Litigation Flashpoints

Proxy contests spill over into court for many reasons, but there are certain flashpoints of which both activists and issuers should be mindful.  For activists, these are pitfalls to avoid, while for issuers they may represent opportunities to push back on sharp tactics and maintain a level playing field in the struggle for shareholders’ votes.

Some common reasons for which parties may find themselves before a judge include:

  • Securities disclosure requirements: Securities laws require disclosure of positions at specific thresholds, and these requirements can vary from one jurisdiction to the next. An activist wants to focus on its message for shareholders, not be dragged into the distraction of defending itself from allegations it is offside securities laws.  From an issuer’s perspective, these statutory filings may be the first evidence that an activist wants to make a move on the company.
  • Inadvertently acting in concert: Seeking support from fellow shareholders is integral to an activist campaign, but in doing so would-be dissidents should be careful to avoid communications or agreements that could result in them being considered by a securities regulator to be acting in concert, which could cause the activist to accidentally pass disclosure or even takeover bid thresholds.
  • Don’t get carried away: Securities laws prohibit false or misleading statements, and the defamation suit has a prominent place in the special situations litigator’s toolkit. For both activists and issuers, the solution is a simple one: speak with the facts, and avoid making up new ones.
  • Be careful with social media: Just because an appeal to shareholders is made in a tweet doesn’t mean there aren’t applicable securities laws. Be mindful of, for example, shareholder solicitations made on social media which could trigger regulatory filing requirements.
  • The bylaws set the rules: Issuers are increasingly adding disclosure requirements and other rules to control the parameters for of the proxy playing field long before an activist investor emerges onto the scene. Activists need to do their research and, if an activist wants to challenge a provision in the issuer’s bylaws, the activist should be prepared to go to court.
  • Standstill agreements: Parties who agree to a standstill should choose their language carefully, or else an issuer could find itself confronted by an activist challenger much sooner than they believed they had bargained for. Conversely, an activist that believes it is outside a standstill could have its campaign stopped in its tracks if a court disagrees with its interpretation of the contract.
  • It’s not over until it’s over: Winning a campaign is not necessarily the end of the threat of litigation for the activist. Where there is a sale of the company closely following a successful campaign, the activist can face a claim, which could come in the form of a class action, alleging that the newly elected directors breached their duties to the issuer.

For all of these, the best and most important precaution that an activist or issuer can take is to hire counsel experienced in proxy disputes and securities laws.  Indeed, lawsuits are infrequent precisely because it is uncommon for activists to launch proxy contests without hiring external consultants to help them navigate the legal waters, and issuers are well-advised to take the benefit of similar expertise.

Unintentionally landing in court is expensive, distracting, and usually unpleasant.  It should never happen by surprise.

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Should companies expect an increase in short-selling activism in Canada?

Success breeds imitation. The persistence of that cliché is good evidence of its accuracy.  Its implications, however, may be a warning call with respect to shareholder activism in Canada.

The woes of Valeant Pharmaceuticals International Inc. (“Valeant”) and its share price have been well documented in the media. Following a report by Citron Research, who held a short position in Valeant, alleging improper revenue recognition, Valeant’s shares fell precipitously: on the day prior to the report, October 20, 2015, Valeant’s shares closed at $190.85 (CDN) on the TSX.  On October 22, 2015, Valeant’s shares closed at $144.05.  By now, Valeant’s shares have declined to under $40, albeit not solely on the basis of Citron’s allegations.

It is not my intention to recite in depth the news surrounding Valeant. Its plight does, however, highlight an important form of activism that should not be overlooked: short-selling activism.

In broad strokes, the practice of short-selling activism involves an activist taking a short position on a company, while publically identifying reasons why the share price is overvalued – often (but not always) through explosive allegations of fraud or criminality. The practice is not particularly new, with well documented cases of public shorts in North America in 2011 and 2012, but the Valeant case represents one of the largest, most notorious, and most consequential public short in Canada in recent memory.  It is a fair assumption that this notoriety may lead to an uptick in short-selling activism, and it is an issue that boards should be prepared to address.

