How Pershing Square has changed proxy fights
Activist investor William Ackman forced major board restructuring in
It’s very rare
when everyone in the marketplace agrees about something at the same time,
but in the case of Pershing Square Capital Management’s ground-breaking
proxy battle with Canadian Pacific Railway (CP), no one can deny that a
major shift is under way in the Canadian market. William Ackman is the
architect of the boardroom coup that installed a slate of seven board
members onto Canada’s second-largest railroad in one major action.
Canada had not
seen anything like this happen to as large a company as CP before, and
Ackman crowed loudly about his accomplishment in a Globe and Mail
article in May. ‘In every significant boardroom they are talking about the
Canadian Pacific proxy contest and … what is the right thing to do for a
board,’ Ackman is quoted as saying. ‘Directors are sitting up more
straight and reading board materials more carefully and questioning the
CEO more intently. That is a very, very good thing.’Ackman is right, and
while some may not admit this, these developments have grabbed everyone’s
Canada in particular are more aware now that investors are watching them
more closely. In the back of their minds, they are likely wondering how
this may affect them in the future. Staring them in the face is the
reality that Ackman purchased just over 14 percent of CP’s shares in
October last year, and by May 17, he had CP chairman John Cleghorn, CEO
Fred Green and four other board members announcing that they would resign
their positions and not stand for re-election to the board just prior to
the company’s annual shareholder meeting.
In a matter of
months, Ackman, with the help of a team of advisers, had convinced an
overwhelming number of investors to back his efforts to gain board
representation and replace the CEO at one of Canada’s iconic businesses.
For a company of CP’s size and stature, this was a first – and a wake-up
‘A change of
that magnitude only reinforces the fact that shareholders have the
ability, the strength and the wherewithal to actually replace some
substantial and significant names on a very prominent company board – and
it’s not going to be taken lightly,’ says Glenn Keeling, partner at
Phoenix Advisory Partners.‘We are expecting a great deal more of this type
of behavior,’ Keeling adds. ‘It’s a combination of poor stock performance
and wrong-side governance – not enough independence and not enough
oversight. If you think this thing is a flash in the pan, it’s not.’
‘The fact that
this occurred in such an overwhelming way demonstrates both to issuers and
to investors that it could happen to any company,’ says Riyaz Lalani,
chief operating officer of Kingsdale Shareholder Services, which was one
of Pershing Square’s primary strategic advisers during the proxy battle.
‘Proxy fights used to be the providence of small and mid-cap companies and
every year there are dozens of them in Canada, but I don’t think any of
these large, sophisticated boards thought that it was possible – so this
is a new reality for them.’
To adjust to
the ‘new reality’ of dealing with proxy contests, Canadian publicly traded
companies should be mindful of the following factors.
shareholders before activists show up.
Companies must make better efforts to understand their shareholders’
concerns before activists show up and use those concerns against
management. ‘It is important that boards be proactive with the engagement
of shareholders before the activist comes knocking so that they avoid
being perceived as simply responding to an activist-initiated situation,’
says Andrew MacDougall, partner at Osler Hoskin & Harcourt.MacDougall
reasons that had CP done regular comparisons of its industry operating
performance and stock price performance against those of its industry
peers, it may have seen the warning signs that an activist investor might
take a run at the company. He says the firm should have seen its
shortcomings and then reacted by ‘building relationships with the
shareholder base’ in order to give reassurance and build loyalty. Instead
there was very little engagement, and by the time CP reached out to
investors, management seemed like strangers.
shareholders to act more like fiduciaries.
As performance continues to be sluggish at some companies, more
shareholders are stepping up to sound the alarm and push for change.
Shareholders are indeed partners in a company, and they have
responsibilities too. ‘Part of their fiduciary responsibility involves
making changes on the board,’ says Lalani. ‘They will not be bystanders to
bad corporate behavior any more.’
language of the shareholder.
When an investor commits large sums of money to a stock, he or she wants
to know how the company intends to grow that investment. Getting that
message through to shareholders depends largely on the story you tell. Wes
Hall, CEO of Kingsdale Shareholder Services, says Pershing Square spent
additional money researching a plan to show other shareholders exactly how
it intended to double its billion-dollar investment. Installing Hunter
Harrison, the former CEO of the Canadian National Railway, as CP’s new CEO
was promoted as part of the strategy to strengthen the company for
long-term growth. ‘You need to find out what shareholders consider the
important metrics to be, because those are the things you need to be able
to speak to them about,’ says Lalani. ‘Investors may decide that the
success of the company is not just about management – it’s about a whole
host of other factors. You need to understand the pain points. ’Obviously
stock price is an important performance metric, but you must find other
things to talk to shareholders about in order to win over their trust,
especially during a proxy contest.Hall suggests asking yourself the
question, ‘How can we make some changes that can really enhance the bottom
line and add to the performance of the company over time?’ If you work
with shareholders to come up with those solutions, you’ll be speaking
good team of impartial advisers.
Companies need good advisers who are willing to tell them the truth.
Having a core team of advisers that always agree with the board may not be
in the organization’s best interest.‘The board should seek independent
advice and should encourage the advisers around the table to express their
independent views on the issue,’ says Hall. A great team of advisers will
also help you be better prepared for possible investor actions. ‘Have
advisers around you that understand proxy matters and can keep you in safe
harbor all year long, because if you are not doing that, you are going to
run these risks,’ Keeling notes.
