When Canadian shareholder activist Yves Michaud rose to speak at the annual meetings of several Canadian banks in 1997, he effectively ushered in the era of shareholder activism in Canada. In this revealing article, the co-authors document the nature of individual and institutional shareholder activism in Canada and contrast it with shareholders’ actions in the United States.
In the United States, considerable research exists on the links between shareholder activism and both corporate performance and corporate governance. In Canada, the research is sparse-which is unfortunate, because shareholder influence on the performance outcomes, governance characteristics and social responsibility have taken on considerable importance. Empirical research in the U.S. suggests that firms attracting activist efforts tend to be large and have high levels of institutional ownership (e.g., Karpoff, J.M., Malatesta, P. H., & Walking, R.A. Corporate governance and shareholder initiatives: Empirical evidence. Journal of Financial Economics, 1996, Vol. 42, pp. 365-395). In this article, we examine shareholder activism from a Canadian perspective. This country’s economic and political systems borrow heavily from the U.S.; therefore, an analysis that builds on the U.S. experience should benefit academics, practising managers, institutional activists and policymakers.
Shareholder activism in the U.S. and Canada
We define shareholder activism as the sum of actions that shareholders initiate and the political ploys they engage in that help shape corporate outcomes to their advantage (David, P., Hitt, M. A., & Gimeno, J. “The influence of activism by institutional investors on R&D,” Academy of Management Journal, 2001, Vol. 44, pp. 144-157; Montgomery, K. E., “Market shift-The role of institutional investors in corporate governance,” Canadian Business Law Journal, 1996, Vol. 26, No. 1, pp. 189-201.). Shareholder proposals represent a form of activism because they must be formally documented in a corporation’s proxy materials and sent out to all shareholders. We must note here that shareholder proposals are direct and explicit insofar as communicating their dissatisfaction with management is concerned.
Shareholder proposals target a wide range of issues that may affect a company. This article focuses on the relationships between the number of shareholder proposals and firm size, and between the number of shareholder proposals and ownership. We also present a brief analysis of shareholder proposals in relation to their year-over-year progression, industry-wide distribution and sponsorship type.
There are two fundamental differences between U.S. and Canadian corporations that have important implications for our study.
First, the nature of corporate ownership across Canada and the U.S.is different. Whereas share ownership in U.S. corporations is disperse, nucleate and transient, ownership in Canadian corporations is highly concentrated-a small number of shareholders control a huge proportion of traded equities. In Canada, there is also a high level of cross-ownership and ownership by pyramid. As a result, research on Canadian shareholder activism needs to consider the ownership structure of a corporation.
Second, shareholder activism almost always follows a process, and the process is subject to certain legal considerations. The victory of shareholder activist Yves Michaud in 1997 opened the door for individual shareholders to have their proposals included in the proxy circulars of banks prior to the annual general meeting. This court victory has largely eased the process of shareholder activism, especially in cases involving shareholder proposals.
Below, we offer a brief review of the history of shareholder activism in Canada, followed by the methodology used in our study. In the final section, we analyze our findings and comment on their implications.
Shareholder activism in Canada
Shareholders in Canada were not very active until after 1995 (Hutchinson, M. The promotion of active shareholdership for corporate social responsibility in Canada, Michael Jantzi Research Associates Inc., 1996, Toronto.). From 1982 to 1995, only 18 shareholder proposals were included in the proxy circulars of Canadian corporations. This number is very small compared to the U.S., where, in 1994 alone, the Investor Responsibility Research Center tracked 701 shareholder proposals. The paucity of shareholder proposals in Canadian corporations in the past could be attributed to a number of factors. One researcher (e.g., Montgomery, K. E. Market shift – The role of institutional investors in corporate governance, Canadian Business Law Journal, 1996, Vol. 26, No. 1, pp. 189-201) identified the following barriers to institutional activism in Canada, which roughly mirror the barriers that confronted individual stockholders as well: (1) lack of time, resources and the knowledge required for effective monitoring, (2) legal and regulatory environments that constrain shareholders from communicating among themselves, (3) conflict of interest that generates pressure on shareholders who have commercial relationships with the companies they invest in, (4) lack of respect for those who publicly associate with shareholder activism, and (5) management resistance to the disclosure of useful information.