Traditional shareholder activism generally seeks to increase a corporation’s share price, at least in the short term. Short-selling activists, in contrast, only profit when a company’s share price declines.    The dissimilar incentives as between shareholder activism generally and short-selling activism means that responding to this unique form of activism, or being prepared in advanced to respond to it, presents unique challenges.

We have outlined strategies for responding to shareholder activism in the past, and our Special Situation Team, in collaboration with The Boston Consulting Group and RBC Capital Markets, has released a white paper addressing defensive strategies to shareholder activism.  Many of these strategies, including engagement with long-term shareholders, good governance, and proactive board involvement in value creation, remain relevant and important to defending against virtually all forms of activism.  Engagement with the activist, however, which may be beneficial in responding to traditional activism, has little to recommend itself in the context of short-selling activist, as it is effectively a zero-sum situation: there can only be one winner when one party seeks value creation and the other value destruction.  Consequently, a board should be prepared to adopt a significantly more aggressive strategy in dealing with a short-selling activist, and should expect the activist to respond in kind.

Policy activists get tough on climate change

As we previously predicted in a 2014 article, The Rise of Policy Activists?, policy activism in Canada is gaining speed. In this year’s upcoming proxy season, a hot topic for policy activists is the potential transition to a global low-carbon economy.

Canada is currently working towards a national climate change plan and one of the tools being considered is a national carbon tax. If implemented, energy companies would be required to pay a national tax on greenhouse gas emissions.

One of Suncor’s shareholders, NEI Investments, filed a shareholder proposal last month demanding that Suncor address its long-term survival plans. In particular, it demands that Suncor “provide ongoing reporting on how it is assessing, and ensuring, long-term corporate resilience in a future low-carbon economy.”

NEI Investments’ proposal will be put to a shareholder vote at Suncor’s annual general meeting on April 28, 2016. While shareholder proposals are technically non-binding even if they receive a majority of votes, this proposal has Suncor’s support and Suncor has even recommended that shareholders vote in favour of the proposal.

NEI Investments explains its position in a report entitled The End of the World as We Know It: Transitioning to a Low-Carbon Energy System. It states: “We believe the energy transition is already underway and change is now inevitable. As a result, investors face both risks and opportunities, but more importantly, we believe investors have a responsibility to actively drive this transition.”

South of the border, shareholders of Exxon – the world’s largest publicly traded oil company – recently brought a similar proposal requiring Exxon to account annually for the risks of climate change legislation. Exxon objected, arguing that the proposal was vague and that Exxon already published carbon-related information for shareholders on its website. The US Securities and Exchange Commission, however, found that Exxon’s public disclosures do not appear to “compare favorably with the guidelines of the proposal” and ordered the shareholder resolution to be put to a vote at Exxon’s annual meeting this May.

While the specifics of Canada’s climate policy remain to be seen, it is clear that a climate change plan is on the agenda for Canada and other countries around the world. Policy activism will continue to rise as investors become increasingly conscious of the risks of climate change.

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Making Your Vote Count: New Developments on Proxy Voting in Canada

The majority of shareholders in Canada hold their shares through a broker or other intermediary which in turn holds their shares with the Canadian Depository for Securities Limited (CDS). Most voting at shareholder meetings therefore occurs within a layered, complex and opaque proxy system. This leads to uncertainty as to whether all of the votes of the true beneficial shareholders are properly tabulated. The Canadian Securities Administrators (CSA) have announced proposed changes to the process of vote counting and reconciliation, which will hopefully result in a more accurate, reliable and accountable voting system.

The CSA has proposed new protocols for the parties responsible for vote collection and tabulation.  These parties include CDS, intermediaries such as brokers, Broadridge Investor Communication Solutions Canada (the main proxy voting agent for intermediaries) and transfer agents who act as vote tabulators at shareholder meetings.  The new protocols delineate clear roles for each of these participants at each stage of the process and outline the operational processes that each should implement to ensure their roles and responsibilities are fulfilled.

The protocols include:

  • moving towards a paperless proxy voting system; and
  • developing end-to-end vote confirmation capability that would allow beneficial shareholders to receive confirmation that their voting instructions have been received by their broker or other intermediary and submitted as proxy votes, and that these proxy votes have been received and accepted by the transfer agent as tabulator.

