Ian Robertson is an executive vice-president at Kingsdale Advisors.
A victory in one of the most unexpected election campaigns in Canadian history reveals important lessons for directors who will find themselves competing for the hearts and minds of proxy holders in the face of a shareholder activist, hostile bid, or contentious annual meeting.
Directors need to think and act like the candidate; view their company strategy as a campaign platform; and consider the movement of their stock as real-time polling data passing judgment on their performance.
Most important, they need to appoint a CCO – a chief campaign officer – someone to oversee a finely tuned electoral machine who heeds some valuable lessons we just saw play out in Ontario.
Boards, like governments, are voted out, not in. The Liberals approached the provincial election as they had each of their previous victories: Coast and wait until the opposition makes a mistake. For boards that could see an activist shareholder emerge, they can’t just sit back and assume that when a proxy fight starts, they’ll be able to villainize their opposition. Time and energy must be spent on a continuing basis winning over investors, ensuring they are not only aware of your strategy but feel invested in it.
It’s clear voters decided 15 years was enough for the Liberals and Kathleen Wynne and imposed a term limit. For boards, rather than have a similar fate imposed on them by shareholders, careful examination should be given as to what makes an appropriate best-before date given their unique circumstances. Issues arise when directors serve for 10 or more years.
Never underestimate the desire for change
Multiple points of contact with shareholders over a period of time and involving independent directors can help control this. There are many issues – especially related to governance – that shareholders may not wish to address with management, yet are nonetheless critical to their voting decision.
The characterization of Doug Ford as undisciplined and scattershot is remarkably similar to the formula incumbent directors under attack by an activist rely upon. As with Mr. Ford’s slogan “For the People,” we often see proxy fights mobilized under a variation on a similar theme, “For the Shareholders.” Mr. Ford’s campaign, like many activist campaigns, did well to harvest voter anger and displeasure with the status quo. Boards often underestimate the role hearts – and not just minds – play in shareholders’ judgment on their performance.
It all starts with an accurate read of your electorate. The value of stratifying shareholders along with voters is often underappreciated. For voters, this is most commonly done on the basis of demographics or issues. For shareholders, it is important for management to understand that rarely are shareholders 100 per cent with you or 100 per cent against you. Perhaps they like the long-term strategy but have an issue with the compensation plan. In this situation, directors may hold onto their seats on the board but be exposed to a say-on-pay vote.
One of the most important voting blocks companies often fail to pro-actively address are those shareholders who follow recommendations from proxy advisory firms, ISS and Glass Lewis. In the case of institutional shareholders, directors may find the portfolio managers who make the money decisions are supportive and are buying shares, yet the fund may have a policy of strictly following the recommendation of the proxy adviser.
If one of these large blocks do go against you, a path to victory can be found by stitching together smaller, more ambiguous voter coalitions. As Mr. Ford demonstrated, it’s possible to assemble a coalition of quiet, disenfranchised voters who may not have voted in previous elections because they were disillusioned or just disinterested. Indeed, 58 per cent of Ontarians voted in the provincial election – the highest turnout in almost two decades.
In the case of a proxy vote, this means reaching out to mom-and-pop shareholders and letting them know you understand and empathize with their concerns. These are people who have generally been left untouched by your company’s investor relations program, and may have never cast a vote before.
In motivating that vote, personal brand plays a big part. A case for change can be a compelling narrative, especially when it is coming from someone voters believe will do what he or she says. Whatever you think of Mr. Ford, voters demonstrated they trust he will stand up for them and make good on his promises. This trust factor escaped Ms. Wynne and was compounded by her delusive handling of the gas plants, OPP investigation into candidate promises and numerous other issues.
Like political elections, shareholder turnout can be driven by anger. A feeling the incumbent is, at worst, looking out for themselves, and at best, simply out of touch, can be fatal. Directors who dismiss shareholder engagement on a continuing basis as overrated, or shareholder opposition as “irrational” or “misplaced,” will find themselves out of work if they fail to get the underlying mechanics of their campaign right.