In meteoric fashion, some of the now-large cannabis companies in Canada have graduated from the TSXV to the TSX, and in some cases the S&P/TSX Composite Index. While this has created huge returns for seed investors, it has also dramatically changed shareholder bases: large cannabis companies have seen a turnover from retail to institutional investors, who place more importance and scrutiny on board governance. Based on an analysis of publicly available data for six of the largest Canadian cannabis companies by market cap, the number of institutional shareholders over the last year have increased on average by 549 per cent. As such, Cannabis companies and their boards could face a rude awakening at their 2019 AGMs.
So, while cannabis companies are focused on the opening of the recreational market, there is a more important choice for them today: Either get prepared and spend the time needed to properly institute best-in-class governance practices, or run the risk of an unexpected ‘against’ recommendation from one or both proxy advisers that can result in a failed vote at their annual meeting. Or, vote results can be embarrassingly close, resulting in a narrow win that causes consternation with shareholders and proxy advisers.
For the past 15 years, Kingsdale has worked with some of Canada’s largest companies on these challenging issues. Keep your company on track with this 2019 AGM Checklist:
1. Do you know your shareholders? Are you aware of how sensitive your shareholder base is to the recommendations of the proxy advisers? Too often companies are taken aback by how many of their shareholders follow the voting recommendations of proxy advisers Institutional Shareholder Services (ISS) and/or Glass Lewis. This is especially true if your company is newly listed, has recently been added to a stock index, has graduated to a senior exchange, or if there has been a recent turnover in your stock. Conversely, some shareholders have developed their own internal voting policies that may be stricter than ISS and Glass Lewis. Understanding the composition of their governance teams and their policies, as well as how they previously voted on the same or similar proposals across the sector, is critical to determine whether a proposal will pass the vote. If listed in the U.S., be aware of your Foreign Private Issuer status – losing it could mean proxy advisory firms’ U.S. policies will apply. This can make a significant difference to their recommendations. If support is less than certain, do you know where discretion can be applied?
2. Do your shareholders know you? Like any good relationship, the relationship with shareholders is equal parts sharing your message and listening. Directly engaging shareholders is crucial in courting shareholders’ support. Engagement not only allows you to share your strategy and ensure it is understood, it can provide valuable feedback that will allow you to discern if shareholders see your board and committee chairs stewarding their priorities. The first time shareholders learn what your board has been up to and how it thinks about key challenges shouldn’t be the management information circular. Does your board plan on embarking on a ‘listening tour’ before this year’s vote?
3. Is gender diversity a problem for your board? If you are a part of a TSX-listed company with no female directors on its board and you do not have a robust gender diversity policy, your chair of the nominating committee may be in trouble. Other diversity measures regarding ethnicity have also come into play and may generate withhold recommendations from ISS’ Social Advisory Services. Is your board 30 per cent diverse on an racial and gender basis?
4. Can your board members, especially new members, withstand scrutiny? On the surface, board refreshment via the appointment of new board members may look great, but some shareholders will take a deeper dive on board candidacy. A strong CV and record of performance is no longer enough. What relationships do nominees have with other directors? What do they bring to your board? How many other boards do nominees sit on? ISS’ new policies demonstrate a renewed focus on overboarding. ISS has removed the secondary attendance trigger for directors seeking re-election in 2019 and increased the number of boards directors can sit on. These factors can have ramifications for how shareholders perceive your nominees.
5. Have you considered reviewing your by-laws, articles, and shareholder rights plan to make sure they keep up with best practices? It is critical to balance the rights of shareholders and proper defense mechanisms. Are you aware of the benchmarks against which your full by-laws will be assessed by ISS if you are changing any one part of your by-laws?
6. Are you aware of the rising importance of environmental and social (E&S) issues for corporate issuers? If the E&S wave has not hit your company yet, it has likely hit your peers. Do you know which of your peers have received E&S shareholder proposals in the last few years? Are you aware of how you will be evaluated from an E&S perspective and the consequences?
7. Is your meeting turnout where it should be? This is a subjective question, dependent on factors like shareholder base composition between retail and institutions and contentious proxy resolutions. However, what cannot be denied is that a strong voter turnout is a sign of a healthy, well-governed company. Have you noticed the participation rate at your meeting on the decline? How does it stack up against peers? Do you know what is causing the apathy and what you can do? Your ability to mobilize a full spectrum of voters is a key differentiator in the market and a strategic advantage.
8. How has your company performed and is your executive compensation aligned with performance? Shareholders traditionally look at total shareholder return performance, but ISS and Glass Lewis look at a variety of financial metrics in addition to total shareholder return. Do you measure and have targets for other financial performance metrics and do you know how you have stacked up against your peers?
9. Are you planning to renew your rolling reserve equity plan or do you intend to seek shareholder approval for additional treasury reserves? Be aware of the ISS Equity Plan Scorecard approach to evaluating equity plans. The scorecard looks at three main categories, including plan cost, plan features and granting practices.
10. When was the last time your board met with an activist-defense team, and is your defense playbook up-to-date? There have been 39 proxy fights in 2018, already more than the 32 in 2017, and new battles continue to surface daily. An activist-defense team will help you take stock of your vulnerabilities beyond a simple SWOT analysis, and will prepare your board to effectively respond to an activist’s challenge.
Ian Robertson is executive vice-president of communication strategy at Kingsdale Advisors