Corporate Canada enters new era after CPR shakeup

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It took a New York hedge fund to shake up the board at Canadian Pacific Railway. (JEFF MCINTOSH / THE CANADIAN PRESS ARCHIVES)

Change has come to corporate Canada.

Not from new legislation or regulations, but an unexpected catalyst: a New York-based hedge fund with a history of shareholder activism.

What began as a proxy fight in the fall, when Pershing Square Capital Management bought a 14.2 per cent stake in Canadian Pacific and proceeded to demand change at the top of the 131 year-old company, morphed into something much larger by the time CP's annual general meeting rolled around Thursday.

Full of anticipation, hundreds packed the meeting room. In the audience one could see employees, long-term shareholders, finance types and former CP Limited board members.

While the event was anticlimactic, after CP's chief executive, Fred Green, resigned less than three hours beforehand and the other five directors Pershing CEO Bill Ackman wanted replaced announced they would not stand for re-election, it would be naive not to see this as the beginning of a new era in the boardrooms of corporate Canada.

Not only does it send a strong signal shareholders expect directors of boards to hold management accountable for performance, it also signals a generational shift in the investment world.

Canadians pride themselves as being a kinder and gentler sort. Two shareholders, when asked prior to the meeting, why it took an American to shake things up at CP, the response was a shrug and comment about it not being "the Canadian way" to rattle cages and shake things up. And it's true.

Shareholder activism directed at boards populated with high-profile individuals with long-established careers is not something Canadians regularly engage in. And when you think about in the context of an iconic Canadian company such as CPR, the last surviving, publicly traded entity from the CP Limited spinout in 2001, the idea of Canadian shareholders protesting the company's performance is even more remote.

Just think of the raised eyebrows last year when the Alberta Investment Management Corporation was publicly critical of Viterra Inc., the former Saskatchewan Wheat Pool. It's simply not done -- and if done at all, certainly not in public domain.

But now, with Pershing succeeding in upending the CP board and initiating the search for a new CEO, it's a safe bet this won't be the last time there is a proxy fight to shake up the boardroom and C-suite.

While some might disagree, it's tough not to see Thursday's events as pivotal in terms of corporate governance in Canada. If anything, it sends a message to companies, boards and management that they must show performance; failure to do so will not be tolerated

It also portends a change in how boards of directors are composed.

Board composition is becoming more scrutinized and in recent years there has been a big shift toward the professionalism of board composition. Companies are using skills matrixes to identify gaps at the board table and using search firms to make sure they have the best candidate -- even if they already have someone in mind.

All this underscores the objectives of the Institute of Corporate Directors, whose mission is to see directors and boards are the best they can be.

At the same time, Thursday's events indicate activist shareholders who see an opportunity for financial gain have no problem exploiting undervalued targets for the purpose of realizing financial rewards.

Will we see more of this behaviour initiated by investors in Canada?

In this context, it's important to point out there is a difference between the approaches taken by an AIMCo or Canada Pension Plan Investment Board as compared with what a hedge fund might do. While either firm will take an active role in the context of managing investments, it's never quite the same as Ackman and his ilk because institutional investors have longer time horizons than hedge funds.

Furthermore, Canada, unlike the U.S., does not have a plethora of deep-pocketed hedge funds, let alone those such as Pershing whose stake in CP is worth $1.4 billion. And herein is another takeaway from Thursday's events.

There is a shift in terms of investment philosophy, driven in part by globalization and the fact financial and economic cycles are shorter and more volatile

Thus, an institutional shareholder with a meaningful position in a company whose performance is underwhelming is going to be favourably disposed to an investor who not only wants to make changes, but also is willing to put money behind it.

How long they stay as investors is another story, but meanwhile, the institutional investor is more likely to support that agenda because they need to show performance. And, when it comes to a pension fund, one might go as far as saying there is a fiduciary duty to support an alternative for better performance.

In the case of CP, the question is whether Ackman and company -- who have set themselves up for meeting great expectations -- can make changes that result in lower operating ratio drop and a fatter bottom line. It would be nice to think this one is a slam-dunk. But it isn't. At a company such as CP, expecting big change in short order is unrealistic; observers at Thursday's meeting said it could take between 18 and 24 months to see anything significant.

-- Postmedia News

Republished from the Winnipeg Free Press print edition May 19, 2012 B7