Sharon Geraghty is a partner at Torys LLP specializing in M&A, corporate governance and securities law.
Today's shareholders want an increasingly active role in governance, even if they don't have a literal seat at the table. And as investors get closer to the boardroom than ever before, directors have to take notice and change their practices to respond.
Shareholders have been putting the spotlight on governance practices for several years as they seek to promote better governance and better boards, pushing for greater board independence, majority-voting policies and "say on pay" votes. This rise in engagement shows no sign of abating, with recent research by FTI Consulting Inc. suggesting that Canada is likely to face increased shareholder activism, in part because the regulatory environment here is considered more activist-friendly than that in the United States.
Having active owner-managers can be beneficial, as shown by the value that private-equity owners have created following their acquisition of public companies. Investors in public companies often want to replicate that governance model by having influence at the board level and a say in strategic direction to improve shareholder performance.
However, shareholders of public companies are diverse and self-interested, with no fiduciary duty to act in the best interests of either the company or other shareholders. No matter how permanent shareholders may consider themselves, they will each have their own investment objectives, trading strategies or even political or other objectives that may conflict with value maximization.
While proxy contests are the best known and most obvious way for shareholders to influence strategy development and decision-making by trying to get their nominees on the board, there are other ways that don't involve proxy fights. In those cases, the targets and activists reach a mutually satisfactory resolution that addresses the activist concerns through discussion and negotiation.
Another way institutional shareholders register their dissatisfaction is through tactical voting, such as voting "no" on say-on-pay votes or withholding their votes in the election of targeted directors.
Some also go public with their criticisms, such as when the Canada Pension Plan Investment Board withheld its vote for the chair of Bombardier Inc. over executive-compensation issues or when the Caisse de dépôt et placement du Québec openly questioned SNC-Lavalin Group Inc.'s response to its bribery scandal.
Boards can take several steps to avoid costly activist interventions, starting with how the company reacts to shareholder concerns. That McKinsey study found that, although three-quarters of activist campaigns began collaboratively, half eventually turned hostile. Deciding how to engage with shareholders is just as important as what actions to take in response to their concerns.
Every board should have a process in place to allow it to engage with shareholders, and that process should be disclosed in the information circular. In some cases, engagement should be proactive instead of waiting for shareholders to become unhappy.
A successful board will understand its shareholder base, including their investment criteria, the objectives for their investment, their time horizon and how they measure performance. Armed with this knowledge, the board can be vigilant on what matters to shareholders, including management performance, executive compensation, accountability and corporate efficiency, so they are better positioned to anticipate and resolve potential conflict issues before they prompt activist intervention.
Any engagement must be real and meaningful, so the board must be prepared to listen to what shareholders say and address the feedback appropriately. This requires the board to keep an open mind and avoid any knee-jerk defensive responses to negative feedback.
Renewing the board over time to bring in new expertise and experience and a diversity of views should be a priority. All board members should be assessed regularly and the views of institutional and other long-term shareholders on board composition and renewal taken into account. Any directors who are not contributing should be moved out.
Ultimately, however, a board cannot abdicate its decision-making responsibility to satisfy the wishes of some shareholders.
Under our corporate governance model, boards, not shareholders, have the duty to oversee management, balancing the interests of shareholders and other stakeholders in making decisions for the company. Canadian corporate law imposes fiduciary duties on directors to act in the best interest of the corporation in doing that job. Shareholders have no similar role or duty.
Nevertheless, shareholders' opinions clearly matter. If shareholders lose confidence in management, the board will not be able to execute its strategy. In today's environment of rising activism, boards ignore shareholders at their peril.