On the eve of a special shareholders’ meeting last May by Taseko Mines Ltd. (TSX:TKO), activist shareholder Raging River Capital LP threw in the towel. The firm, created for the sole purpose of lobbying Taseko to replace two directors and give it a say in key company decisions, had no choice: by the meeting’s cut-off date for advanced voting, with 50% of the votes in, shareholders had voted a resounding 94% against the dissident’s proposals.
Two months later, at Taseko’s annual meeting, Raging River tried again. But holding only 6.3% of shares and garnering no additional support, it failed to have any impact. Taseko’s board nominations, shareholder rights plan, say-on-pay and a new say-on-services resolution meant to address activists’ concerns, sailed through.
Vancouver-based Taseko’s story makes for familiar headlines. Management, better prepared these days for dissidents, is winning more often than not. But winning at a cost. Taseko reported it sank $4.5 million into thwarting the battle and would have to “work hard to reverse the additional reputational and goodwill harm RRC sought to inflict.”
As the 2017 proxy season approaches, companies should consider the price of a high-profile conflict. “I think that everybody agrees, except the lawyers, that it’s in everyone’s best interest to settle in advance than go to war,” says Jonathan Feldman, partner with Goodmans LLP in Toronto. “It’s cheaper, it’s faster, it’s more constructive and there’s much less blood left on the field.”
Prevention is the way to go this season. “Boards are looking internally at what they can do to look ahead. It’s made them far more proactive,” says Susy Monteiro, senior vice-president at D.F. King Canada, which provides proxy solicitation and corporate governance consulting.
Preventing battles is getting tougher, however. New voting and takeover rules give dissidents more tools. Familiar issues such as say-on-pay and board diversity will grow more complex this year, and guidelines on overboarding will further put the pressure on boards that have gone stale.
Feldman says even banks are asking about activists—everyone is at some risk for upheavals big and small. He also reminds issuers that prevention should not start now, on the eve of the AGM. Truly strategic boards will think like activists, put in place good governance practices, stay connected to messaging from Institutional Shareholder Services and Glass, Lewis & Co. and communicate with shareholders all year long. Still, action heats up with the annual proxy. With that in mind, here’s a look at five key trends and topics likely to dominate in 2017.
Activists play nice
For all the focus on fights, full-blown proxy contests are actually on the wane. Kingsdale Shareholder Services counted 55 battles in 2015, with activists prevailing in 30 cases, compared to just 31 contests during the first 10 months of 2016. Add the fact that, according to Kingsdale, just one in three activist endeavours ever become public, and the trend is clear: dissidents know battles cost money, the loser loses big, and the winner doesn’t even come out unscathed. Hence, more activists are interested in negotiating, at least at first, and nudging companies via semi-peaceful evolution, not revolution.
“It shouldn’t be adversarial,” says Richard Leblanc, associate professor of governance, law and ethics at York University. “The board is not there to protect management, the board should meet with activists and listen to their concerns.” Most activists have a sophisticated understanding of the issues at hand and have valid solutions. “They may look aggressive, but they’re very measured in terms of their analysis,” says Leblanc.
What they increasingly want, particularly in a constructive situation, is change on a small scale. This year, Monteiro expects to see more minority board takeovers, where dissidents seek to capture a few seats on a board, not pull off an entire takeover. “Boards are far more receptive to the idea of taking on one or two [directors] to help turn things around. What can it hurt?” she says.
Companies in the oil and gas sector, meanwhile, may find themselves a particular target this season. “Now is the time. They’re out of the trough and there may be ways to create more value, particularly with companies that have been able to survive,” says Amy Freedman, president of Kingsdale. Companies may struggle to prove their view has more validity than that of a dissident’s—and who knows which side is wrong. Feldman backed an activist client a few years ago in the replacement of an entire board in the energy industry. “We won, but a year or two later it was in CCAA [Companies’ Creditors Arrangement Act].”
When dissidents come knocking, give them face time. “Hunkering down and ignoring an activist is the worst thing you can do,” says David Salmon, president of Laurel Hill Advisory Group Canada, a proxy solicitation firm. Conversations with activists, however, must be executed carefully. You must look like you’re listening, yet avoid responding in the moment to suggestions—a fine balance. Salmon has seen activists use a company’s reaction at a meeting against them later in their communications with shareholders. Tread carefully and expect posturing.
Beware new rules
Last May, the Canadian Securities Administrator’s new takeover bid rules came into effect and they are now having a side impact on proxy season. Since there’s now a minimum bid
period of 105 days, takeover timelines are more likely to overlap with the AGM. Buyers or third parties have time to try various manoeuvers, such as voting out the board.