In addition, the CSA intends to establish a committee to promote better communication, information sharing and problem solving among the participants responsible for vote collection and tabulation.

Although the CSA did not identify any vote reconciliation issues unique to proxy contests, the proposals, if implemented, will provide greater certainty and transparency for all parties involved in proxy contests and hopefully will provide beneficial shareholders with greater comfort that their votes were, in fact, properly received and counted.

The deadline to comment on the proposed protocols is July 15, 2016.  The CSA intends to publish the final protocols by the end of 2016, in time for the 2017 proxy season.  The protocols will likely be implemented on a voluntary basis initially.

A copy of the CSA amendments can be accessed here.

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The State of Proxy Access Reforms

With the rise of shareholder activism led by what some refer to as “constructivists”, “reluctavists” or “suggestivists” (and, yet others, those who commit “extortion”), shareholders have become increasingly distrustful of leaving matters of corporate governance to management and boards. One tool that investors can rely on is exercising rights pursuant to a proxy access by-law, or, in Canada, the statutory rights of certain shareholders.

Proxy access is about enabling shareholders to influence who governs a company, and by extension, how the company proceeds with its affairs. It expands the activist shareholder’s quiver of offensive tactics by giving shareholders the right to nominate candidates to the board of directors and, in the United States, have information about those candidates included in the management’s proxy statement at the expense of the company. In Canada, the current rules do not provide the right to include shareholder nominees on the same form of proxy used by the company, so shareholders resort to preparing costly dissident proxy circulars that provide an overview of the nominees, as well as the overall thesis behind the shareholder’s actions.

In essence, proxy access preempts the need for an expensive, drawn-out, and often all-consuming proxy battle. All shareholders are given control of the board nomination process through their vote at the annual meeting, and can directly select the most qualified or best-positioned candidate to replace unproductive or misaligned directors.


In August 2010, the Securities and Exchange Commission (SEC) adopted changes under Exchange Act Rule 14a-11 to the federal proxy rules in order to “facilitate the rights of shareholders to nominate directors … as a matter of fairness and accountability”. The changes, which are now colloquially referred to as the ‘3/3/25 Rule’, gave shareholders who: (i) owned at least 3% (whether held individually or as an aggregate of a group) of the total voting power of the company’s securities that are entitled to be voted on the election of directors at the annual meeting, (ii) for at least 3 years, (iii) could nominate up to 25% of the company’s directors. In July 2011, the United States Court of Appeals for the District of Columbia Circuit vacated the rule, stating that the SEC “acted arbitrarily and capriciously” and” inconsistently and opportunistically framed the costs and benefits of the rule”. The SEC, in response, permitted companies to adopt proxy access bylaws of their own accord.

In November 2014, the New York City Comptroller submitted 75 proxy access proposals through the 2015 Boardroom Accountability Project at companies targeted because of corporate governance deficiencies with respect to environmental liabilities, executive compensation and board diversity. To date, well over 100 U.S. companies have adopted proxy access bylaws (up from 6 in November 2014, and including household names such as Apple Inc., Coca-Cola Co., General Electric and McDonald’s Corp.), with the issue gaining momentum as we head into the 2016 proxy season, for which the Comptroller has already submitted more than 70 proxy access proposals. Overall, roughly 10% of S&P 500 companies have adopted proxy access by-laws.


Proxy access bylaws have not, as of yet, been an important consideration for most Canadian companies, largely due to the fact that under existing corporate laws, shareholders owning 5% (or shareholders representing 5% of shares in the aggregate) can nominate directors under a statutory mechanism (in Ontario, Business Corporations Act, RSO 1990, c B.16 s 99; federally, Canada Business Corporations Act, RSC 1985, c C-44, s 137). In Canada, director nominees are most often selected by an independent committee of the board of directors, which is responsible for identifying and nominating candidates. Extending the proxy access right in Canada is important due to the fact that most shareholders vote on the directors nominated by that committee prior to the meeting with a proxy form, making nominations at the annual meeting useless. In addition, in order to rely on the statutory mechanism, the nominating shareholder must limit the content of the nomination in the directors’ circular to 500 words, which must be submitted many months prior to the meeting date; activist shareholders do not frequently rely on the company’s proxy circular, for fear of too heavily relying on it as the only voice promoting the shareholder’s nominees. Over and above that, separate rules contained in advance notice bylaws adopted by a company are now widespread, requiring shareholders to submit detailed and compliant nomination proposals well in advance of the meeting.


