Activists are becoming increasingly aggressive and sophisticated as regulation and market conditions turn in their favor
Shareholder activism in Canada is changing, and shareholders are increasingly driving change at the companies in which they own shares. No longer content to sit politely on the sidelines, Canada’s institutional investors are continuing to demand more responsible – and responsive – corporate directors, a trend analysts say has been has been building for the last few years. Spurred by a softened economy and inspired by regulatory changes in the US, many venerable Canadian companies are under pressure from their investors this proxy season to make a raft of governance changes.
This year, experts say, could be among the most active in history as institutional shareholders that were sidelined by the financial crisis return to the market and demand greater engagement. Canada’s natural resources and energy sectors are expected to be among the most active as investors look to maximize shareholder value, often by any means necessary.
Shareholder engagement is evolving in Canada in much the same way it did in the US. In the past, activism tended to focus on structural or governance issues such as separation of chairman and CEO roles, removal (or at least shareholder approval of) poison pills, dissolution of staggered boards and increased risk disclosure. But as market value has deteriorated and shareholders have become both more emboldened and increasingly sophisticated, their sights are shifting. For proxy season 2010 many investors are pushing to displace board members they feel are underperforming, in some cases attempting to replace them with candidates of their own. Others are pushing firms to unlock value, whether through a sale of assets, strategic acquisition or some other tool to accelerate growth and total shareholder return.
Preparing for battle
Proxy season in Canada has long stood apart from the US version due to its general lack of aggression and relatively few outright proxy fights. But as investors north of the border have seen their US counterparts achieving increasing success, they have started to adopt more of their tactics. Voting season this year is likely to be very vocal.
Corporate governance professionals and companies that assist with annual meeting services say 2010 may not be a hallmark year for shareholder activism in Canada in terms of the total number of fights, but concur that increasingly demanding investors are not letting up the pressure on key issues such as executive compensation and CEO succession planning.
Shareholders challenged Canadian corporate boards with 22 proxy fights in 2008, increasing slightly to 25 in 2009, according to Georgeson, a global consulting company that helps firms prepare for their annual meetings and handle shareholder relations, as well as advising shareholder groups. ‘It’s hard to predict how 2010 will go, but it’s not going to hit the 2008 or 2009 numbers, based on activists, hedge fund managers and, shall we say, concerned shareholders,’ says Roy Shanks, president and CEO of Georgeson Canada. ‘We do, however, expect a number of proxy contests this year. Stock prices will present that opportunity.’
Particularly vulnerable is Canada’s emerging resources sector, especially alternative energy. ‘Stock prices have been a little depressed and it’s easier to launch a battle when you can say the prices haven’t done well,’ explains Chris Makuch, Georgeson’s vice president. With prices being down across the board, there will be a far greater likelihood of ‘opportunistic’ deals as companies look to use cash reserves to take over competitors, potentially increasing shareholder value, at least in the short term.
The practice is particularly widespread in the mining and oil industries, Makuch adds. Those firms are especially vulnerable to market fluctuations and there have been several significant mergers in the sector in the past few months. It’s important to note, says Makuch, that takeovers are not always bad for the target company; many directors and investors in these firms welcome an approach from a rival, provided the bid is considered fair.
Taking lessons from the south
It turns out that Canadian shareholders, like capitalists everywhere, are increasingly concerned by potentially volatile market swings and a shrinking economy. Indeed, Canadian investors are pretty much like their American counterparts, observers say, though sometimes they’re a year or three behind in the anger curve.
The regulatory environment is shifting for Canadian issuers, too. Public companies have witnessed a constant march of disclosure regulation in recent years, as shareholders push for more information about the operation of companies they invest in and what risk factors might affect them. Other changes, such as the new 25 percent rule from TMX Group, which operates Canada’s two national stock exchanges, are designed to solidify the position of shareholders and force greater engagement between boards and owners.
Governance officials in Canada also keep a close eye on Washington and Wall Street, with companies often voluntarily adapting their own bylaws in response to SEC rulings. Many Canadian companies are dual listed or have US subsidiaries, and thus US shareholders. Still more surmise, more or less correctly, that the US and Canadian markets are so close they may as well harmonize sooner to avoid problems later.