This is already happening with the takeover bid for Canexus Corp. (TSX:CUS) by Chemtrade Logistics Income Fund. One of Canexus’ main shareholders, Stirling Funds, threated to oust the entire board over the deal. (This deal was not resolved at press time.)
“This 105 days is a long time,” says Salmon. “So many variables could come into play.” So, along with digging deep for new tactics to fend off the takeover itself, companies must increasingly communicate with shareholders to hold onto their board, too. “You’ve really got to sell your business case,” says Feldman.
Also, while it likely won’t hit until 2018, issuers should track the amendments to the Canadian Business Corporations Act, which passed their first reading in Parliament in September. New rules will require CBCA companies—about 40% of companies listed on the TSX—to hold an election for their entire board of directors annually, vote for each director individually and, most importantly, use uniquely crafted majority-voting rules that only let shareholders vote “no” or “yes” for a director, eliminating the use of “withhold” votes which is standard practice under existing TSX rules.
It’s an important change, because many boards now following the TSX’s voting rules do take advantage of this loophole: in 2015, 21 directors got majority withholds, and in 16 of the cases, boards used the exemption rule to keep the director. In early 2016, three similar votes all saw the directors retained.
Once the CBCA amendments become law, Salmon suspects this approach to majority voting will become standard practice beyond CBCA corporations.
Freedman also stresses its significance. This is a rule that “is giving shareholders more power,” he says. And it could be disruptive. “You could be losing key directors, and how do you replace them? If your bylaws say you can only lose 25% of your board, there could be some consequences,” agrees Salmon.
Prepping for this inevitable future change entails getting in the habit of communicating with shareholders so you know well in advance who might be a target. Boards will also need a pool of diverse, skilled candidates waiting in the wings. That takes time: build it now.
Ideally, companies should make majority voting rules part of their company’s policy now. “Many institutional investors already view majority voting as good practice and frown upon companies who have yet to implement,” says Monteiro. Companies thinking like activists are getting compliant in advance to ward off any quibbles with their governance practices.
Focus on board compensation
Last year, a client of Accompass, a Toronto-based benefits and compensation firm, did an IPO as it transformed from a crown corporation to an independent public company. “As with any organization, they were taking baby steps in terms of putting certain programs into place,” says Accompass’s senior vice-president Anand Parsan.
That included setting up executive compensation packages with a basic performance-based stock option plan—a legally compliant one similar to its competitors in the service industry—with the intention of refining the package later on. But before the company’s first AGM last spring, ISS reported that the package went against its guidelines and suggested shareholders vote against. “If we issued an amendment, it would look like the board didn’t know what it was doing,” says Parsan. So the company went to its main government shareholder, explained the situation and secured enough votes.
It wasn’t the ideal way to start out as a public company, but it was a clear reminder how much board compensation remains a hot issue, especially with say-on-pay voting continuing to spread.
Last year, while shareholders were generally supportive of the 180 issuers in Canada who held say-on-pay votes, rejecting just two proposals—Canadian Pacific Railway Ltd. (TSX:CP) and Crescent Point Energy Corp. (TSX:CPG)—the numbers are shifting. Goldcorp Inc. (TSX:G) registered 22.3% of votes against its executive pay proposal and Teck Resources Ltd. (TSX:TECK.B) saw 25.3% vote against. And the overall average level of support fell to 89%, down from between 90-91% in 2014. “It’s closer to the wire. It’s getting tougher,” says Salmon.
To get the numbers and the package right, companies have to monitor the recommendations coming out of ISS and Glass Lewis and pitch salaries to industry averages, plus take into account the company’s performance. (CP Rail lost its vote over a $19.9-million pay package for CEO Hunter Harrison, which ISS claimed was 2.8 times more than his peers while CP’s share price and overall performance were lacklustre.) Talking to shareholders—both to sell them on your pay packages but also to find out if they’re concerned—can lead to meetings with no surprises.
Meanwhile, for companies that don’t yet have a say-on-pay policy, get one. Leblanc thinks Canada may one day follow after jurisdictions such as the UK and Australia and mandate it; might as well do it now.
Pressure on board composition
Heading into year three of the “comply or explain” regime for diversity on boards, the numbers look mediocre. The Canadian Board Diversity Council reports that women hold 21.6% of seats on FP500 companies, up marginally from 19.5% in 2015. Meanwhile, Osler, Hoskin & Harcourt LLP’s report on all TSX-listed companies in the first half of 2016 found little changed over 2015 regarding the number of women on boards and the number of boards that have zero women.
