The shareholders are restless.
During the 2023 proxy season, Canadian companies found themselves in the crosshairs of a record-breaking 69 shareholder activist campaigns, according to Kingsdale Advisors, a Toronto-based consulting company that for two decades has advised public companies on governance, transactions and shareholder relations.
The 2023 number is an “unprecedented high” that was a 97-per-cent increase over 2022, Kingsdale said. Activists typically argue a company’s stock is undervalued and demand changes in the board of directors in order to redirect the company’s strategy.
It’s part of a broader trend of discontent: In addition to activist campaigns, investors are pushing back on management at Canadian public companies in matters such as shareholder proposals, votes on directors, executive pay and even auditors.
These are the conclusions of Kingsdale’s latest Proxy Season Review, which covers shareholder votes and activist-management squabbles for 12 months ended June 30. The report is titled “Change Is Here,” but that may understate the current climate.
“What has changed in activism in Canada is that it’s no longer the brand name, capital-A activists who are driving proxy contests,” Kingsdale chief executive Ian Robertson said in an interview. “Only seven of the 69 proxy fights in Canada were conducted by what I’d call a brand-name activist, so what that tells companies is when you look at your shareholder list and you don’t see an activist in your stock, that does not mean you should not be worried.”
The 2023 proxy season also marked the first time since 2017 that activists have outpaced management in victories, thanks to growing support from big money managers.
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In 2023, the Top 100 global investment managers voted on the side of activists in Canada nearly 57 per cent of the time. From 2018 to 2022, on average, the Top 100 voted with activists less than 42 per cent of the time.
This, Kingsdale says, “overturns the assumption that large institutional investors automatically side with management, and they are now more than ever open to supporting activists’ agendas.”
That happened despite proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis & Co. demonstrating stronger support toward Canadian management in 2023. ISS recommended the activist position in proxy contests just 25 per cent of the time, with Glass Lewis backing activists just 36 per cent of the time.
It doesn’t take a special activist situation to see increasing investor skepticism, however. Shareholder votes occur every year at most companies, prompting Kingsdale to say “routine meetings are anything but.”
For many years, Kingsdale says, the advice of ISS and Glass Lewis, its newer competitor, carried the day for most big investors. Increasingly, however, institutional investors are bulking up in-house stewardship staffs and developing their own policies, many of which are tougher on companies than the advisory services’ standards.
This year saw an increase in opposition in Canada to say-on-pay proposals, in which a company’s board asks investors to vote “yes” in a non-binding advisory vote on a company’s approach to executive compensation.
Average investor support in these say-on-pay proposals decreased from 92 per cent in 2022 to 90.9 per cent in 2023, the lowest level since 2019.
The number of failed proposals – less than 50-per-cent support – dipped slightly from nine in 2022 to seven in 2023. But the number that received less than 80-per-cent support – considered a red line of dissatisfaction by many companies – leapt from 22 to 35.
The ratification of a company’s outside auditor, which Kingsdale says has typically been considered a formality, is no longer. Some investors are concerned that a long-time auditor-client relationship can lead to a coziness that inhibits the auditor from reining in aggressive accounting practices.
Over the past two years, the number of Canadian companies that have received less than 90 per cent investor support for their auditor ratification resolutions has exploded: from seven in 2021, to 23 in 2022, to 38 in 2023.
Kingsdale said the 2023 proxy season saw the continuation of an increasing trend, across all sectors, of individual directors getting targeted and support levels dropping. Kingsdale compiled its director-support numbers from the United States and Canada, and found the percentages of directors receiving less than 95 per cent, 80 per cent and 70 per cent support all continued to climb. In 2023, nearly one-quarter of directors failed to get 95 per cent, while 4.4 per cent failed to get 80 per cent and 1.8 per cent got less than 70 per cent.
David Milstead