What is shareholder activism? In the last decade, and especially after the global financial crisis, shareholders of publicly listed companies have started to be more active and advance their views to the board of directors. It should be noted right from the beginning that the intensity of the shareholders activism is not correlated with the state of economy.Therefore, the management of a publicly traded company should not assume that in times of relatively strong economy shareholders will turn a blind eye to issues affecting them (Taylor Wessing LLP, 2012, p. 1). To better understand the concept of shareholder activism, a tentative definition is required. According to the European Corporate Governance Institute (ECGI), “shareholder activism is the way in which shareholders can assert their power as owners of the company to influence its behaviour” (ECGI, n.d. , para. 1).
Shareholder activism has both proponents and opponents. Those sympathising the emancipation of the shareholders argue that “when companies perform poorly, shareholders activists are said to play the role of fire brigades that bring about change and more quickly than would have been the case had the fire brigade been on strike” (ECGI, n. d, para. 3). On the other hand, opponents think of shareholder activism as “a euphemism for disruptive, uninformed, populist ranting” (ECGI, n.d. , para. 4).
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The rise of shareholder activism in Canada and abroad In the world of business the concept of shareholder activism has lost its novelty a long time ago. However, the last few years saw an increase in the level of this kind of activity. “Investors appear to be feeling increasingly empowered to intervene in the management of public companies” (Taylor Wessing LLP, 2012, p. 2). The reasons are multiple.
Mediatized international scandals involving some of the biggest companies in the United States of America, such as Enron and Worldcom, have led to changes in the legislation regarding the corporate governance and the directors’ independence. Moreover, the public access to information on unjustified executive compensation and bonuses, and the recent financial crisis have put the shareholders’ patience to test. Closer to home, some changes in the Canadian corporate law have encouraged shareholders to take action whenever they felt their interests were not properly considered by the management.
In an interview for Calgary Herald, Noralee Bradley, a partner with Osler, Hoskin & Harcourt, points out some of the changes in the Canadian legislation: A request by five per cent of shareholders can now compel a company to call a shareholder meeting; proxies can now be solicited by an unhappy shareholder through informal public statements such as press releases, without issuing a formal dissident proxy circular; and, a dissident can now privately solicit proxies from up to 15 shareholders before going public with a proxy circular. (as cited in Burton, 2012, para.7)
Another reason for the rise of the shareholder activism in Canada identified by Bradley is the increase in size of pension funds and hedge funds. The size enables these funds to take a stand whenever the companies are underperforming, or they do not meet their targets (as cited in Burton, 2012, para. 8). In the United States of America the situation is almost similar.
Some of the most important characteristics are: (1) “greater financial firepower […] permitting them [the activists] to make larger and more investments” (Noked, 2013, para. 3); (2) the emergence of new activist funds started by individuals who worked for other similar funds; (3) the degree of sophistication has increased, meaning that activists are hiring financial and legal advisors, and they run more professional campaigns.
Also, many of the activists have switched their platforms to seek long-term involvement with their target companies; (4) increased attention from the media, which is usually sympathetic with the activists and it is always a low cost way to pressure companies (Noked, 2013, para. 4 – 7). Forms of shareholder activism According to Admati and Pfleiderer (2006), shareholder activism can take any of several forms: proxy fights or battles, takeovers, strategic voting, or shareholders’ proposals (p. 1).
Other forms of shareholder activism include private discussions or public communication with the board of directors and management (or negations), publicity or press campaigns, blogging or other electronic ways of outing the underperforming managers, talking with other shareholders, calling shareholder meetings, shareholder resolutions, litigations and settlements, whistle blowing, and in extreme cases “voting with ones feet” and “seeking to replace individual directors or the entire board” (ECGI, n. d. , para. 1).
Many of the tactics employed by the activists do not need any further explanations, but some of them require special attention not only because they are more complicated and not so easy to understand by an untrained observer, but also because they are the best course of action. Proxy fights. “A proxy is a person to whom a principal with voting authority delegates his voting rights” (MIPR, n. d. , para. 1).
A proxy fight usually involves a battle for other shareholder proxies and it is typically in opposition to management (MIRP, n. d., para. 3). According to Burton (2012) a proxy fight has the goal to “force change on an unwilling company” (para. 4). Shareholder resolutions. “Shareholders exercise most of their influence over how the corporation is run by passing resolutions at shareholders’ meetings. Decisions are made by ordinary, special or unanimous resolutions” (Industry Canada, 2011, para. 8). In Canada, ordinary resolutions may involve the election of directors or the appointment of auditors, and only a simple majority is required (Industry Canada, 2011, para.9).
On the other hand, special resolutions must be approved by two thirds of the votes and usually involve fundamental changes, like selling all of the corporation’s assets, or amending the corporation’s name (Industry Canada, 2011, para. 10). Usually management will oppose many of the shareholder resolutions leading to a rather lengthy process in which the sponsoring shareholder and the management summarize their opinion and try to get to a common view (MIPR, n. d. , para. 5). Say-on-pay vote. In the United States of America, “the say-on-pay vote asks investors to vote on the compensation of the top executives of the company – the CEO, the Chief Financial Officer, and at least three other most highly compensated executives” (SEC, 2011, p. 1).
