Fueling the investor revolution
Finance is a gun. Politics is knowing when to pull the trigger. When Mario Puzo and Francis Ford Coppola co-authored that line for Michael Corleone in Godfather III, they can’t have imagined it might one day resonate with Canadian corporate officers and directors. But this proxy season, shareholder revolt is showing corporations the value in being politic about finance – and the consequences of failing to do so. At issue has been not only knowing when to pull the trigger, but also being certain which way the barrel is pointed.
Various factors are driving increased dissent and activism among Canadian investors this proxy season, from anxiety about the economy to increased awareness that executive compensation continues to rise as investments and many non-executive paychecks are hit with reductions. The say on pay movement, which just arrived in Canada last year, has gathered steam, and shareholders are generally more quick to criticize real or perceived instances of corporate mismanagement.
The result is that as stock prices have plummeted in Canada, proxy battles have risen sharply. Roy Shanks, president and chief operating officer of Georgeson Canada, estimates that there were 20 proxy fights in the Canadian market in the 2008 season.
This year is radically different. ‘We’ve never seen so many shareholder rights plan announcements,’ says Brad Allen, senior vice president of Laurel Hill Advisory Group. ‘It’s a daily thing now in the papers.’
Management gets drilled
However, many Canadian companies are coming late to the realization that they need to improve their standards of transparency and open shareholder communication. Some that failed to clue in have taken a beating in shareholder confidence and public relations. A generally more aggressive activist attitude is resulting in tension between companies and investors and perhaps this proxy season’s most spectacular shareholder activist blow-up to date involved Toronto-based HudBay Minerals.
The company, which mines and produces zinc, copper, silver and gold at mining properties located in North America, planned to acquire Lundin Mining Corporation, also headquartered in Toronto, which is engaged in exploration for and production of base metals in Europe. HudBay intended to finance the acquisition through the issuance of new stock totaling more than 50 percent of the total existing outstanding shares. Although the deal would have been highly dilutive, shareholder approval initially was not required. Despite this, shareholders were not happy and aired their concerns to company management requesting that they reconsider. Unable to get the company to agree to change its course, shareholders took their concerns to the Ontario Securities Commission, which on January 23 issued an unusual ruling that HudBay would have to get shareholder approval of the acquisition.
The company cancelled the deal on February 23. In a press release announcing the reversal, HudBay stated its belief that ‘due to current market conditions, its shareholders will not approve the transaction in the vote required by the Ontario Securities Commission.’ The statement added that the company ‘had very strong feedback from many of its shareholders indicating that they would vote against the transaction’ and that ‘based on discussions with significant and influential HudBay Minerals shareholders and their experience in similar situations, the shareholders of HudBay Minerals would not approve the transaction if put to them.’
Within days of the announcement, SRM Global Master Fund LP, which owned 11 percent of HudBay’s stock, initiated a proxy battle whose goal was to replace the company’s board and the CEO Allen Palmiere with his predecessor, Peter Jones. On March 10, the company announced Palmiere’s resignation from his position as both chief executive officer and as a director of the company, effective the previous day. HudBay director Colin Benner assumed the role of interim chief executive officer. As this issue of Corporate Secretary went to press, the company was preparing for its March 25 special meeting of shareholders.
While HudBay has seen its troubles make unwanted headlines this proxy season, many more Canadian companies are facing similar, if less public, shareholder revolts, some of which are sparking substantive change at the companies. Allen notes that there has been ‘increased accountability at the director level, so even where there may not be dissident action, [investors] certainly are looking to hold the directors accountable.’
And sometimes they’re looking for – and accomplishing – considerably more. David Salmon, Laurel Hill’s vice president for western Canada, says an analysis of statistics from 2008 proxy fights for board control show a nearly even split between outcomes where management kept its seats or those where dissidents took over either the entire board or the seats they sought. ‘It’s basically 50-50, so that’s the best indication that something happens if shareholders get concerned,’ he says.
Allen agrees, adding, ‘If the company ignores the concerns of shareholders, they certainly do that in this environment at increasing peril as a result of shareholders’ willingness to look at replacing boards and board members.’