“I think it’s going to be slow until it’s enforced,” says Monteiro. She and other executives who themselves don’t fall into the “male, stale and frail” category have concerns about mandated quotas. “The last thing you want is to think you’re a quota filler,” says Freedman. Such a board member will struggle to be heard and respected; it’s not the way to build a functional, activist-resistant group.
But legislators will step in if nothing changes. “If you don’t do anything, it’s not going away,” says Leblanc. Activists, meanwhile, will target a board that looks stale. “I’ve seen diversity in the context of activists, putting names forward in backroom negotiations,” says Feldman.
This year, the issue of overboarding will further put boards on the defence about their composition. Glass Lewis says it will recommend voting against a director on more than five boards, or two for executives. ISS plans to alter its rules as of February 2017 to limit CEOs to one board membership and others to four in total.
Beyond keeping tabs on your board composition, issuers should draft a policy on diversity (regarding women but also cultural background, sexuality and disability), tenure and overboarding. A policy provides a goal, and a way to get rid of hangers-on. “It’s easier to say ‘Sorry, this is board policy, this is how it’s got to go,’” says Salmon.
None of this will work if boards aren’t working throughout the year on cultivating a stable of qualified prospects. That means working with a recruiter, networking widely and making connections at organizations that support diversity initiatives. Looking long-term, put in place hiring and promotion polices at the company itself, to bring women and other diverse employees up the ranks.
Communication as strategy
Last summer, the Canadian Coalition for Good Governance awarded ARC Resources Ltd. (TSX:ARX) its 2016 Governance Gavel Awards for Best Disclosure of Corporate Governance and Executive Compensation Practices. The Calgary-based company, which was an early say-on-pay adopter (2011), runs a robust communications strategy. It meets institutional shareholders regularly at conferences and non-deal roadshows, and hosts an annual investor day. For retail shareholders, the company stays busy on social media and produces a newsletter. Despite all this conversation, Bevin Wirzba, ARC’s senior vice-president, business development and capital markets, says shareholders are “increasingly requesting more frequent updates on our operations, plans and state of the organization.”
Communications strategies are most effective when the relationship gets established when little’s going on. “You don’t want to be reaching out for the first time in a time of need,” says Monteiro. “Rest assured in those times the activist is reaching out to them as well.”
However, companies must also then listen to, and embrace, valid shareholder ideas. Such conversations can reveal which issues your shareholders actually care about—maybe board diversity isn’t even on their radar, and won’t be a deal-breaker come vote time.
“When dealing with a heavy percentage of retail shareholders, it’s really hard to communicate with them. They don’t subscribe to press releases,” says Monteiro. While only about 5% of retail shareholders will vote, in a contest that tiny slice of the pie can swing the vote.
Know whom those retail investors are, and seek them out via the appropriate social media channel for their demographic, and send paper or digital newsletters. If there’s a battle brewing, set up a bolt-on website explaining your viewpoint. These shareholders may miss your other communication attempts, but will pay attention to the proxy circular. “That is going to be one mechanism guaranteed to get read. You get one kick at the can,” says Monteiro.
Sidebar: Getting the yeas and nays in order
Proxy vote reconciliation reform is happening—but mostly in the background
For years it’s been known that the vote-counting system, which sees proxies tracked by meeting tabulator via information from the Canadian Depository for Securities Ltd. and Broadridge Investor Communication Solutions Canada, had gaps that led to errors. Now the Ontario Securities Commission, in tandem with the Canadian Securities Administrators, is moving forward on reforms in time for the 2017 proxy season.
The changes are important, but experts say they will have little direct impact on proxy preparers. ”What they mostly do is articulate the types of communications that should be occurring among the relevant participants in the proxy system to identify and hopefully reconcile potential over-voting and under-voting,”says Andrew MacDougall, a partner at Osler, Hoskin & Harcourt LLP. “This was not a wholesale change to the voting process.” Adds Frédéric Duguay, a partner at Hansell LLP: “[The parties] have to be more precise and they’ll have to communicate more.”
However, one new standard may be relevant to some issuers—their responsibility to obtain the omnibus proxy from CEDE & Co. for beneficial owners holding through U.S. intermediaries and provide it to the tabulator. MacDougall explains: “In the CSA’s analysis, they noted that a significant source of unvoted proxies was that the U.S. depositary would send the omnibus proxy to the issuer and, either because the omnibus proxy went to the wrong person at the issuer or the issuer did not know what to do with it, the tabulator was unable to reconcile votes from U.S. holders.” —D.P.