CPP Investments “Escalates” Concern over Classified Boards

Canadian pension scheme demands sunset clauses from portfolio companies.  

The Canadian Pension Plan Investments Board (CPP Investments) has voted against directors more than 500 times as part of its opposition to classified boards at its portfolio companies.  

CPP Investments, which manages C$523 billion (US$381 billion) in assets for 21 million beneficiaries, acted in accordance with a new voting policy “to escalate our concern regarding classified boards”.  

As part of the new policy, it will “consider voting against all directors up for election where votes against one or more directors are warranted under our proxy voting principles and guidelines”. 

In the year ending 30 June, CPP Investments applied its classified boards voting policy at 200 shareholder meetings, placing 555 votes against directors under the policy. The firm supported 100% of management proposals to declassify its board, as well as 100% of shareholder proposals requesting boards to declassify.  

The details were published in CPP Investments’ 2022 Report on Sustainable Investing. 

De-classifying classified 

Under a classified board system, directors can serve a term length between one to eight years, with longer terms tending to be awarded to senior board positions. This often limits the number of board members up for election each year. Defenders of the system say it is important in preventing acquisitions and hostile takeover, as well as promoting good corporate governance and providing “enhanced continuity and stability”.  

However, critics of the system, including CPP Investments, say it can cause board member complacency and force directors to maintain good relationships and placate corporate management. Moreover, it limits the ability of shareholders to show dissatisfaction with the board. “This structure actively inhibits the rights of shareholders to hold specific directors to account annually”, said CPP Investments.  

CPP Investments’ action is in line with its new policy introduced earlier this year, which follows related action taken by other asset owners. Railpen and US asset owners recently launched an initiative to ensure portfolio companies offer appropriate voting rights and defend shareholder rights.  

“We expect companies with classified boards to clearly set out appropriate sunset provisions that will define when annual director elections will commence and that governance will converge to best practice on a reasonable timeframe,” CPP Investments said.  

Net zero commitment 

In addition to voting against classified boards, the report gave details of CPP Investments’ voting behaviour and related actions on tackling climate risks in its portfolio. Last year, the pension fund introduced a climate change voting policy which means it will vote against the reappointment of any committee responsible for climate change oversight if the board fails to “demonstrate adequate consideration of physical and transition-related impacts from climate change”. 

Up to the end of the 2022 proxy season, CPP Investments voted against directors 65 times, as well as 35 companies where it voted against the reappointment of the chair of the risk committee. It also supported 20 climate-related shareholder proposals seeking “deeper disclosures” on issues including public policy, operational emissions management and asset portfolio resilience.  

CPP also updated its net zero commitment this year. The firm will target carbon neutrality by using a strategy of “active engagement to drive real-economy decarbonisation”. It has also committed targeting net zero greenhouse gas emissions from its operations and investments across all scopes by 2050. 

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