The second barrier (legal and regulatory restraints on shareholders) is remarkably important in its own right, and requires some elaboration. The relative lack of shareholder activism in Canada can be attributed to the legal constraints imposed after the 1987 court case of Varity Corporation versus Jesuit Fathers of Upper Canada et al. In this case, the court sided with Varity Corporation’s decision to not circulate a shareholder’s proposal on disinvestment from South Africa (see Hutchinson, M. The promotion of active shareholdership for corporate social responsibility in Canada, 1996, Michael Jantzi Research Associates Inc. Toronto).
The relatively small number of shareholder proposals in Canada does not mean that Canadian investors are laid back or simply vote with their feet when corporate events are about to take an unfavourable turn. Shareholders can use other avenues, such as correspondence designed to influence management, personal meetings, video conferencing, e-mail, and so forth (Chowdhury, S.D., & Wang, E. Institutional activism types and CEO compensation: A Time Series analysis of large Canadian corporations, Paper presented at the 24th Annual International Conference of Strategic Management Society, San Juan, Puerto Rico, U.S., 2004; Hutchinson, M. The promotion of active shareholdership for corporate social responsibility in Canada, 1996, Michael Jantzi Research Associates Inc.). Nevertheless, shareholder proposals remained rare in the governance of Canadian corporations until 1997, when the Quebec Superior Court and the Quebec Court of Appeals forced three banks-Laurentian Bank of Canada, National Bank of Canada and the Royal Bank of Canada-to include activist Yves Michaud’s proposals in their proxy circulars, and to allow for voting on the proposals at their annual general meetings. Subsequently, in 1998, more activists followed Michaud’s example in sending proposals to other banks. Bell Canada Enterprises and Dofasco were the first non-bank companies to be targeted by activists. Since then, activists have routinely filed shareholder proposals with banks, and the practice has gradually spread to other types of companies.
Our study used data from multiple sources for the years 1997 to 2002. The companies in our sample had performed well enough to maintain their standing on the former TSE 300 between 1995 and 2002. By screening our sample firms on the basis of performance, we were better able to focus on those variables that had been shown to affect the occurrence of shareholder proposals. Although our sample included 91 firms, we used observations from only the 74 companies for which we were able to track all the independent variables: we used return on equity (ROE) and Tobin’s Q ratio to control for performance. (ROE is a financial market-based measure; Tobin’s Q ratio is a valuation multiple that provides a more reliable inference than price/earnings ratio when studying data across different industries.) We used CEO duality- that is, one individual is both CEO and board chairperson-to control for variation in corporate governance. (CEO duality is believed to make a difference in the governance of a corporation.) Finally, we used sales to approximate the firm’s size.
We obtained information about [or on] shareholder proposals, CEO duality and ownership data from corporate proxy circulars, and calculated ROEs from each firm’s common share price. The dependent variable was the number of shareholder proposals. If a firm received shareholder proposals, then the observation for that firm was the number of proposals received. Otherwise, a value of zero was assigned. Ownership was measured along three dimensions: institutional, management or dominant.
Characteristics of Shareholder Proposals. The annual distribution in the number of shareholder proposals is presented in Table 1. This distribution also indicates the proportion of proposals that were withdrawn during the course of a year.
The distribution in Table 1 appears to demonstrate a particular pattern. When we look at the origins of the proposals we find that all the shareholder proposals filed between 1997 and 1999 were submitted by individual shareholders. These individual shareholders might have been associated with an institution or an activist organization, but, nevertheless, they filed their proposals on their own. By the year 2000, however, more private institutions filed shareholder proposals than did individual shareholders.
Table 2 shows the distribution of shareholder proposals across industries. Because the structure of ownership varies from industry to industry in Canada, an examination of the distribution of shareholder proposals across industries sheds light on the relative attractiveness of an industry for shareholder activism.
The firms that attracted shareholder proposals between 1997 and 2002 produced an interesting pattern: banks were the primary target; only a small number of firms in the “other” category received shareholder proposals. Clearly, the distribution of shareholder proposals between banks and non-bank firms could not be random-perhaps attributable to the 1997 ruling of the courts in favour of Yves Michaud.
