Shareholder activism in Canada last year resulted in 30 campaigns, led by the materials and healthcare sectors in Canada with 11 and six campaigns, respectively, according to Gryphon Advisors.
An ‘activism campaign’ is defined for these purposes as including:
- A shareholder opposing management by public initiation of a shareholder meeting requisition
- An announcement of an intent to launch a campaign to replace directors or otherwise oppose management
- The filing of activist materials opposing or soliciting against management.
It does not include hostile bids.
Although the representation of mining companies in activism campaigns is high, it is important to remember that the mining sector accounts for almost half of all issuers on the Toronto Stock Exchange (TSX) and TSX Venture Exchange. The concentration of claims in the healthcare sector can be accounted for, at least in part, by increased activity in the cannabis industry.
In transactional contexts, a recent activist tactic has been to use ‘mini-tenders’ to acquire up to 19.9 percent of a target without triggering the takeover bid requirements under National Instrument 62-104 Take-Over Bids and Issuer Bids (NI 62-104). We note that, overall, the number of unsolicited offers continues to decline since the changes to the takeover bid regime that were implemented in NI 62-104.
On the shareholder proposals front in 2019, the Shareholder Association for Research and Education and ISS counted 84 shareholder proposals submitted at 32 companies, excluding TSX-listed issuers that are US domestic issuers. This is a significant jump from the 2018 count of 40 proposals at 21 companies.
The shifting focus of shareholder proposals is arguably even more noteworthy than their overall numbers. The increasing emphasis on ESG is reflected by significant growth in environmental and social shareholder proposals. ESG issues were the focus of 45 percent of all proposals in 2019, up from 30 percent in 2018, including 18 proposals aimed at integrating ESG metrics into compensation determinations, according to Gryphon Advisors.
Other areas of focus were the adoption of a say-on-pay vote and CEO compensation, including the disclosure of CEO-to-median employee compensation ratio.
Despite the increase in their numbers, the majority of shareholder proposals last year were withdrawn before voting took place. This is likely a reflection of satisfactory management engagement. Moving into the 2020 proxy season, board and management considerations of their company’s ESG framework could include opportunities for shareholder and broader stakeholder engagement on these topics to address issues that could otherwise encourage a shareholder proposal or activist effort.
This type of engagement could also be considered as part of company policy design in support of good corporate governance and proactive socialization and management of shareholder and stakeholder concerns.
Although still the exception, we expect the use of virtual shareholder meetings to continue to increase in the 2020 proxy season. We have seen an uptick in their use by a number of S&P/TSX 60 issuers in a virtual-only format with others adopting hybrid formats.
Potential advantages of virtual or hybrid meetings include the potential for increased access and participation by shareholders. But the primary governance concern is ensuring that such virtual formats grant shareholders who are participating electronically the same rights and opportunities as those granted to shareholders participating in person.
ISS has yet to take a policy position on virtual meetings, but Glass Lewis in its 2020 proxy paper guidelines for Canada indicates that it may vote against governance committee members if there is not adequate disclosure to support the preservation of shareholders’ right to participate virtually.
SCRUTINY OF PROXY ADVISERS
Last year a new spotlight was shone on proxy advisory firms’ reporting and recommendations as well as the diligence responsibilities of investment advisers in connection with proxy advisory reporting. The SEC voted in favor of new guidance regarding the responsibilities of investment advisers and regarding the application of proxy rules to proxy voting advice.
This proxy voting guidance is intended to address concerns relating to proxy firms’ significant level of influence across the industry, and to ensure that investment advisers meet their fiduciary standards by doing the appropriate diligence on proxy adviser recommendations.
Proxy advisory firms’ reports have occasionally aroused concerns stemming from what critics argue are conflicts of interest inherent in the firms’ business models, uncorrected errors in their reports and insufficient transparency around methodology. A fourth complaint that has been raised in certain cases concerns the firms’ perceived unwillingness to engage with issuers. The proxy advisers have rejected these criticisms and defended their business models.
The SEC’s proxy voting guidance will likely have most of an impact in the investment adviser community as a result of increased pressure to engage in more thorough due diligence, particularly when finding errors in reports or gaps in the methodology used by the proxy firms.
Given the potentially significant added cost of addressing quality issues and the need for more interaction between proxy advisers and issuers, other impacts could include: increased costs to investors and investment advisers, dampening of proxy adviser recommendations and reports and/or greater support for management-backed proposals.
Both Glass Lewis and ISS published updates to their proxy guidelines for the 2020 proxy season, which include updates to director attendance and attendance records, board composition (former CEO/CFO, diversity and skills), over-boarding, board oversight expectations for environmental and social risks and executive compensation (contractual payments and arrangements and company responsiveness to low say-on-pay support). A summary of these updates can be found here.
Beyond awareness, we encourage you to consider what these trends and developments mean for your organization, specifically how they are incorporated into your governance and disclosure processes and frameworks, and how they may impact your annual meeting preparation and continuing corporate governance matters.
For many issuers, this means conducting a strategic review of stakeholder-focused communication, including continuous disclosure materials as well as board and committee charters, company policies and underlying frameworks to consider whether updates are needed in areas such as:
- Identifying gaps in allocation of oversight and responsibility, as well as in current disclosures, policies and materials, and determining options for your organization to address these
- Reviewing the frameworks and processes that support disclosure, charters and policies, particularly as they relate to risk management
- Simplifying disclosures to focus on quality of disclosures specific to the organization, its business and its risks
- Aligning policies and/or public filings with regulatory and best practice updates and changes made this year and in past years, while taking a fresh look to eliminate redundancies or inconsistencies.
Lisa Culbert is counsel for legal design & operations and Ramandeep Grewal is a partner with Stikeman Elliott in Toronto