Hitting a moving target
Glenn Keeling, a partner at Laurel Hill, calls ‘a large percentage of the Canadian issuer community…very ill prepared in situations like this.’ Not only haven’t they given much thought about ‘what to do in the event something aggressive comes over the bow,’ but worse, they often ‘have very little knowledge…about who actually is in their stock,’ he says. ‘Some of the companies that we’re in dialogue with or actually working for have seen upwards of 25 percent, 30 percent and 40 percent of their stock churn in such a short period of time, it’s a moving target. One of the most difficult things to do is get a strong handle at this point in time on who your shareholders are.’
That makes it more difficult to maintain the level of communication and transparency that many Canadian shareholders are demanding, but it’s still essential to meet that demand. Many companies that failed to do so will now be forced to use damage control to repair strained relationships that could have been avoided had shareholder communication been better in the first place.
Shanks points out that improved communication is not just a matter of issuing statements more frequently or meeting with key shareholders in person on a regular basis to give information to them. ‘It is about listening to the shareholders, and whether it’s groups like the Canadian Coalition or other governance types of firms and organizations, hearing what the shareholders have to say is important.’
‘We recommend when you’re talking to shareholders, transparency is very important,’ says Penny Rice, vice president of advisory services at Laurel Hill. The key is to provide information to shareholders and ensure that information is kept accessible and up to date. That can allow a company to answer a lot of questions preemptively, before they’re even asked, much less given time to fuel investor discord. It’s also important to explain matters like executive compensation and bonus structures well enough that they’ll be understood by the layman. ‘If you do have a compensation plan that on the surface appears to be out of whack with the performance of your stock or your company, and you try to sweep it under the rug, people’s imaginations fill in the blanks. It’s better to explain it than to let people explain it to themselves.’
Increased openness in investor communications also can increase the company’s chances of counting on shareholder solidarity in the event of unwanted takeover advances.
‘It’s widely held that Canada is the easiest country in the world to take companies over,’ Keeling explains. The environment ‘spawned several hedge funds and private equity players over the last several years to come after Canadian firms, and they have been quite successful in their quest. In this world of very, very much lower valued companies, it’s that much more attractive for players looking for strategic or opportunistic buys in the Canadian market.’
Now that companies’ valuations are so low, ‘they’re very attractive to strategic acquirers,’ Allen agrees. That, in some cases, may make shareholder rights plans ‘the first line of defense against possibly being put in play against their will.’
Survival of the most forthcoming
So who’s getting it right in Canada this proxy season? The Laurel Hill team points to the country’s major banks, which have successfully addressed issues related to disclosure and measuring risk versus performance, as an example of the move other companies need to make toward best practices.
Allen explains, ‘The banks passed compensation proposals that have been put forth by shareholders who have filed compensation-type proposals. As a result of engagement of the passing of a management proposal a large percentage of those [shareholder proposals] were withdrawn prior to the meeting.’
The banks generally achieved that result by meeting with the person or group that had the concern, developing a better disclosure standard, and coming to an agreement to go forward in a manner that satisfied the filer’s request.
That’s ‘how it should work,’ Allen says. ‘When a concern is raised that for whatever reason was not addressed previously, the parties get together and come to an understanding. Therefore that no longer remains an issue and the shareholder proposals are withdrawn before they’re formally put forth.’
Companies that survive this season’s proxy battles should not think they’re out of the woods. Say on pay is gaining popular support in Canada and may well be more of a lightning rod for shareholder dissidence and activism during the 2010 proxy season. Shanks believes that in addition, ‘We’re going to see some regulatory changes going forward…in terms of notice and access. Our administrators and regulators are looking at some of these issues.’
Whether their companies have faced shareholder discontent or escaped it this time around, all corporate officers, directors and executives need to look ahead now to devise and implement strategies for steering clear of trouble next year. Again, communicating well now is the key to averting problems later. ‘They should be regularly engaging in communications with their key shareholders, not just when they need them,’ Allen says. Otherwise, ‘a lot of them are finding out that when you go to them when you need them, they’re not always there for you or the other side’s already got them.’