“In Canada, say-on-pay began as an investor-led campaign that started in 2007, when the big five banks were asked if they would offer shareholders an annual advisory vote on executive compensation” (Alberta Venture, 2012, para. 9). It is important to note that say-on-pay give investors a non-binding vote, which makes this vote simply an expression of support, or disapproval (McFarland, 2012, para.12).
Voting with their feet. Another tactic employed by activists is to vote with their feet. This is an extreme situation in which the investor sells all the shares of the company and exists the corporation. Historically, this was the most common form of shareholder activism, until proxy battles became more common (Taylor Wessing, 2012, p. 2). Canada is ready for shareholder activism Shareholder activism is not something new in Canada, in fact it is slowly becoming business as usual.
Agrium Inc. , Canadian Pacific Railway Ltd., SNC-Lavalin Group Inc. , Telus, and Rona have all been involved in cases of shareholder activism during 2012 and 2013 (Dmitrieva & Pasternak, 2013, para. 2). “There were 42 cases of shareholder activism among Canadian firms last year, almost double the 22 a year earlier” (Dmitrieva & Pasternak, 2013, para. 4). Shareholder activism can take many forms, but proxy battles and say-on-pay could prove the most effective in the Canadian corporate world. The legislation has changed and has become more shareholder friendly.
Proxy battles are more frequent in Canada and according to Jeffrey Gandz, a professor of strategic leadership at the Richard Ivey School of Business in London, Ontario, “If it’s happening more, it’s probably because it pays” (as cited in Dmitrieva & Pasternak, 2013, para. 7). Gandz’s statement is backed by facts that indicate an increase in the value of the shares issued by the companies involved in proxy battles. The same view is shared by Robert Staley, a partner at the Bennett Jones law firm in Toronto. “We’re going to see more shareholder-driven activism in Canada this year; this is a growing trend.
This should increase the share prices of companies targeted” (as cited in Dmitrieva & Pasternak, 2013, para. 18). Indeed, each company that was targeted by activists recorded and increase in the share prices, from CP Railways Ltd. to Rona and Agrium Inc. These results should motivate shareholders to be more active and to consider proxy battles as a method of voicing their interests. However, proxy fights usually involve strong public attacks on both sides, and some shareholders may wish to keep a low profile. For this reason settlements might seem like a better alternative (Melnitzer, 2013, para. 13).
Say-on-pay is another tactic that activists can engage and it is already being accepted by many publicly traded companies. Some of them are Potash Corp. , Manulife, Power Corp, and Bombardier. According to Cornell Wright of Torys LLP’s Toronto office, say-on-pay and majority voting “allow investors to express themselves to management on frequent basis. The prospect that investors might express their view by withholding votes from board members or voting against a company proposal on say-on-pay is in a sense a more nuanced, less costly and lower-risk threat than a proxy fight” (as cited in Melnitzer, 2013, para.20).
Say-on-pay votes may not seem like a reliable weapon for Canadian activists, but it will slowly be accepted as a confidence vote for the directors’ compensation and decisions. In Canada, say-on-pay has the potential of increasing the directors’ accountability to the owners of the company. Also, this kind of vote can lead to a better cooperation between the boards and shareholders in order to design a compensation package that will motivate the executives to work harder and maximize the company’s value in the long-run.
It is not a surprise to see an increase of say-on-pay votes in Canadian companies because investors are slowly becoming more vocal. It is also not surprising to see an increase in negative votes considering the financial uncertainty in the business world. Shareholder Association for Research & Education (SHARE) concluded that in 2012 “4. 5 per cent of Canadian companies had scored less than 75-per-cent support for their pay votes this year, while no companies scored below that level in 2011” (McFarland, 2012, para.6).
In the past few years say-on-pay votes in Canada have managed to change the composition of CEOs’ compensation packages to include more share units and stock options. Even though the real benefit is hard to understand very quickly, there is a reason why this tactic should have a big impact in Canada: “those equity elements more often include additional performance features, requiring a company to meet financial targets before they pay out” (McFarland, 2012, para. 16).
Shareholder activism has become a hot topic in the business world especially after the financial crisis that affected the profits of many publicly traded companies. It is an activity that has both opponents and proponents. Shareholder activism is on one hand just another populist method of influencing the public, but on the other hand is probably the only way to save a company from an underperforming management. Activism has a lot of facets, from proxy battles to takeovers, strategic voting, or shareholder resolutions, from press campaigns and blogging to litigations and settlements, and “voting with ones feet”.
Canada is not immune to these kinds of shareholder activism, but the ones that will really have an impact in the near future are the proxy battles and the say-on-pay votes. Both methods have yielded an increase in the value of the shares of the targeted company. According to Paul Gryglewicz, managing partner at Global Governance Advisors, “say on pay and shareholder activism are very real and very alive in Canada” (as cited in McFarland, 2012, para. 15).
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