The coronavirus created a swift and sweeping test for public companies of how well they could govern through a dangerous situation that most had not foreseen. With people struggling to stay safe and to keep businesses afloat, shareholders did not, generally speaking, push for bold, new initiatives during the 2020 proxy season.
This year’s proxy season, the experts predict, will be completely different.
“By the time the pandemic took hold, shareholders were locked in, in terms of what their proposals were,” says Anthony Schein, Director of Shareholder Advocacy at SHARE, a not-for-profit that helps Canadian institutional investors become active shareholders. “So this is investors’ first opportunity to ask questions or have views on how companies have managed through the pandemic.”
Institutional investors are demanding progress on the ‘S,’ or social issues within ESG, but they are perhaps even keener to see progress accelerate when it comes to climate change and corporate diversity. As for the latter, investors say that the time for excuses is well past. Boards that are ‘male, pale, and stale,’ as the saying goes, need to change even if companies are coping with an ongoing pandemic.
Signals abound that shareholder concerns may be accompanied by some hard-and-fast demands. Matthew Merkley, partner at Toronto-based Blake, Cassels & Graydon LLP, believes that shareholders will push for concrete change this proxy season.
As evidence, he cites both ISS and Glass Lewis, which have named specific targets for gender and other forms of diversity and are setting deadlines for achieving goals. For instance, for any meetings held on or after February 2022, ISS will recommend a withhold vote for the Chair of the Nominating Committee at S&P/TSX Composite Index companies where less than 30% of the Board is comprised of women.
Amy Freedman, CEO of Kingsdale Advisors, urges IROs to actively monitor shareholder concerns.
“Last year proxy season was smack dab at the beginning of the pandemic. Investors were distracted with their own news and companies had a lot on their plate, and so companies got a ‘get out of jail free card,’” Freedman says. “This year, investors are going to be back to scrutinizing things quite closely.”
ESG: Centre Stage
In 2020, flows into ESG ETFs were twice as great as the previous year, more companies stepped up and made net-zero carbon commitments and institutional investors began “doubling down” when it came to addressing environmental risk, says Judy Cotte, CEO of Toronto-based ESG Global Advisors.
“I think that COVID has really revealed the extent to which the whole world can be impacted by a failure to take action on broad, systemic risks, and climate, of course, is one of those risks,” she says.
Cotte points to new efforts to measure companies’ actions regarding the environment. She cites Climate Action 100+, which is rolling out its Net-Zero Company benchmark, making it easier to hold companies accountable for meeting environmental targets. She also anticipates that more investors will be using shareholder proposals to ask for “disclosures of [net-zero] plans and disclosures of progress against those plans.”
Jonathan Pinto, Senior Vice President and Business Head at D. F. King Canada (part of AST Trust Company Canada), agrees: “There’s a big thirst for ESG disclosure and that’s only going to intensify and intensify.”
Before joining D.F. King in 2019, Pinto was Vice President of IR at Genworth Canada and (earlier still) in Treasury and IR at Manulife, and he believes that IROs play a key role in keeping top executives focused on ESG. Pinto highlights the reputational price companies might pay if they are not proactive. “Investors these days,” he says, “are likely to shoot first and ask questions later. If you don’t, for instance, have a separate ESG report on your website, you’re going to get dinged.”
The same tougher investor stances are spurring changes in gender and racial diversity initiatives. In 2017, CPPIB (the Canada Pension Plan Investment Board) began engaging with 45 Canadian companies that had no women directors on their Boards. By the following year, half of those companies had appointed a woman director.
While in earlier years, the standard was “comply or explain,” Freedman says that explanations alone no longer carry sufficient weight. “There’s a new regime,” she says, “and you’re going to have to say what you’re doing to meet targets.”
Executive Compensation and Activism
“In the Canadian landscape, it’s been a tale of two cities, to use a Dickens reference,” says David Salmon, President at Laurel Hill Advisory Group. He notes that in precious metals and other industries that have weathered the pandemic well, investors will be fine if compensation “mirrors where the stock price has gone.”
