Failed say-on-pay votes, no-confidence votes for directors and wolf packs all argue for more rigorous efforts at shareholder engagement
Activist shareholders have had a significant impact on the 2015 Canadian proxy season according to a recent report from Kingsdale Shareholder Services. Kingsdale’s 2015 Proxy Season Review notes that proxy contests have increased over 2014 levels, a record number of companies have failed their say-on-pay votes and more corporate directors are being asked to resign under newly implemented mandatory majority-voting rules. The report warns that the heightened level of activism appears to have become ‘the new normal.’
‘Only halfway through this year, we’ve seen more proxy fights than we did in all of 2014. With a growing rift between long and short-term shareholders, more active institutional investors, and boards continuing to underperform in a number of key areas, we expect the back half of the year and early 2016 to be just as busy,’ Kingsdale CEO and founder Wes Hall said in a statement. ‘Activists are attracting more capital, superior talent and effecting change.’
In fact, activist investors have been especially effective at winning more proxy contests. Since 2011, when activists and management won 11 proxy contests each, activists have consistently won more proxy contest each year. As of August 2015, management had won 13 proxy contests and activists 12, with four undecided. However, according to Kingsdale’s report ‘with four contests in the pipeline, we anticipate proxy contest results will mimic previous years’ results with activists racking up more victories.’
Activists are winning by threatening reputational damage as leverage to negotiate favorable settlements with issuers, the report says. Companies are becoming more willing to agree to settlements that include concessions on governance policies and board seats in order to avoid a public proxy battle. Another strategy that activists are using entails multiple activists entering a stock, though only one will have made its position public. This is referred to as a ‘wolf pack’ and means that instead of fighting off one activist companies will be faced with combating several aggressors simultaneously. ‘Companies should be aware that as the activist asset class grows, wolf packs will become more common and require more preparation [to defeat in a proxy fight],’ the report warns.
‘You could argue that the wolf pack concept has started to filter into Canadian institutional investors playbooks, as we have started seeing, for example, pension funds readily forming groups to indicate their displeasure with compensation and other governance issues,’ says Brad Allen, CEO and founder of Branav Shareholder Services.
Wolf packs are used ‘to skirt the disclosure requirements if a single fund held a large position,’ Allen explains. The strategy has been used in the US over the last decade and by a few institutional players in Canada within the last five years. He says it allows hedge funds and other activist investors who have ‘implied agreement’ on voting support to work behind the scenes to apply maximum pressure and negotiate desired concessions by management.
Adoption of say-on-pay in Canada continued at a slower pace, bringing the total to 200 companies that have given shareholders an advisory vote on executive compensation since 2010. ‘Say-on-pay support levels have increased in 2015 with overall average support at 92.21 percent,’ the report says. In 2014, overall average support for say-on-pay proposals was 91.98 percent.
Activists’ concerns over executive pay packages resulted in a record number of issuers failing their say-on-pay votes this year (three in 2015 versus none in 2014). And this year, Canadian Imperial Bank of Commerce became the first major Canadian bank to fail its say-on-pay vote.
Majority voting for directors, which has become mandatory, also gave activists and other shareholders an opportunity to express their displeasure with governance practices. Voting results for 20 directors at eight different issuers triggered the majority voting policy, which requires board members who receive less than 50 percent approval to resign their seats, the report says. ‘This is in stark contrast to just four directors at two companies who triggered the policy in 2014 and [a total of] only eight directors at three companies in all years prior to 2014.’
However, because the majority voting policy is advisory rather than binding, boards aren’t required to accept these resignations. Companies have 90 days to decide whether to accept the resignation of a director who does not receive majority support or reject it on the rationale that losing that person’s expertise would be detrimental to shareholders. According to public disclosures, of the 20 directors asked to resign so far this year, five resignations have been accepted by boards, while nine have been rejected. The remaining six were still being decided on the day that Kingsdale released its report.
The rise in no-confidence votes against directors underlines the importance of succession planning for publicly traded companies. ‘At least three companies have multiple directors triggering the majority voting policy and, in the most extreme of those cases, a majority of directors,’ the report notes. It’s difficult for a board to operate effectively if a majority of its members are asked to resign.
In view of these trends, Kingsdale emphasizes the need for directors to engage more with shareholders and suggests that companies seek to work with ‘activists as collaborators’, which KIngsdale believes should lead to more constructive results.
