Powerful coalition spurs change in corporate governance

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A powerful coalition of large institutional shareholders has had a major impact on convincing companies in Canada to adopt leading corporate governance practices such as say on pay votes for shareholders, according to new academic research unveiled Tuesday.

Canadian companies have been far more likely to adopt key governance reforms when they have been lobbied privately by the Canadian Coalition for Good Governance (CCGG), which represents most of Canada's largest institutional investors with combined assets under management of $2.5-trillion, according to a study by researchers at the University of Toronto.

Alexander Dyck and Craig Doidge of the Rotman School of Management were granted confidential access to the CCGG's files to review which companies were pressured privately to adopt three key governance reform issues since 2005, and to study which adopted the reforms.

They concluded that companies were 30 per cent more likely to adopt majority voting policies after being pressured to do so by the CCGG, which Prof. Dyck said is a "highly statistically significant" impact.

"They really got a lot of bang for the buck in a short period of time by pursuing this," Prof. Dyck said.

The study found companies were 25 per cent more likely to implement say on pay votes, compared with other companies not contacted by the coalition. Companies were also 32 per cent more likely to adopt executive compensation reforms – including policies allowing bonuses to be clawed back in cases of wrongdoing and caps on the size of CEO pensions – after being approached by the CCGG to make changes.

Prof. Dyck, who presented the findings Tuesday at the annual meeting of the CCGG in Toronto, said academic literature usually dismisses the power of institutional investors to strongly influence governance change when they have non-controlling ownership stakes in companies.

He said the Rotman research suggests the CCGG is different, however, because its members work together in a unique coalition that is not duplicated in scope by any single group in the U.S., U.K. or other major countries. The findings send a message to investors in other countries about the merits of collection action, he said.

CCGG chairman Dan Chornous, who is chief investment officer at RBC Global Asset Management Inc., said the academic findings are "a satisfying outcome" after years of effort to influence change.

"I think it breathes a little energy into the important mission we have ahead of us," he said.

The researchers also calculated the impact of the CCGG's lobbying if they controlled for a wide variety of other factors that could have caused a company to adopt a reform – including whether companies got shareholder proxy resolutions on the issue or were targets of media pressure to introduce reforms.

After controlling for a long list of possible influences, they said companies were 16 to 22 per cent more likely to adopt majority voting policies after CCGG lobbying, 10 per cent more likely to introduce say on pay votes, and 25 to 27 per cent more likely to implement compensation reforms.

The research also found the CCGG has influence beyond its direct lobbying, because directors on targeted companies took the message to their other corporate boards to urge them to also examine the same reforms even if those companies had not been approached by the CCGG.

The researchers looked at directors on boards of major banks that were early adopters of majority voting policies, which require directors to offer their resignation if they get a majority of "withhold" votes in board elections. The study found other companies were 15 per cent more likely to adopt the reform when they had a bank director on their boards.

"Your engagements have a bigger impact than the individual firms because some of those practices travel with the engaged director," Prof. Dyck told CCGG officials at the annual meeting on Tuesday.