As Table 3 reveals, more than 50 per cent of the shareholder proposals fell into the internal corporate governance category, followed by compensation-related issues. Roughly 12 per cent of the proposals targeted social responsibility issues, a finding that is consistent with traditional leanings of Canadian shareholders. (In 1982, Alcan Aluminum became the first Canadian corporation to vote on a shareholder proposal relating to social responsibility.)
The management response to shareholder proposals between 1997 and 2002 was generally negative. It is interesting to note that the most ferocious response to shareholder proposals came from the three banks involved in the Michaud ruling in 1997-Laurentian Bank, National Bank and the Royal Bank. Since then, Canadian firms have routinely enclosed shareholder proposals in their proxy circulars, and have asked shareholders to cast their votes on these proposals. Senior management recommended only 11 of the 232 shareholder proposals filed between 1997 and 2002 (all 11 of these proposals were subsequently approved at annual meetings).
Shareholder Proposals and Firm Size
Table 4 (next page) shows the variables and their estimated impact on the number of shareholder proposals for the years 1998, 2000, 2002 and for the entire sample period (1997-2002). The estimates are based on the averages of the variables.
Our results show that shareholder proposals are associated with firm size — as measured by sales –because the coefficients with sales are all significant at the 1 per cent level. The negative signs for the coefficients with Tobin’s Q ratio indicate that, when a firm performs well in terms of valuation by financial markets, that firm will be less likely to attract shareholder proposals. The rate of return does not provide any conclusive direction, however, as to the number of shareholder proposals. It can also be inferred that CEO duality makes it easier for shareholders to file proposals.
The effects of sales, CEO duality and Tobin’s Q ratio on the occurrence of shareholder proposals are as expected, and are consistent with the extant literature. The results are particularly interesting for ownership variables. All the coefficients associated with ownership variables are negative. While the literature on shareholder activism suggests that institutional ownership promotes shareholder proposals, our results do not seem to support this finding. The existence of dominant shareholders, such as institutions or holders of large blocks, reduced the number of shareholder proposals significantly for all years. A management-controlled firm, however, is ineffective in reducing the number of shareholder proposals, and this is consistent with the insignificance of the impact of executive/director ownership on the occurrence of shareholder proposals, as suggested in the literature.
The negative relationship between shareholder proposals and ownership variables can also be explained by the characteristics of shareholder proposals. As discussed earlier, most shareholder proposals were filed with Canadian banks, all of which were Schedule I banks. According to the Bank Act, no person or institution is allowed to own more than 10 per cent of a Schedule I bank’s shares. So, it could be argued that Canadian banks were targeted because the banks had diverse and nucleate shareholders.
Thirteen of the 18 companies listed in Table 5 are widely held. Each of the remaining five companies is controlled by a dominant shareholder, and is a household name in Canada. Moreover, by Canadian standards, all the companies are large. This size might help to explain why Canadian Western Bank, a Schedule I bank that is ranked 8th in its class, had never been targeted with shareholder proposals. Canadian Western Bank, which operates only in the four western provinces in Canada, is simply too small to warrant shareholder proposals.
This study shows that Canadian firms that have been targeted by shareholder proposals are mostly large and widely held. The association between large size and the volume of shareholder proposals seems to corroborate the U.S. experience. In Canada, however, the inverse relationship between institutional ownership and shareholder proposals is quite intriguing.
We must emphasize that we have not examined other variables-such as industry-adjusted return, returns to sales, sales growth, growth in operating income, market to book ratio, return on assets, and leverage-that attracted shareholder proposals in the U.S. The inclusion of these variables in the specification of a model similar to ours would advance the understanding of shareholder proposals in Canada. This would be a useful undertaking, because shareholder proposals are undoubtedly gaining momentum as a primary tool to challenge the legitimacy of key corporate issues.
Acknowledgement: Eric Wang and Jacob Musila acknowledge the financial support from the Academic Research Fund at Athabasca University. They also appreciate the capable research assistance of Jun Zhu and comments from Virendra Gupta. Shamsud D. Chowdhury gratefully acknowledges the support from the J.W. McConnell Family Foundation of at the Schulich School of Business, York University, for part of this research.