Invesco Canada's demand for a shareholder vote to dislodge the directors of poorly performing home improvement retailer Rona Inc. is an uncharacteristically bold move for a conventional Canadian institutional investor. Will its outburst of activism herald a torrent of similar actions by Canadian fund managers? Possibly. But the more immediate question is how another institutional investor, the Caisse de dépôt et placement du Québec, responds.
The Caisse must decide which of its two masters it answers to first: investors or politicians. It operates under a dual mandate – to pursue optimal returns on behalf of millions of Quebeckers and to support the province's economic growth. Managing that mission has been a chronic challenge and has led the asset manager into some terrible investing decisions over the years, all to keep its political masters in Quebec City happy.
The Caisse has a murky position on Rona, a Quebec-based firm that has posted lacklustre results for years. After it was revealed on the eve of the recent Quebec election campaign that U.S. giant Lowe's was planning to bid for Rona, provincial politicians said they would block a takeover. The Caisse (which declined to comment Wednesday on its intentions) tried to have it both ways – upping its stake in Rona to 14 per cent from 12 per cent and stating it wanted to create value for its depositors but also pushing to protect Rona's Québécois suppliers, franchisee entrepreneurs and head-office employees. Since then, Lowe's has retreated, Rona has put up poor results and the board has turfed CEO Robert Dutton.
The choice that Invesco, the second-largest Rona shareholder behind the Caisse, is putting before fellow shareholders is extreme. Most activists put forward a slate consisting of a handful of new directors rather than pushing for a complete ouster. But it's clear the Rona board needs new blood and must revisit its faltering strategy of owning a hodgepodge of retail formats.
More than half the retailer's business is outside the province but just one of the company's 11 directors is a non-Quebecker. The board appears devoid of anyone who can provide practical advice on how to fight off growing competition from both Lowe's and Home Depot, the U.S. giants that have redefined the home improvement sector.
Any shareholder who is serious about generating good returns from an investment in Rona should welcome change on the board and demand the company undertake a strategic review that considers all options, including the sale of the company. If the Caisse takes its role as fiduciary seriously, it should push for both, even if it means inviting non-Quebeckers to the board and holding an auction for the company.