After buying a significant stake in CP, Pershing didn’t immediately push
for a sweeping change of the board. Ackman originally asked for two board
seats to guarantee that he would have input. It was only after the
original request was rebuffed that his company reached out to other
shareholders and campaigned for support to obtain board representation,
and the Pershing director slate grew from two to seven. Although the board
may have felt insulted by the initial request for board representation
because it came with the suggested change of CEO, Hall points out that
when your largest shareholders suggest that a move be made, ignoring them
is not a good idea. Other shareholders are watching to see how you treat
the larger shareholders in order to determine if you are serving
investor’s interests or management’s. Since Ackman is a well-known
activist investor, the CP board had to know that he would ask for board
representation because he has shown in the past that he doesn’t invest in
companies to keep the status quo.
certainly knew – other investors followed Ackman into the stock, driving
the price higher on the expectation that there would be some change. While
companies can’t offer board seats to every large shareholder, Hall says,
‘This was the exception, where you have to say, I need to invite these
people in and give them a board seat – or do I want to take the
temperature of other shareholders to see what their thoughts would be on
making changes to the board?
’Unfortunately, the CP board didn’t exercise either of those options
quickly enough. The shareholders were sending CP management the message
that they wanted to see change. It’s management’s job to find out what
type of change shareholders will accept and then, with the board, make
compromises on ways to achieve it.
Shareholder Services’ CEO Wes Hall shares some key aspects of the
proxy contest between Pershing Square and CP
you know you could win a vote to gain board representation?
very early in the process
– after the town hall meeting – that this was a fight that we were going
to be able to win. As we were talking to people and gauging the support we
were receiving, we were really getting what people’s appetite was for –
whether they would support two, three, four nominees, and so on. Once we
set our slate at seven, we knew we would be able to get that number.
things in your favor once you started talking to investors?
The board and
management completely misread their entire shareholder base. There are a
lot of underperforming companies out there, but despite their
underperformance, management were able to tell a good story because they
were in touch with their shareholder base. It was a misreading of the
shareholders and how they would react to what we were proposing – but the
argument that we were taking to the shareholders was not just about the
performance of the CEO. There were some governance concerns that we had as
an issue as well, and we were looking at some of the changes in the
C-suite over a period of time – I think there were three CFOs during the
tenure of the CEO and five COOs during that same short period of time.
You can always
say poor performance was those people’s fault, but if they were very
capable when they were hired and they were going to be the solution to the
problem, and then after a year those people are gone, you really have to
look at the internal workings of the organization to see if the board is
doing a good job with succession planning.The board’s fundamental duty is
to make sure there is proper succession planning for the CEO, and when
your cycle for the COO, who is really the successor to the CEO, is at such
a rapid pace, there are other underlying issues that people may want to
pay attention to.
what happened with Pershing/CP, what has changed about how proxy battles
will be fought in the future?
I think you
can’t take the shareholders for granted anymore. You can’t sit there and
say, ‘I’ve done all these great things in my career and I need to get a
pass as a result.’ There is an attitude among certain companies that says,
‘We’ve got a great board that have had accomplished business careers over
the years, and that’s good enough for us to be immune to any kind of
shareholder activism.’ The Pershing/CP case really shows that however your
board was put together, or whatever successful business careers these
board members have had over the years, it doesn’t really matter when it
comes down to performance and issues of governance.So, I don’t think
you’re going to find any boards in this country where somebody would pick
up a significant stake in a company, say 14 percent to 19 percent, and ask
to have proportionate representation, and the board will say no thank you…
I think at a minimum, you’re going to find that the board will pay
coziness on Canadian boards?
Advisory Group former senior vice president Brad Allen says a closer
examination of the proxy battle between Pershing Square and CP uncovers a
troubling aspect of Canadian governance. Since proxy battles that remove
board members happen all the time in Canada, the fact that none had
affected a mega-cap company like CP before now might be considered
strange. For many years, CP underperformed yet continued to receive
positive ratings from proxy advisory firms and 99 percent approval votes
for board members. So why did it take a US hedge fund coming in and making
noise about something that existed for years to seemingly inspire all the
Canadian institutional investors to quietly fall in line behind an action
they appeared unwilling to carry out themselves?
the answer lies in the relationship between Canada’s board members and
institutional investors. ‘There is an element of coziness between the
boards and institutions because there is not a large pool of board members
in Canada – it’s a small market compared to the US, and there’s not many
institutions that invest in these companies in Canada,’ says Allen. ‘Just
like in board relationships, people aren’t willing to be deemed an
activist to any large extent. There is a fear of reprisal and a general
understanding of unwillingness on the part of institutional investors to
make negative comments about Canadian board members because everyone knows
much ‘coziness’ be hindering boards, institutions and management from
challenging each other in ways that could strengthen Canadian governance
and improve the overall productivity of companies? We are about to find
out.As Allen notes, the repercussions of the Pershing/CP proxy fight mean
that ‘underperformance is going to be tolerated less than ever’ and
‘US-led shareholder activism in Canada will increase.’ These factors
should force board members to speak up and take action on a number of
issues sooner – unless they want to end up voted out like the CP board, of
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