Shareholder Activism

Claude Lamoureux, president and chief executive officer, Ontario Teachers' Pension Plan Board

Now for the moment of truth. Did your investment manager vote against the shareholder rights plan? Better yet, did he or she even bother to vote? In too many cases the answer to both questions is 'no.'

Apathy among some pension funds and other institutional shareholders prompted Canada's second largest pension plan--Ontario Teachers' Pension Plan Board--to reassess its approach to proxy voting. Ontario Teachers' had been meeting with the boards of corporations behind closed doors, urging the withdrawal of proxies that are not in the interest of Ontario Teachers' plan members and other pension fund investors.

Last November, Ontario Teachers' reviewed these activities. "I sat down with [president and chief executive officer] Claude Lamoureux to discuss how many times we had voted against a proxy and seen it turned down," says Brian Gibson, senior vice-president of active equities at Ontario Teachers' in Toronto. "The answer was zero."

Ontario Teachers' decided to redouble its efforts. Barred from lobbying other institutional shareholders on proxy issues by shareholder communications restrictions in the 25-year-old Canada Business Corporations Act (CBCA), it began posting its proxy voting intentions and rationale on Ontario Teachers' Web site. This unprecedented initiative was highly effective. Corporate boards of directors began calling to discuss their proxy plans to avoid the embarrassment of having them publicly critiqued on the site.

Tom Gunn, chief investment officer of Ontario Municipal Employees Retirement System (OMERS) in Toronto, articulated the view of leading activists such as Lamoureux in his presentation last year to the Standing Senate Committee on Banking, Trade and Commerce on amendments to the CBCA, which will take effect next month. "We see ourselves as shareowners rather than shareholders. We consider that pension fund money constitutes a permanent source of capital, but we also consider that companies are our property," declared Gunn. "This is a growing trend in a number of pension plans both in Canada and elsewhere, and we take our responsibility as an owner of companies seriously."

Taking the lead of Ontario Teachers' and OMERS, a small but growing number of pension plans are assuming these responsibilities. Many have developed proxy voting guidelines modeled on those of the Pension Investment Association of Canada (PIAC). The impetus, however, has often been provided by the example of U.S. investment managers that file their proxy voting guidelines and voting records to comply with the Employment Retirement Income Security Act (ERISA).

"If all the pension plans followed the PIAC standards, it would improve matters tremendously," says Lamoureux, adding that if Canadian pension plans were obliged to report their proxy votes, it would "give the lawyers the ammunition they need if trustees don't do their jobs."

Lamoureux would like to see ERISA-style legislation mandated in Canada. Pension plan sponsors or their investment managers should, at the very minimum, vote their proxies, he says, noting that most investment managers don't do this.

Connor, Clark & Lunn Investment Management Ltd. of Vancouver has proxy voting guidelines in accordance with PIAC standards and it issues quarterly reports to clients on its proxy votes. "In the last two or three years we've had more and more requests for our guidelines and voting records," says Martin Gerber, a partner at the firm.

Overall, interest in information on proxy votes has come primarily from pension funds that employ internal investment managers. Those that invest through index funds or external investment managers are less likely to have proxy voting guidelines or to know if and how their proxies were voted.

As an internal investment manager, Robert Kamp, director of investments with Telus Corp. in Edmonton, has a detailed proxy voting guideline and records his proxy votes. "Our formal guideline, based in part on those of Ontario Teachers' and OMERS, goes back about two years but we've always voted our proxies," he says. Telus also requires its external investment managers to have a proxy voting policy and vote on behalf of the plan sponsor.

Abitibi-Consolidated Inc. of Montreal relies exclusively on external investment managers and as a result, pension director Larry Johnson says the company often doesn't know how or even if managers voted its proxies. Johnson does receive the ERISA-type reports of Connor Clark & Lunn, though. "I see myself wanting more of that from our other investment managers," he adds.