There are generally two approaches that can be taken by companies trying to determine how to proceed. A company can take a “wait and see” approach and not act until a shareholder makes a proposal for the adoption of proxy access bylaws. Under this scenario, the proposing shareholder will be able to control the dialogue and suggest terms that may not be as preferable to the interests of the company if the company had led with its own version of the bylaw. Although most companies have adopted the ‘3/3’ elements of the 3/3/25 Rule, many have reduced the percentage of directors that can be nominated and placed limits on the number of shareholders acting together in order to form a 3% aggregate.

Under the second approach, the company can propose its own form of the bylaw, preemptively adjusting it to reflect its own appetite for shareholder participation in the nomination process.

The two major proxy advisory organizations have, so far, indicated different approaches on how they will evaluate proxy access bylaw amendments. Institutional Shareholder Services (ISS) has stated that it will generally recommend a vote in favour of proxy access proposals that abide by the 3% for 3 years standard, with a 25% limit on the number of directors nominated by the shareholder. On the other hand, Glass, Lewis & Co. has stated that it will review proposals on a case-by-case basis, and will not make broad recommendations.

In the United States, the Council of Institutional Investors, a nonprofit association of pension and benefit funds representing over $3 trillion USD assets under management, has been vocal about its position on proxy access, which it considers a “crucial mechanism”. Similarly, the Canadian Coalition for Good Governance (CCGG), a coalition of investors who together manage $3 trillion CAD in assets on behalf of funds and institutional investors, has come out with full-force support of proxy access reforms, suggesting even broader rights to shareholders. The most notable reform suggested by CCGG would be to eliminate the holding period, so that any shareholder meeting the requisite percentage would be able to nominate directors; this, as CCGG suggests, would eliminate the “two classes of shareholders” created by a holding condition.

Finally, as pointed out by another commentator, the issue of proxy access may well be one that is merely symbolic, with little material effect on activist endeavours. The type of shareholder that typically attempts to reconstruct a board of directors—most often, an activist hedge fund—does not often maintain long-term positions in a company. And as a comparison of13D filings (in the United States) and early warning reports (in Canada) to the occurrence of activist campaigns reveals, this type of rich and nimble investor becomes active in a stock for the very purpose of surfacing shareholder value through corporate reforms. This essentially means that proxy access and proposal rights may, ultimately, have little to no impact, and may divert investment dollars into companies that have not yet adopted these reforms. It remains to be seen whether proxy access will remain in the spotlight in the 2016 proxy season.


Corporate governance at top of mind for investors

A recent article from IR Magazine, “Governance crucial factor for nine in ten Canadian investors” (the Article), highlights just how much emphasis Canadian investors place on good corporate governance. Canadian companies would be smart to take heed and ensure their corporate governance is in line with accepted good practices. The Article reports that, of the members of the Canadian buy side interviewed as part of the “IR Magazine Investor Perception Study – Canada 2016”, 86% cite corporate governance as being a crucial factor when making investment decisions.

While corporate governance is a broad term, the respondents indicate that a good long-term strategy, succession planning and the separation of chairman and CEO roles are among the most important considerations for investors. The Article also states that where a company does not have appropriate measures in place in respect of these considerations, investors may pass on the company entirely, regardless of how good a potential return on investment is.

In addition to investors’ views on corporate governance broadly, the study also surveyed respondents to consider whether shareholder activism is generally good or bad for long-term shareholder value. The majority of those surveyed believe that shareholder activism is good for a company’s value, while 30% found that it is difficult to determine or varies based on each case and 15% answered that it was unequivocally bad for shareholders.