Shanks says shareholder activism ebbs and flows in Canada, influenced by a combination of external – for which read American – influences and foreign regulations, as well as Canadian recession and, of course, individual company performance. ‘Boards are conscious of the landscape out there,’ he says. ‘They are looking at their best practice and corporate governance guidelines, and the compensation and nominating committees to make sure they are independent and well informed. Boards are becoming more engaged with their investors while directors and management are trying to understand who their shareholders are.’
Setting a good example
Boards of directors and senior management alike are eager to be seen as responsive to shareholder concerns, if not downright proactive. Among large and established corporations, the experience of the Royal Bank of Canada may prove instructive. The 146-year-old institution held its annual meeting on March 3, and shareholders overwhelmingly passed an advisory resolution asking for a clear explanation of executive compensation. Much more so than the actual numbers, shareholders wanted a description of the compensation’s links to individual and collective performance.
‘It went very well,’ says Carol McNamara, RBC vice president, associate general counsel and corporate secretary. ‘No drama.’ She says shareholders had for years been calling for an advisory vote on compensation disclosure. ‘Our board was very interested, and we were following the developments in a lot of different jurisdictions on the subject,’ she adds.
Indeed, the effort was coordinated through the Canadian Coalition for Good Governance (CCGG), a seven-year-old consortium of institutional investors controlling more than C$1.3 trillion ($1.29 trillion) worth of assets. RBC and a dozen other Canadian companies were involved in the drafting of sample language for say on pay. All of the companies involved with the initiative will have put the resolution before their own investors by the time annual meeting season ends.
David Denison, CCGG chairman, has described the collaboration as ‘uniquely Canadian’, and urged all public firms to adopt the practice of allowing shareholders a vote on executive compensation The group has posted its appeal at www.ccgg.ca.
Small steps
‘The past practice has been, if not to ignore dissident investors, to be dismissive of them’ The say-on-pay resolution is a step in the right direction, shareholder advocates say, but not necessarily a large one; the measure that garnered 91 percent of RBC shareholder support is not binding. Nor does it give investors the right to review compensation decisions or even challenge the amounts. One executive derisively called it ‘a sense of the shareholder’ resolution.
McNamara says RBC is pleased with the experience, but she wishes the language was more specific, and defined more clearly the steps the bank must take to comply with such a delicate subject. She notes that RBC’s board and senior executives made a concerted effort to meet with concerned groups of shareholders before and after the annual meeting, communicating as directly as possible to address concerns.
In addition, the corporate governance page on the bank’s website has a link to send an email to the board of directors, a feature that is probably more often used by retail investors than the institutional powerhouses that can convene a shareholders’ meeting if they hold more than 5 percent of outstanding stock.
This represents a change in overall corporate culture, an evolution that has lagged only slightly behind the best practices of large US firms. Publicly traded Canadian companies ‘are becoming more sensitive to shareholders, in part because of the large pension coalitions,’ says Mihkel Voore, co-chair of the Securities Law Group and head of the corporate finance practice in the Toronto office of Canadian law firm Stikeman Elliott. The biggest shareholders, he adds, seem to get access to their boards.
Communication is key
Voore notes that the number of proxy contests seems to have increased over the last three to five years, largely a reaction to Canada’s financial crisis. The recovery has yielded a ‘mixed situation’ wherein lower share prices make companies more vulnerable to shareholder initiatives. ‘We are slowly moving in a similar direction to the US,’ Voore explains. ‘Boards are more inclined to engage with shareholders, but it’s taking time.’ He criticizes directors who leave that contact to executives and the investor relations team.
Boards are not as likely to dismiss their shareholders’ concerns as they have been in the past, say senior officers and shareholders’ representatives. But many are still dismissive of the upstart investor, the one who agitates for change and who, if not properly mollified, may just be able to pick off a weak director or build support for a merger or other major business decision. ‘The past practice has been, if not to ignore these people, to be dismissive of them,’ says Voore.
But the recent success of dissident shareholders of US companies, not to mention some successful campaigns in Canada, is forcing Canadian boards and management to take the activists more seriously. This year, institutional investors have signaled their intention to challenge a director or two, rather than trying to take down the entire board. Governance professionals say the efforts are driven by a board member’s professional experience, inclination or associations. Sometimes, it’s not quite that specific.
‘Strategic investors want to persuade retail investors it’s time for a change,’ Shanks explains. ‘They feel their views should be well represented in the boardroom.’