Some plan sponsors believe that because they delegate buy and sell decisions to external investment managers they should also defer the proxy voting decisions to these experts. The Royal Bank of Canada's pension fund demands proxy voting guidelines and reports from its eight external investment managers.

Institutional shareholder activists such as Ontario Teachers' have an ambitious agenda. They want to reform corporate governance so that the interests of boards of directors are aligned with those of shareholders. In the example of XYZ Corp., the board of directors was clearly not fulfilling its role of representing shareholder interests.

Institutional shareholder activists are united by a common belief that by encouraging good corporate governance they are improving shareholder value. Boards of directors of chronically underperforming corporations, for example, are more likely to demand executive and strategic changes and accept takeover offers if the majority of directors are independent of management. "We see good corporate governance as an important contributor to corporate performance," says Lamoureux. "Don't lose sight of the fact that we're all after performance."

Lamoureux does acknowledge that there are times when corporations with poor governance outperform those with good corporate governance. For example, he says, although some U.S. shareholder groups have complained that Warren Buffet supported the election of personal friends as independent directors to the board of Berkshire Hathaway, Ontario Teachers' has voted with that board on many occasions because it has generally acted in the best interests of all shareholders.

An accumulating body of research shows that most of the principles and practices of good corporate governance do improve investor returns and share values, but the evidence is not overwhelming. Also, there are alternative explanations for the relative success of corporations practicing good governance.

McKinsey & Company's Investor Opinion Survey (June 2000) reports that three-quarters of large institutional investors say board practices are at least as important to them as financial performance when they are evaluating companies for investment. As well, over 80% of investors say they would pay more for the shares of a well-governed company than for those of a poorly governed company with comparable financial performance.

In practice, investors don't pay premiums regardless of a corporation's governance standards. Patrick McGurn, director of corporate programs at Institutional Shareholder Services in Rockville, Maryland, a leading provider of proxy voting and corporate governance services, explains: "Investors put a discount on poorly governed corporations because they doubt that management-dominated boards of directors will take the necessary actions to change management strategy and personnel. The share prices of corporations with poor governance tend to fall further and take longer to recover when their performance turns south."

The double-digit returns earned by many pension funds between 1997 and 2000 quelled the appetite for improved corporate governance, according to the Conference Board of Canada. In June, it reported that corporate governance had improved steadily between 1995 and 1997, but then leveled off over the following two years. Last year, the average score dropped. "Good corporate governance doesn't tend to come to the fore until tough economic times," notes David Brown, a senior research associate with the Board.

Lamoureux maintains that corporate governance has steadily improved over the last decade. But he concedes that "when markets are down people may pay more attention to corporate governance but they would have been wiser to have paid attention when the markets were up."

Corporate investments and other business activities will come under closer scrutiny as institutional shareholder activists meet with the boards of underperforming companies to discuss their fiscal 2001 results. Corporate Canada is likely to be more attentive given the new powers that shareholders gain next month when the CBCA amendments come into effect.

Companies will find it harder to prevent shareholder proposals from being raised and voted on at shareholder meetings. Shareholders will be able to communicate more freely among themselves without triggering current restrictions on proxy solicitation. Should shareholders launch formal proxy battles they'll be able to promote their positions not only on Internet sites but also in newspaper, magazine, television and radio ads.

"The amendments will dramatically liberalize proxy solicitation rules," says Wayne Lennon, senior policy analyst, corporate law policy directorate with the Corporate Governance Branch at Industry Canada. Institutional investors are less enthusiastic. Lamoureux says the CBCA amendments were not as liberalizing as Ontario Teachers' had hoped for."

The success of institutional shareholder activists to date has been marked by incremental gains. They may lose the high-profile proxy battles at shareholder meetings but they are making steady progress in closed-door negotiations with corporate management and boards of directors.

"There has been a noticeable reduction in staggered boards, more independent directors on boards and there are more option plans tied to performance," says Lynn Clark, vice-president of economic policy and strategic research with OMERS. "We're making progress and institutional investor activists have been a big part of that." BC