CANADIAN IR PRACTITIONER PERSPECTIVE

                                                                   Sun-tzu

We have entered a new age of shareholder activism. It became a major corporate governance phenomenon in the United States in the 2000s. This trend accelerated in recent years and was evident more frequently in Canada. Shareholders are fed up with diminishing returns and high payments to executives. They want change, and are not willing to wait forever as their investment horizons get shorter. The recent increase in activist shareholder activity in Canada is shifting the shareholder/company relationship. Shareholders appear to be increasingly willing to take advantage of legal mechanisms to force boards and management to respond. 

The statistics on activism are disquieting. According to Fidelity in the United States, as an example: votes against management in uncontested elections rose to 26% in 2009 versus 17% in 2008; shareholders voted against at least one management recommendation at 50% of shareholder meetings, up from 41% in 2008 and 38% in 2007; and shareholders voted against 55% of all executive compensation plans in 2009. In many of the recent proxy contests and activist campaigns, companies have found themselves caught off-guard and vulnerable to the latest tactics employed by activist shareholders seeking to exert substantial pressure and influence over the company’s day-to-day operations, with the ‘stated’ overall goal of enhancing shareholder value.

What do Shareholders Want?

Shareholders are increasingly dissatisfied with shrinking returns, increasing management payouts and perceived mismanagement of the company to the detriment of their investment. A growing number of major shareholders are accumulating positions in specific companies for the purpose of taking proactive measures to forward their agendas, such as:

• to extract short-term returns in a company by forcing management to undertake a series of initiatives;
• to motivate management to increase company value over the long-term;
• to change the strategic direction of the company, often including a change at the management and/or Board level;
• to cause management to make changes to create a leaner and more efficient organization, improving performance; or
• to effect change in a company they perceive is mismanaged.

It is fairly easy to initiate a shareholder campaign. An activist investor may only need to secure a 10%-15% ownership stake in large companies in order to place a disproportionate amount of pressure on management. That is because these shareholders, especially if they are high profile and successful investors, gain the ear of other investors. Canadian activist investors don't have to wait for the annual shareholder meeting to proceed with board nominations, nor are they limited to the nomination of a few directors at a time; any shareholder with a 5% stake may request a special shareholders’ meeting.

One of the most widely publicized Canadian activism cases was that of Pershing Square’s victory with respect to Canadian Pacific Railway. It was a crucial moment that shook the largest Canadian boards to the core and showed major Canadian corporations that they are not immune to the discontent of their owners. Most recently, the well-known activist hedge fund Jana Partners took an interest in Agrium Inc. in an effort to enhance shareholder value through the separation of the company's retail unit from its core agricultural operations. The investor has since agreed to management exploring options to boost shareholder value. A secondary growing form of shareholder activism of late deals with corporate social responsibility. This is evident in the case of the Northern Gateway Project in B.C., where three Canadian socially responsible investment mutual fund firms have been pushing for Enbridge Inc. to address environmental and socio-economic risks associated with the project to pipe heavy oil to the West Coast for shipment to China. These examples highlight the need for the IRO to be prepared for such situations.

What is an IRO to Do?

IROs often must face calls from contentious shareholders. It is important to differentiate between those who are (a) openly hostile and potentially verbally abusive, and (b) generally frustrated and want to understand why their investment is not performing as expected. In both situations the IRO needs to remain calm and rational. In the latter case, the IRO can assist through education, discussion and explanation – providing investors with information to make an informed decision. Unfortunately, little can be done to address the other type of caller, who is often past listening and feels that it is his or her right to vent frustration on the IRO as the spokesperson for the company.

Prior to experiencing an activist situation, a company should consider implementing the following preventative initiatives:

• Actively monitor the shareholder base and market intelligence;
• Develop and implement a proactive and healthy dialogue with shareholders, meeting regularly to communicate management strategy, proposals, or changes in policies. This should allow the company to be in a better position to understand shareholders’ primary concerns and expectations while also providing the benefit of being better prepared in the event of an activist situation; and
• Develop a shareholder communications plan outlining strategy pertaining to potential shareholder activism. This would include identifying and being aware of possible triggering events.

Often management can perceive through trading/ownership changes, shareholder feedback and/or market intelligence that it may be facing shareholder activism. Once a shareholder campaign is on the horizon, a company should consider the following strategies:

• Establish a team of relevant outside advisors: IR and legal counsel, proxy firm and financial advisors. It is crucial to hire specialists with experience in such situations;
• Review the shareholder communication plan and adjust the strategy as warranted;
• Know and understand shareholder perceptions and motivations. If the main activist shareholders are speaking to the company, there is potential for changes to be made that placate the shareholders;
• Leverage credibility with investors, media, regulators, communities and employees; and
• Be willing to listen and negotiate prudently, when appropriate, to give the Board time to exercise its fiduciary responsibilities.

Shareholder activism is a growing phenomenon in Canada due to fundamental changes in shareholders, who are demanding that companies ‘prove themselves faster than in the past. A proactive approach by the company, based on good corporate governance, experienced resources, and effective communication through various mediums and tools, may reduce the likelihood of time-consuming, expensive and highly publicized disputes.

NB: Since the previous column appeared, MFC’s takeover bid offer for Compton Petroleum Corporation was successful and the company was subsequently delisted from the TSX.

Susan Soprovich is Principal at Phoenix Strategies in Calgary.