For those respondents that are of the view that shareholder activism is positive for company value, they point to the fact that activism sends a helpful reminder to management that it is are accountable to shareholders and generally results in positive change. Respondents also indicated that they typically prefer to work with management, rather than against. Of the group that believe activism is simply bad for shareholder value, the most highly cited reason was the potential for short term investments and the kind of problems which can arise as a result of a quick buy and sell.

With proxy season in full swing in Canada, issuers are preparing and releasing management information circulars chock full of corporate governance disclosure. This Article and study highlight the importance of company policies, strategies and independence. Investors are likely to be engaged in a detailed review of this disclosure as it is released through the spring and summer with a view to investment opportunities.

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How corporate governance reforms spread

Recent research on the adoption of majority voting rules provides some insight on how corporate governance reforms are adopted and change company behaviour, and suggests that reforms may have the greatest impact on firms that are late to adopt them.

The push for majority voting, which requires that directors receive a majority (rather than a plurality) of the votes cast in order to be elected, has been highly successful, with over 90% of S&P 500 companies adopting some form of majority voting by January 2014. Majority voting is intended to make boards more accountable to shareholders.  A recent paper by a group of U.S. authors tries to determine if it actually works, and in the process makes an interesting observation about the spread of corporate governance reforms.[1]

The framing observation for this investigation is that, while widely adopted, majority voting rules have caused the removal of very few directors. Of more than 24,000 director nominees subject to majority voting in elections between 2007 and 2013, only 8 failed to achieve a majority of votes cast, and of those, only 3 actually left the board .  These numbers raise the possibility that majority voting may be popular precisely because, while it looks good, it doesn’t actually do much.

However, empirically, majority voting rules are associated with several positive markers – more consistent majority shareholder support for directors, more regular board attendance by directors and fewer “withhold” recommendations from ISS. The researchers attempted to determine if this was a majority voting success story (i.e. these positive effects occur because majority voting pushes directors to be more responsive to their shareholders) or if there was another explanation, such as: companies that are already more responsive to their shareholders are more likely to adopt majority voting; companies with majority voting lobby ISS more heavily to avoid negative recommendations; or shareholders are more reluctant to vote “no” under majority voting because they perceive a no vote to be more impactful than it would be under plurality voting.

Researchers found some support for all four explanations but, interestingly, they found that the timing of the adoption of majority voting made a significant difference. Early adopters were more likely to be firms that were already responsive to their shareholders, and majority voting had little effect on director behaviour for these firms.  Conversely, late adopters were much more likely to have changed their behaviour as a result of adopting majority voting.

These findings suggest that corporate governance reforms are rarely successful in changing the behaviour of perceived problematic actors at the outset. Instead, reforms spread first to more receptive companies that already have good relations with their shareholders, for whom adoption carries little cost and does not demand any change in behaviour.  Adoption by these firms creates an industry norm that increases the pressure on non-adopting firms, who become increasingly isolated as the reforms gain acceptance.

On reflection, this makes sense. Voluntary adoption is a sign that reforms are succeeding, but the reforms have little effect on the firms that readily adopt them voluntarily; rather, it is at the firms that resist adoption and are pressured into it that actual change occurs.

For companies, this is simply another reminder of the importance of keeping up to date on corporate governance issues. A firm that becomes an outlier in the market may be challenged to either explain itself or change its ways, and it could invite activist attention depending on how it handles these questions.

[1] Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel and Rock, Edward B., Does Majority Voting Improve Board Accountability? (November 4, 2015). University of Chicago Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 15-31. Available at SSRN:

More proxy fights and bully M&A tactics to come for commodity issuers; CSA publishes amendments to the Canadian take-over bid regime

Yesterday morning, the Canadian Securities Administrators (the CSA) published the long-awaited amendments to Canada’s take-over bid regime (the Amendments) under Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids. We believe that these Amendments may result in the increased use of proxy fights and bully M&A tactics by acquirors to effect acquisitions of commodity issuers.