Within service and travel, on the other hand, shareholders have suffered as stock prices have fallen. For executives in these industries, he says, performance metrics will be very difficult to hit. While in the past, companies have sometimes amended “long-term incentives to accommodate their executives,” this year he believes that doing so might incur shareholder wrath.
“Most institutional investors have suffered, and stock prices are down,” says Salmon. “Why should the executive compensation be amended? It’s not like you can amend your stock price.”
Much of the executive compensation debate will likely centre around Say-on-Pay votes this year and next. Salmon describes Say-on-Pay as a “strong rearview look” at how compensation practices are viewed. He notes that in 2020, overall Say-on-Pay support was 93%, higher than the 91% typical for the past decade. That said, most of these Say-on-Pay votes took place in the early days of COVID and reflected pay practices from the prior year. Salmon is convinced that how Say-on-Pay votes go this year – and even more importantly, next year – will speak volumes.
Schein agrees: “The mood among investors – certainly the ones I hear from here at SHARE – is pretty skeptical of executive compensation that is not aligned with the times we’re living in.” He continues: “I don’t think investors will have a lot of patience” if companies change compensation packages in executives’ favour.
Schein is convinced that the times demand a level of shared sacrifice. He notes that while it is “fair enough” for companies to accept emergency wage subsidies, companies that have done so would look bad if they “raided dividends or raised executive pay while laying off workers at this same time.” He continues: “This really puts a spotlight on corporate Canada, and a lot of us will be looking for responsible kinds of action on executive compensation.”
Engaging with Shareholders
Last year, the experts agree, all bets were off when it came to annual general meetings because companies were scrambling on so many fronts at once. Again, this year is different. “Now that some companies are coming up on their second annual general meeting in a fully virtual mode, you definitely need to give shareholders a voice,” suggests Pinto.
Salmon agrees: “If we’re moving to another season of online meetings, my expectation is that shareholders should have a chance to ask questions in something that mimics an in-person forum.”
The standards for these meetings may depend, at least to some extent, on the issues being discussed and on a company’s size. Salmon maintains that companies that have contentious issues before them will need to make sure shareholders have an opportunity to speak openly.
At some smaller companies, standards may be more relaxed. Salmon notes that at exploration companies, for instance, “cash is king, and investors may not want to see management blow $30,000” on making sure that the latest videoconferencing technology is in place. “In a situation like this,” he says, “I think shareholders would rather see their investment dollars put into the ground than into the technological aspects of the meeting.”
According to Pinto, companies that engage regularly with shareholders and demonstrate an interest in robust and ongoing disclosure will likely be given the benefit of the doubt. He also emphasizes that engagement and disclosure are now necessary for all companies, even those with extremely small carbon footprints.
In the end, says Pinto, active engagement with shareholders is paramount. “You should be pushing your CFO, general counsel and CEO to be providing enhanced disclosure around ESG, diversity and other key issues,” he emphasizes. “The more you disclose, the better. Remember that it all comes down to preparedness and knowing your investor base.”
Shareholder Activism, Alive and Well
For several months after COVID hit, shareholder activism in Canada essentially died, says Salmon. “No one,” he notes, “wanted to be perceived as wearing that black hat and taking a run at a company that was fighting to stay relevant. The powder was being kept dry.”
Last August, however, things began to change. Salmon recalls that M&A activity at Great Canadian Gaming and Rocky Mountain Equipment (which will be taken private) illustrates some of the prevailing tensions. Both of these companies complained that offers were opportunistic and took advantage of “COVID pricing,” says Salmon. While the bids were increased, the transactions were not scuttled.
Going forward, predicts Salmon, M&A in Canada will almost certainly occur more frequently. “When it comes to activism,” he concludes, “we’re going to get back to pre-COVID levels – if not higher – very soon.”