This text is part of the special section Le droit au Québec
Faced with the rise of shareholder offensives from activists in Canada, experts recommend that companies be proactive in their governance.
A shareholder campaign means that a company’s shareholders attempt to make demands heard by management and its board of directors. While some of them aim to draw attention to climate or human rights issues, others, on the other hand, aim above all to improve profitability.
“This type of campaign is a low-cost way to have significant influence and generate returns for our investors,” explains Sébastien Roy, partner at Davies. An upward trend in Canada, he notes. “We may have been isolated from these campaigns in Canada, and especially in Quebec. But, we can undeniably say that the activists have indeed arrived, ”he observes.
But who are the instigators of such shareholder offensives? “These are notably shareholders of speculative investment funds or hedge funds. They will use this technique to make their voice heard by management,” summarizes Yvan Tchotourian, professor at the Faculty of Law at Laval University. He points out that initiatives of this type are rarely the work of traditional shareholders. “It takes expertise,” he adds.
Profitability, but not only
The professor distinguishes between two types of shareholder campaigns. While some aim to generate a certain level of profitability, others, more soft he says, want to draw leaders’ attention to climate or human rights issues. “You are not necessarily looking to destabilize the company, but to make yourself heard by management, by the board. And you want them to take action, to orient their strategy on the subjects that you defend, ”he illustrates.
For his part, Mr. Roy cites the example of the shareholder offensive of Engine No. 1, which forced the American oil company ExxonMobil to integrate new members favorable to the climate cause to its board of directors. “ESG factors [environnementaux, sociaux et de gouvernance] are increasingly discussed and can even be the spearhead of an activist campaign,” he observes.
He believes that companies would do well to take climate change into consideration in order to develop new investment prospects. “It’s also good for shareholder returns,” he says.
Serious consequences
In addition to reshuffling a board of directors and forcing an organization to realign its priorities, shareholder offensives can also have the effect of depressing the stock price. And this happens more and more often by short selling, a practice which consists, for an investor, in selling a security that he does not own. It generally does so with the aim of exposing poor governance practices, unsustainable business strategies or egregious fraud, thereby helping to enhance the efficiency of financial markets, correct sometimes inaccurately inflated stock prices and promote market liquidity. It provides an important counterweight to issuers and their management.
When discovering, for example, why a company’s stock may be overvalued, the activist takes a short position in those stocks and publishes the information available to him, usually in a negative report accompanied by a press release and social media posts, in the hope that the share price will adjust accordingly. He can then buy back shares at a later date and at a lower price in order to be able to cover his initial sale.
Between 2010 and September 2020, 116 activist short-selling campaigns took place in Canada, according to a report by the Canadian Securities Administrators (CSA). These campaigns have targeted organizations in a variety of industries, ranging from cannabis to aerospace, mining, retail and insurance, according to a 2019 report by Davies.
Effects that can even jeopardize the sustainability of the company, says Mr. Tchotourian. But in some cases, such an offensive has the effect of reviving activities. “We found that, indeed, some of them were badly managed and were not performing as they should. And it is true that the intervention of these funds has nevertheless made it possible to give better results,” he notes.
Be proactive
While shareholder attacks are often viewed with suspicion by boards of directors, they can also lead managers to see their company from another perspective. “It forces the councils to question themselves,” believes Mr. Roy. He also suggests that business leaders get to know their shareholders and identify their expectations in terms of objectives and returns by communicating regularly with them.
His golden rule: “think like an activist”. “The world is polarized, complex. Who says polarization and complexity, says opportunity for this kind of shareholders and stakeholders,” he observes.
Mr. Tchotourian abounds in this sense. “To be themselves more activist than they are and not necessarily to be passive. Do not wait for a campaign like that to destabilize them, but try to take the lead a little, ”he advises. “Don’t hide information, manage the company well. These are the best ways to avoid a harsh campaign. »