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Shareholder activism can wield real power over firms

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It's easy to feel like a powerless pawn in the world of business. On the surface, the little guy has virtually no influence in the decisions of today's power brokers.

But we have more power to effect change than many us realize. Sure, we can vote in democratic elections, picking leaders who will decide how to spend our tax dollars.

What many people don't realize is that they, themselves, are partial owners of some of the world's largest corporations, and they have a say in some of those companies' affairs.

If you own stock in RBC, Suncor or Rogers, for example, you're also an owner. And you can vote on various issues the board of directors puts forward at annual meetings.

Even if you don't directly have shares of these firms, you might own a mutual fund that does, or you're a member of a pension plan with a stake in them. And you can make your voice heard to those managers about the firms they've chosen to hold.

Of course, most investors are still just a tiny little cog in a big corporate machine, making it difficult for the elephant to even acknowledge the mouse.

But in this brave new world of investor activism, the squeaky wheel does sometimes get the grease, says Trevor Scott, a lawyer and partner at the Farris law firm in Vancouver.

"About 10 years ago there wasn't a great deal of emphasis on shareholder activism, but that's changed and probably even accelerated in the last three to four years."

Shareholder activism has become big business news. Take your pick of high-profile examples, such as hedge fund CEO Bill Ackman's battle with CP Rail to replace its board and CEO, which he won in what's referred to as a proxy fight.

That corporate tussle is an example of shareholder activism in which investors push to improve a company's bottom line by making management changes, says Scott, whose practice involves shareholder-activism issues.

Other activists are more concerned about corporate-governance issues, such as the recent 'say on pay' push by shareholders to vote on executive compensation.

And perhaps the most notable form of shareholder activism of late deals with corporate social responsibility -- in particular, the Northern Gateway Project in B.C.

In this dust-up, the nation's three largest socially responsible investment (SRI) mutual fund firms have been pushing for Canadian firm Enbridge -- one of the world's largest pipeline companies -- to address environmental and socio-economic risks associated with the project to pipe heavy oil to the West Coast for shipment to China.

"All three SRI funds are concerned with three types of related risks: environmental risk such as a spill, litigation risk -- legal risks associated with a lawsuit if there's a spill -- and reputational risk," says Cheryl Crowe, a SRI specialist with Assiniboine Credit Union.

The involved firms -- IA Clarington Inhance, Ethical Funds (part of NEI Investments) and Meritas SRI Funds -- are engaged in a three-step process with Enbridge. It's a strategy many shareholder activists commonly use, Crowe says.

Step 1 is establishing dialogue with the company. Activist shareholders attempt to meet management about their concerns and discuss how they should be resolved. If that fails, they move to Step 2: Activists put forward a resolution for vote at the company's annual shareholder meeting.

That's exactly what the SRI investment firms did. They brought forward a resolution to make Enbridge's management address their concerns.

"Basically, 28.5 per cent of the shareholders, or $9 billion in market capitalization, voted in favour of the resolution," Crowe says.

That fell short of the majority of 50 per cent plus one, so the resolution failed.

Yet even when resolutions succeed, they often only serve as a guideline for company management, Scott says.

In the last few years, shareholders of some of Canada's largest corporations, including the big banks, passed resolutions that obligate these firms' boards of directors to put executive compensation to a shareholder vote.

But the results aren't necessarily binding, Scott says.

"The shareholders took their viewpoint to the board with the goal that the board hopefully takes that into consideration and modifies the executive pay practices of the company."

Still, most companies will honour shareholders' decisions.

"They will likely want to avoid the embarrassment of not upholding a vote," he says.

In many cases, companies will work with activist shareholders before it gets to a resolution vote on an issue because if activists put forward a vote, company management risks losing control, Crowe says.

"Over 90 per cent of the time, companies will say 'Yes, we will do something.' "

If steps one and two fail, activists' third and final option is to vote with their feet. They can sell their shares. And that's what IA Clarington Inhance -- owned by Vancity, Canada's largest credit union -- did a few weeks ago with Enbridge.

But Crowe says many activist investors -- SRI funds, individuals, hedge funds and pension funds -- often are reluctant to sell their stake. They see change as a long-term process. For instance, Ethical Funds -- owned by Canada's credit unions including ACU -- has been working with Suncor for several years to get the major oilsands producer to implement better environmental and social-responsibility practices.

"Success isn't black and white," Crowe says. "A lot of times SRI funds will not get exactly what they want, but it will move issues down the road."

Yet, if large investors with multimillion-dollar stakes face a tough slog, it's tough to imagine the small investor having any effect at all.

Indeed, small players face a steep -- if not impossible -- climb, says Susanne Soederberg, a political studies professor at Queen's University.

The expert in shareholder activism says effectively engaging in shareholder activism is usually a costly enterprise.

"It takes time, money and information," Soederberg says. "To get an issue, such as labour or environmental standards on the agenda, shareholder groups require money as it costs a lot of money to file a grievance or issue, which may or may not make it to the slate."

Yet, even if you own just one share in a firm, you can get involved. All publicly traded firms have proxy votes -- motions put forward by management -- that allow shareholders to vote by mail-in for or against board of director initiatives, such as appointing the CEO.

Even if you don't own shares, it's likely you have indirect ownership in many companies through your work pension plan, mutual funds or even the Canada Pension Plan.

Soederberg says the Canada Public Pension Fund Investment Board has even set out guidelines for responsible investment, so all Canadian workers who contribute to CPP can try to hold the board to account concerning good corporate governance and responsibility, Soederberg says.

"Make them accountable to their own social investment standards through letter-writing campaigns."

After all, activism is about getting your voice heard -- whether you own millions of shares or just a handful.

Just because you're small doesn't mean you won't have an impact, says Crowe, adding one investor with only a couple of thousand dollars in shares has brought about change at one of Canada's largest banks.

"It really can happen and I've seen it first-hand."

Republished from the Winnipeg Free Press print edition September 15, 2012 B10

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