Key Features of Amendments

There are three key features of the Amendments affecting “non-exempt” take-over bids:

  • 105 Day Requirement. Take-over bids must remain open for a minimum deposit period of 105 days (the 105 Day Requirement) (as opposed to the current 35 day timeframe) unless (i) the target board states in a news release an acceptable shorter deposit period (provided that it is not less than 35 days); or (ii) the target announces that it has entered into an “alternative transaction”, in which case the original take-over bid will be subject to a shorter 35-day minimum period. The CSA had initially proposed a minimum deposit period of 120 days.
  • Mandatory Minimum Tender Condition. All bids must include a condition that more than 50% of the outstanding securities that are subject to the bid must be tendered (excluding securities owned by the bidder itself or its joint actors), which may not be lowered or waived.
  • Mandatory Extension. The bid period must be extended by at least 10 days after a bidder has received tenders of more than 50% of the outstanding securities. The purpose of this requirement is to provide target shareholders who did not initially tender their shares the opportunity to take-up the offer after the bid crosses the new mandatory minimum tender threshold.

The CSA’s stated purpose of the Amendments is to “enhance the quality and integrity of the take-over bid regime while rebalancing the dynamics among bidders, target company boards of directors and target company shareholders during a take-over bid.”

More Proxy Battles and Bully M&A Tactics for Commodity Issuers

We believe that the Amendments may result in an increased use of proxy fights and bully M&A tactics by acquirors to effect acquisitions of commodity issuers in circumstances where they would have otherwise done so by hostile bid under the current (and soon to be amended)  take-over bid regime. Under the current regime and in the context of a typical take-over bid, bidders are given multiple opportunities to withdraw their bids, including as soon as 35 days after the bid is launched and every 10 days thereafter. Under the new 105 Day Requirement, such “off-ramps” are no longer available and bidders will be required to leave their bids open for 105 days, which proposition may be less appealing to acquirors seeking to acquire commodity issuers. As such, acquirors would be required to commit themselves to a fully financed fixed bid price over a 105 day period knowing that a swing in the underlying commodity price may make the bid financially unviable, as commodity issuers are susceptible to volatile fluctuations in share prices over short periods of time, particularly in the current environment and market.

One way for a prospective acquiror to avoid the application of the new and more onerous takeover bid regime will be to instead employ more traditional activist tactics to effect an acquisition, such as running agitation campaigns, starting proxy fights, or using bully M&A tactics, such as the use of shareholder supported bear hug letters (which is an offer of a price higher than the trading price made to restrict the target’s options). These tactics offer a seemingly safer avenue through which an acquiror can influence a board or seek board control and ultimately effect an acquisition in possibly a more efficient and cost-effective manner.

From our discussions with securities regulators, we understand that this potential outcome was anticipated. While the Amendments clearly give target boards incrementally greater leverage in a hostile or unsupported context as compared to the existing regime (although not outright control like in the U.S.),  it has been widely known and accepted that Canada has one of or the most shareholder friendly legal regimes  for an advanced and highly developed capital markets jurisdiction, and there are multiple ways in which acquirors can achieve “hostile” acquisitions under Canadian corporate law. That said, commodity issuers should operate with a heightened level of awareness that these activist tactics may be employed against them and begin to focus on activism preparedness.

Effectiveness of Amendments

Except in Ontario, the Amendments will come into force on May 9, 2016. In Ontario, NI 62-104, and the related Amendments will come into force on the later of (a) May 9, 2016, and (b) the day on which certain sections of Schedule 18 of the Budget Measures Act, 2015 (Ontario) are proclaimed into force.

The Amendments can be accessed here.


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Better boards through better risk management practices

Prior to 2008, it was not uncommon for a bank to assign its risk oversight responsibilities to the audit committee of its board of directors, or in some cases, to even divide those tasks between a number of other committees. Since then, a number of policies and guidelines have been enacted (including, notably, the Basel Committee for Banking Supervision’s Corporate Governance Principles for Banks in July 2015) that set new standards and procedures with respect to how financial institutions are to monitor and moderate risk.

PricewaterhouseCoopers recently completed a study entitled Board Governance: Higher Expectations, but Better Practices?, which considers the policies and practices of the ten largest banks in the United States, focusing on boards of directors that have undergone significant changes including structural and functional transformation. The study finds that the impetus for these changes has largely been: (1) the need to comply with new or increasingly stringent regulatory requirements (that began and continue to emerge in the post-2008 environment); and (2) the recognition that better internal risk governance policies can empower boards to monitor—and if necessary, challenge—management on key operational decisions.

