Report takes aim at proxy investing

Perceived ‘threat to public companies’

The number of public proxy contests undertaken in Canada may be on the decline, but that doesn’t mean activism is having less of an impact on Canadian companies.

That’s one of the key takeaways from a 40-page report, Proxy Season Review 2017 prepared this week by Kingsdale Advisors, which found “activism is a persistent investment style and a continued threat to public companies.”

Indeed the 2017 numbers — there have been 20 such proxy contests so far, down from 33 in 2016 and 55 in 2015 — have to be put into perspective, given that the battles don’t always become public spectacles. Instead companies and activists “are finding new ways to work more constructively behind the scenes to realize what both hope to be value enhancing solutions, while saving public reputations and corporate funds.”

By way of an example consider Aecon Group: two months after Eric Rosenfeld, a noted activist in both Canada and the U.S. was voted to the board, the construction company announced it had engaged two firms to explore a potential sale. While there may have been other factors, Rosenfeld said prior to the meeting that he had “discussions” with Aecon “over the last few months.” On that transaction, which presumably won’t count in Kingsdale’s numbers, shareholders have already benefitted given the pop in the share price.

But when activism does become public, the activists have been on a tear. According to the report, in 70 per cent of the fights this year, activists won “some or all of their objectives,” a success ratio that compares with 55 per cent and 33 per cent in 2015 and 2016 respectively.

The 2017 wins include higher prices paid to acquire Tembec, Sandvine and Milestone Apartments REIT.

Factors that may explain the increase in the activist’s winning percentage include: the increased scrutiny and “target-screening” activists apply at the front end; and the greater link between “properly structured activist campaigns” and gaining “traction with the proxy advisers and generating supportive vote recommendations.”

Two examples occurred at Liquor Stores N.A., where the dissidents gained six of the eight board seats, and Granite REIT, where FrontFour Capital Group and Sandpiper Group gained three board seats.

Against a given that the proxy advisory firms (Glass Lewis and ISS) will continue to gain power, what are the big issues on the horizon?

For starters, there will be a continued shareholder focus on environmental, social and governance (ESG) matters.

In 2017, there have been 33 proposals, compared with 20 and 27 in 2015 and 2016 respectively.

One third of the ESG proposals in 2017 were related to climate change. (But not many ESG proposals get over the line.)

As a result of the ESG trends, Kingsdale expects investors will demand “enhanced disclosure,” on a many matters including corporate social responsibility (its advice was to get ahead of the issue as shareholders are more likely to target the laggards) and voter turnout, given that low numbers “can be indicative of poor governance and shareholder engagement.” Based on 2011 data, Canada is middle of the pack with 61 per cent to 62 per cent participation, about 20 points behind the U.S.

Wes Hall, executive chairman and founder at Kingsdale said “the bar for governance standards only continues to rise. Proxy advisers ISS and Glass Lewis are tightening their policies and investors, even those that are considered passive are becoming increasingly focused on management and board accountability.”

Hall noted that what might have worked this year may not fly next year. “Heightened vigilance on behalf of directors is required in the new paradigm of corporate governance,” he said.

IN 70% OF THE FIGHTS THIS YEAR, ACTIVISTS WON ‘SOME OR ALL OF THEIR OBJECTIVES.’