Issues that keep boards awake at night

25 Feb 2019

With proxy season looming, Canadian public issuers are taking their usual rear-view mirror peek at last year’s developments in corporate governance and disclosure, all with a view to ensuring that boards are properly prepared to meet shareholders’ expectations and demands.

And, increasingly, dealing with these issues becomes more daunting.

“On the one hand, shareholders are much more engaged and prepared to assert themselves to get attention on topics they care about,” says Cornell Wright of Toronto, co-head of Torys LLP’s M&A practice.

“On the other hand, increased volatility and competitive pressures in the business environment coupled with a legal framework that is imperfectly aligned with the expectations of stakeholders makes the role of directors more challenging than ever.”

The “imperfection” in the legal framework arises from the fact that Canadian law, which requires boards to act “with a view to the best interests of the corporation,” mandates consideration of all affected stakeholders and not simply shareholders and activist investors.

“The issues change year over year,” says Andrea Brewer, a corporate and commercial partner in Norton Rose Fulbright Canada LLP’s Toronto office.

Walied Soliman, global and Canadian chairman of Norton Rose Fulbright and Norton Rose Fulbright Canada LLP, respectively, told a recent webinar audience that 2018 was a “record year for activism,” both globally and in Canada.

“We saw evidence of this across the board, across industries and from large companies to small companies in Canada,” he said. “There are 100 hedge funds worldwide that are focused on activism and those hedge funds have well in excess of $100 billion.”

So, what are the likely targets for the activists and matters of interest for shareholders generally?

Pretty well everyone agrees that environmental, social and governance  — or ESG — disclosure issues are on the rise.

“In the past three to five years, both regulators and large institutional shareholders have increased their focus on ESG initiatives,” Brewer says.

“The days when ESG was a ‘soft’ issue are well behind us, and companies are increasingly being taken to task on issues like gender diversity and sustainability — largely because investors have come to realize that ESG impacts the bottom line.”

Indeed, according to a global survey by EY, 97 per cent of institutional investors said they conducted evaluation of target companies’ non-financial disclosures, a 20-per-cent increase since 2017.

Just how important ESG has become also appears from the Canadian proxy voting guidelines released by proxy advisors Glass, Lewis & Co., who will recommend voting against board members responsible for any failure to properly manage environmental or social risks.

“Issuers whose shareholder base includes large institutional holdings pay close attention to proxy advisory firms’ recommendations because these firms consult very closely with the large pension funds and asset managers who are their clients — and who rarely depart from their advisors’ voting advice,” Brewer says.

Increasingly, then, boards are responding positively to the recommendations that appear in proxy advisors’ guidelines.

“These firms have influence because of their client base and because their recommendations tend to be fairly aligned, so you’re really pushing a boulder uphill to go against them on a long-term basis,” Wright says.

Gender diversity is also likely to be high on the agenda.

In September 2018, the Canadian Securities Administrators’ fourth annual review of disclosure regarding women on boards and in executive officer positions revealed that the representation of women in these capacities remains low. Of the issuers surveyed, just 15 per cent of board seats were occupied by women and 34 per cent had no women in executive officer positions.

Consequently, the CSA is considering whether it ought to change its existing “comply or explain” guidelines or introduce entirely new or supplemental rules.

For its part, the Ontario Securities Commission has made such a review a priority for the current fiscal year.

It’s not just the regulators, however, that are unhappy with the pace of issuers’ responses to gender diversity.

“The slow pace of progress has been frustrating for some institutional investors, too,” says David Woollcombe, a Toronto partner in McCarthy Tétrault LLP’s business law group. “But that may change as the position of the proxy advisory firms becomes more focused.”

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