The study found that since 2008, all ten of the largest banks in the United States have created dedicated audit committees, compared to only twenty percent in 2008, prior to the financial crisis.

Although the formation of risk committees is now a requirement, the banks have supplemented the regulatory frameworks imposed by the U.S. Federal Reserve’s Enhanced Prudential Standards with additional in-house policies. For example, nine of the ten largest banks require a minimum number of directors to sit on the risk committee, despite the fact that the Federal Reserve has not set any such requirement. Increased committee sizes typically signal an increased desire for direct engagement in a specific area. In addition, 60% of the subject banks have self-imposed a rule that the risk committee be entirely independent, regardless of the fact that the Federal Reserve only requires that there be at least one independent director. Other refinements over the regulated standards include having at least one director with directly relevant risk management experience and including former regulators on the risk committee.

There are, however, areas where banks still fall short. Significantly, roughly one-third of the ten largest banks do not require their respective risk governance policies to be approved by the risk committee and roughly one-fifth do not require either the board of directors or the risk committee to approve risk appetite standards. In addition, only half of the banks require the chief risk officer to report to the risk committee. Issues such as these can raise the concern that these committees are devoid of actual influence on institutional direction and daily operations.

The study makes a number of recommendations. Banks should: (1) enshrine regulatory expectations in risk committee charters; (2) augment their boards with additional independent directors with relevant experience; (3) ramp up risk-related board training sessions; (4) establish internal standards for risk issue escalation, ownership and resolution; and (5) increase the risk committee’s engagement with  the chief risk officer. In order to prevent another big short, financial institutions must give greater attention to the risks they are willing to take on, and a large part of that is through empowering the risk committee in such a way so as to most effectively carry out its mandate.

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Top board priorities for 2016

With 2016 upon us, boards are likely to reflect on the organizational challenges they expect to face in the coming year, and to develop effective strategies to tackle these challenges. A recent EY publication anticipates that in developing these strategies, boards will focus their energies on addressing the following five critical challenges:

1. Board effectiveness, composition and refreshment

Boards are always looking for ways to self-improve. It is expected that 2016 will be no different in this respect. Boards will seek ways to attain the right mix of skills and experience and to enhance transparency and accountability. Particular attention will be paid to achieving board composition reflecting a greater diversity of knowledge and experience to mirror the increasing convergence of sectors and rising global interconnectivity. Demographic changes should give boards pause for thought on establishing an effective succession planning strategy. Among Fortune 500 companies with retirement-age policies, 19% of directorships are held by individuals within 5 years of reaching the board’s designated retirement age.

2. Investor and stakeholder engagement

The recent rise in investor activism has caused boards to reflect on their shareholder communication strategies. Boards are increasingly monitoring required filings to ensure they serve as effective communication tools rather than merely “compliance” documents. Designated directors are expected to be fully prepared to engage directly with investors on appropriate governance matters.

3. Cybersecurity

At the moment, only 7% of organizations claim to have a robust incident response program that includes third parties and law enforcement and is integrated with their broader threat and vulnerability management function. This percentage is shockingly low given the serious risk that a cyber-breach poses. It will be incumbent on boards to ensure critical infrastructure is adequately protected and that there is a system in place to respond to a crisis. Boards will have to familiarize themselves with organizational vulnerabilities so that they can both guide management’s cybersecurity strategy and prepare to face of new risks.

4. Oversight of Enterprise Risk Management (ERM)

In an effort to create long-term value, it is expected that boards will develop new policies and procedures to improve upon current ERM strategies and to enhance their organization’s risk culture.

5. Oversight of talent risk management

In conversations with board directors, three out of four directors claimed that human capital strategy, meaning the need to retain or acquire talent, will be one of the top emerging risks boards face in 2016. To mitigate this risk, it is anticipated boards will work more closely with management to ensure an appropriate human capital strategy is in place. In order to best fulfill this role, boards will be required to apprise themselves of any and all human capital vulnerabilities particular to their organization.

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The author would like to thank Michael Viner, articling student, for his assistance in preparing this legal update.