Shareholder activism in Canada is on the rise and publicly traded companies need to start doing a better job of engaging with investors, says a new report from Toronto-based Kingsdale Shareholder Services Inc. released on Thursday.
The Kingsdale report reviewed the 2015 proxy season and found that shareholder activism is on the increase, with companies facing as many proxy fights in the first half of 2015 as they did in all of 2014.
In particular, the report notes that the differing interests of long-term and short-term shareholders is increasingly creating tension, with some investors demanding that corporate boards demonstrate a commitment to a long-term strategy while others are seeking a role in more immediate decision-making.
Activist shareholders are also continuing to hold their own against management this year, the Kingsdale report says, as they are winning about half the proxy fights they launch.
“Part of the reason for the continued success of activists year after year is their willingness to innovate and adjust tactics, such as the increased use of ‘constructivism’ and minority short slates,” the report states.
“Only halfway through this year, we’ve seen more proxy fights than we did in all of 2014. With a growing rift between long- and short-term shareholders, more active institutional investors, and boards continuing to underperform in a number of key areas, we expect the back half of the year and early 2016 to be just as busy,” says Wes Hall, Kingsdale’s CEO and founder, in a statement.
“Activists are attracting more capital, superior talent and effecting change. Just as companies thought they were catching up and defending themselves appropriately, activists are set to leapfrog their best efforts again,” Hall adds. “Directors should be under no illusion that what got them through last year will get them through the next.”
The report also observes developments on certain governance issues. For example, it notes that a record number of companies have lost their advisory votes on executive compensation, so-called “say-on-pay” votes. “Shareholders have reached their breaking point when it comes to compensation related concerns,” it says.
However, there has been less progress on the issue of board diversity, the report finds. With this being the first proxy season under the new “comply or explain” rule regarding companies’ approach to women on boards and in senior management, Kingsdale concludes, “the big news is nothing changed.”
The report notes that representation of women on boards on the S&P/TSX 60 index rose less than 2% during the year: “Shareholders will begin forcing change if companies are unwilling as diversity has become a metric for companies that pay attention. If investors see the new policy doesn’t mean much to you or you aren’t doing anything about it, it raises the question, ‘What else don’t you care about?'”
This year is also the first proxy season in which majority voting policies are mandated — and the Kingsdale report says there are “more directors in trouble,” with 20 directors triggering the policy this year, up from just four directors last year.
“Boards need to be clear on how to handle the resignation process and succession planning as more shareholders demand ‘true’ majority voting, allowing them to cast votes against directors, not just withhold,” the report says.
Given these developments, Kingsdale advises companies to do a better job engaging with their shareholders.
“Shareholders want regular interaction and transparency into the strategic decisions of the company they own and are increasingly unwilling to accept regulated disclosure as sufficient communication,” Kingsdale’s report says. “We are rapidly approaching a tipping point where shareholders who are not getting the access and information they expect will soon hold boards accountable.”