The Canadian Coalition for Good Governance didn’t invent board-shareholder dialogue. But in 2009, the CCGG’s decision to start arranging meetings with the boards of large public companies in which its institutional investor supporters had significant holdings, marked the beginning of the director-shareholder dialogue era in Canada.
When it started that process, the CCGG was well ahead of the curve, both here and abroad. Most board members were unaccustomed to speaking to shareholders other than through their proxy, at annual meetings and indirectly through management. Set against a wider backdrop of increasing shareholder activism and fear of improper disclosure, the idea of opening traditionally closed doors to potentially hostile outsiders with their own agendas made a lot of directors uneasy.
Fast-forward to today, and the practice of board-shareholder engagement is expanding, more widely accepted…and still making some directors uneasy. But the biggest change might be the extent to which the director community has gone from being back on its heels and defensive in the face of this shareholder-led movement, to stepping up to set terms and take ownership of the process, to ensure it works for them. “Dialogue between boards and CCGG…is a more established practice, but we believe that boards should also initiate direct dialogue with their investors in a way that complements management’s engagement efforts through the IR function,” says Stan Magidson, outgoing president and CEO of the Institute of Corporate Directors.
Magidson’s comments to Listed follow the ICD’s recent publication of a document called “Guidance for Director-Shareholder Engagement.” The centrepiece of that paper is a set of six recommendations covering the engagement process (see sidebar) that speak both to the steps to follow as well as the objectives that should guide directors in preparing for and conducting these meetings.
The document’s origins are twofold. Last spring, the ICD held a special conference investigating problems and issues related to short-termism. One of the findings: long-term agendas would be better served with enhanced board-shareholder dialogue.
In October, the ICD struck a six-person advisory committee to come up with a response. The guidance in their document, and the association’s clear call to action, are the results.
“Significant investors and boards of directors usually have the same objective, which is to foster long-term health and growth,” explains Magidson. “Creating forums where directors and shareholders can engage directly, exchange thinking and answer questions is, we believe, beneficial to a company’s long-term health.”
The committee didn’t start from scratch, however. In 2014, a group of independent and institutional investors in the U.S. published a 10-point engagement guidebook called the Shareholder-Director Exchange (SDX) Protocol. The lone Canadian representative on that panel was Eileen Mercier, then nearing the end of a seven-year run as chair of the board of the Ontario Teachers’ Pension Plan.
Naturally, the first person the ICD enlisted for its effort to create its own made-in-Canada version was Mercier. Joining her on the advisory committee were Greg Boland, Ian Bourne, David Denison, Peter Dey and Michael Wilson. “Obviously there are some differences in the Canadian market that made it worthwhile to do for the sake of argument what we would call an overlay, a wraparound, that would point Canadian companies in a direction where they could take into consideration our somewhat different market,” says Mercier.
Those differences include “a lot less litigious” business environment, which results in far less mentions of corporate counsel in the ICD guidelines versus the SDX version, greater numbers of independent board chairs north of the border, a smaller investment community, and the proportionately greater influence of funds and institutions which have routinely reached out to boards.
She also helps to explain the timing of this guide. Big investors, says Mercier, “have always gone and sought out board people at the biggest companies. But for companies that don’t necessarily have those kinds of resources and find themselves in a position where either they feel that they would like to or have to engage, this is a set of principles and a kind of playing field outline that they could use to help guide them to a place where they could have a constructive discussion with institutional shareholders of one sort or another.”
THE ICD TEXT takes pains to state that engagement should be around governance issues, leaving operational matters to the CEO and others in the management team. According to Andrew MacDougall, a partner at Osler, Hoskin and Harcourt LLP, who sat in as a consultant to the group’s deliberations, there was widespread agreement on the level of appropriate disclosure for directors in these meetings (absolutely no inside information, essentially). On the other hand, MacDougall says, “there was much debate about the scope of what directors could say to investors…what was operational and for management, and what was governance and fair game for directors.”
Adds Stephen Erlichman, executive director of the CCGG: “We think it is a good step by ICD and we applaud ICD for taking this initiative,” noting both organizations agree “that there is a need for more shareholder-director engagement.”
The ICD’s guide cites “the rise of shareholder activism and the influence of third party intermediaries such as proxy advisory firms threatening withhold votes against directors unless certain governance reforms are implemented” as other drivers for better engagement. But Erlichman doesn’t think directors should necessarily engage because they perceive a more threatening investor environment. “We believe it is a good thing to do of its own, for its own reason, just have more engagement. That is a good thing. After all directors are elected by shareholders, they should be talking to each other.”
Erlichman does recognize that Canada is already well ahead of the U.S. when it comes to board-shareholder engagement, which was starkly illustrated at a Millstein Governance Forum several years ago when representatives of Canadian, European and Australian markets told a U.S.-dominated panel just how behind U.S. issuers were in this area. “That is what I think ultimately led to the U.S. SDX Protocol,” he says.
Yet, as much as Canadian directors are more willing to talk to major shareholders, they are not seeking out these discussions. A 2015 survey conducted by the Canadian Investor Relations Institute found that when board-shareholder engagement occurs the board just 20% of the time initiates it. Fully half of companies surveyed have not had meetings featuring their directors and institutional investors, organizations like CCGG or proxy advisory firms.
Yvette Lokker, CIRI’s president and CEO, says directors still face challenges on engagement even with the new guidelines. Chief among them: how to identify shareholders given Canada’s relatively high disclosure threshold (10%), and developing a specific engagement policy (how many shareholders are engaged and how often).
On the latter point, the ICD agrees. “One of the largest obstacles to direct engagement for Canadian directors has been the absence of a standard process that boards can adopt to open and maintain channels of communication in an efficient manner,” says its report. “While some Canadian boards have developed direct engagement policies, many directors remain unsure about how board-shareholder engagement should work in practice.”
In producing the guide and putting its voice behind it, the ICD expects to see more boards getting over that hump.