Cleaning house // Opinion

The appointment process for boards of directors of public companies is in dire need of reform

By Hon. Jerry S. Grafstein Q.C.

On Wednesday November 30th, 2011

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 Boards of directors of public companies are delegated broad discretion to wield enormous corporate power in the interest of shareholders. Frankly, their appointment process does not reflect the scope of that power.

Rather, the process is self-serving to management who, collectively with directors, rarely own more than a sliver of the publicly traded shares.

On the face of it, the interests of equity ownership seems almost irrelevant. Reform is needed. It’s time to put an end to the cronyism and cozy relationships between board members and management and instead give public shareholders a larger stake in how the company is run.

The compensation of senior management often appears to be out of sync with shareholders’ returns without appropriate public explanation; for example, think of the disproportionately high salaries and bonuses given to executives whose corporations lost money. The appointment process is in dire need of renovation and reform in order to more fully reflect the public shareholders’ interests — rather than the current arrangement whereby the management and board members are drawn and mainly selected by the management and other compliant board members.

Due in part to increased questioning over directors’ roles and their commitment to shareholders by unhappy shareholders, academics and the media, the Toronto Stock Exchange and the Ontario Securities Commission are looking at ways to change the voting system by which board members of publicly owned companies are elected in Canada. How to get rid of inept directors nominated by management is a crucial, yet unanswered, question.

More radical reform is needed. That is why the Roxborough Initiative is proposing a different solution, one that strengthens the influence of major shareholders on corporate governance and management. After all, the closer the equity owners are to management, the more management will attempt to satisfy their equity employers. The initiative was drafted by a group of independent investors and business leaders called the Investors Symposium, of which I am a member. Many of us have served on public boards.

The Roxborough Initiative proposes the following fix: The 15 largest shareholders of the company would be entitled to nominate an individual who will serve as a director for the following year. Each shareholder would be entitled to 10 electoral votes that can be allocated to any of the 15 nominees. Multiple votes for any nominee would be permitted. The 10 nominees with the most votes would then be elected to the board. Rounding out the board would be two management directors.

Directors will not receive salaries from the companies on whose boards they sit, but instead be paid by the shareholders they represent. No one on the board will be granted stock options by the company. The two management directors can be rewarded for good performance by the board by way of fully paid common shares held in escrow for two years. This would avoid reward for short-term results.

Clearly, the Roxborough Initiative is not perfect. Rather, it is intended to provoke a public debate in investment, corporate governance, public policy and government circles to renovate what is obviously a flawed corporate process that results in abnormal accretion of corporate power in too few hands at the expense of the equity owners.


The Honourable Jerry S. Grafstein, Q.C., is counsel to Minden Gross LLP, and a member of the Investors Symposium, which authored the Roxborough Initiative. He is a former Canadian senator, and has been the longest serving member of the Standing Senate Committee on Foreign Affairs and International Trade. Grafstein is also a co-founder of Citytv and Toronto Life Publishing Company Limited and previously served as a governor of the Canadian Opera Company.


Illustration: Carl Wiens