly involved in board processes. An alternative direction in which this issue may head, like some other governance initiatives, is toward comply or explain ter- ritory, where issuers that don't embrace a given concept are required or pressured to explain why they don't. This solution is a tempting compromise for ideas that might have benefits but face headwind for being immutable and non-responsive to particu- lar circumstances; though, of course, it is not an easy matter to explain to sharehold- ers why a governance initiative is not being adopted. How the Allstate proposal itself ends up remains to be seen. Allstate argued that it should be entitled to exclude the proposal on the basis that it "[q]uestion[ed] the competence, business judgment, or charac- ter of one or more nominees or directors," but the Securities and Exchange Commis- sion rejected the argument. Having said all of this, it is certainly the case that the underlying motives of encour- aging board renewal and questioning other phenomena that may affect director effec- tiveness are healthy and important. But I do think that there are limits on assess- ments of effectiveness, which is why despite the pleasing rhyme I will resist any efforts for "Say on May" initiatives. Neill May practises securities, M&A and corporate finance at Goodmans LLP in Toronto. The opinions expressed in this arti- cle are his alone. ebate about governance initiatives continues unabated, but the catchy labelling industry seems to be napping. In recent years, the push for shareholder input on executive compensation resulted in "say on pay" shareholder proposals, once considered extraordinary and now somewhat common- place. Much of the recent debate has focused on director tenure, as to whether there should be limits and whether at some point continued ser- vice compromises the director's independence. So I ask, was "say on stay" too obvious a moniker? For those directors who might be really overstaying their welcome, perhaps "say on decay"? Or if there is some sense of bias against older directors, "say on grey"? Please stop, you might pray. B A N K I N G O N C O R P O R AT E By Neill May nmay@goodmans.ca O P I N I O N The compromises of tenure D THE APPARENT BASIS FOR CONCERN ABOUT TENURE IS THAT LONG SERVICE MAY TEND TO RESULT IN AN OVERLY COZY RELATIONSHIP BETWEEN THE DIRECTOR AND LONG-STANDING BOARD MEMBERS AND CHIEF EXECUTIVES.

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