Canadian directors are now on notice: No matter how large the company, no matter how many big names on your board, nobody is immune from a shareholder possessing the power of will, cash and argument.
The concession by Canadian Pacific Railway’s incumbent board to activist investor Bill Ackman drives home what proxy fight professionals have been saying for years. Size is no defence any more, nor is the pedigree of a director. The only thing that matters is performance.
You say your name is John Cleghorn and you once ran Canada’s biggest bank? Great. Congratulations. What have you done for me lately here at CP? Clearly, not nearly enough, as Mr. Cleghorn and five other CP directors, including chief executive officer Fred Green, are gone. Mr. Ackman’s chosen directors are plotting the new course of the company.
Boards that weren’t worried before, ought to be. The success of Mr. Ackman, combined with the doldrums in the market, are likely to lead to more of these battles.
Underperforming directors and management teams can hide in a rising market, where returns are easy to find and there’s no incentive to do the hard work of trying to toss out a board in hopes of sparking some life in a somnolent stock. But in today’s market, with returns scant at best, more shareholders will focus on governance change as a way to drive share performance. Once, proxy fights were for small companies. But big investors need big returns. That means big targets.
While Canadian shareholders have historically been reticent to publicly grouse about management (it does make things so uncomfortable at cocktail parties), give them a standard bearer for change such as Mr. Ackman and it’s very clear they will fall in line.
Fund managers get fired for weak performance. If they can protect their own returns, and jobs, by firing the directors and management of a company when necessary, they will do so. They’d just rather not be seen as the doing the dirty work.
To be sure, shareholder activism isn’t some new phenomenon. It has been slowly getting more mainstream in Canada for a number of years.
In 2007, the Ontario Teachers’ Pension Plan grew frustrated with the sagging performance of telecommunications firm BCE Inc. and helped to push the company into play, generating the takeover battle that eventually led to an agreement to take over BCE (the deal later collapsed during the financial crisis).
In 2010, a Toronto-based fund known as West Face Capital targeted Maple Leaf Foods, a meatpacking and bakery company with lagging shares and a too-cozy board.
But to see a full-on proxy battle that resulted in the ouster of most of the board and the chief executive officer at one of the 40 largest public companies in Canada is another step down the road.
In BCE, Teachers didn’t take too many public shots at management or the board, instead making its point through dry press releases and securities filings.
In Maple Leaf, West Face took a very aggressive stance early, criticizing the company and its chief executive officer. Maple Leaf at first dismissed the fund as an interloper focused on short-term returns, but in the background, long-time Maple Leaf investors were willing to back West Face. Maple Leaf took the temperature of its shareholder base and realized that it needed to work with West Face.
Still, West Face didn’t push to throw out the board, instead taking a softer tack. The result was a relatively happy ending. The CEO, Michael McCain, is still there. West Face has representatives in the boardroom, working with the company.
Bill Ackman’s playbook at CP was something much more – a punch right in the gut of Corporate Canada. He threatened to rent a big hall and lay out in gruesome detail exactly what he believed CP was doing wrong. Then he followed through. He relentlessly hammered away using every channel available, appearing on television, in the newspapers, and writing numerous letters to shareholders.
Did the aggressiveness turn off Canadian shareholders with its brashness? Hardly. The vote was going overwhelmingly Mr. Ackman’s way when the doomed CP directors decided to fall on their swords, saving the agony of a meeting and the release of voting results that would be nothing short of humiliating.