By now, you may have heard that Canadian Pacific CEO Fred Green, Chairman John Cleghorn and four other CP directors have resigned or will not stand for re-election to make way for Pershing Square’s Bill Ackman and a new slate of directors—and a new approach to corporate governance in Canada.
The Pershing Square bid is the perfect storm for what’s wrong with Canadian corporate governance. In short, there’s a lack of attention to strategy, shareholders and domain expertise. Today’s news represents a tipping point for any board in the way it does—or should do—business in Canada.
Lack of attention to strategy
The Dey guidelines being used in Canada are now almost two decades old and outdated. Much has changed in corporate governance. They contain six words on strategy: “adoption of a strategic planning process,” which is inherently ambiguous. The 2005 National Policy is not much better, adding that the board must approve a strategic plan at least annually. (Emphasis added.)
When a question on a board’s role in strategy was asked during a directors session I facilitated last week, two panelists deadpanned “we do it in a superficial way” and “it doesn’t happen.” Boards have become obsessed with compliance at the expense of value creation for the company and shareholders.
But the research confirms that a more engaged board under a private equity governance model will outperform public company peers by a factor of three to one. This outperformance under a Bill Ackman model cannot be ignored by public companies.
The deep dives and due diligence conducted by Pershing Square—over 100 pages in total—should be conducted by boards if they are doing their job and wish to keep hedge funds from knocking at the door.
Seven CP COOs and CFOs were replaced in the last five years and CP has consistently underperformed across its peers. Yet CEO Fred Green met 17 of 18 objectives set by the CP board, which moved those targets, resulting in the cost of management as a percentage doubling.
Public company boards need to be much more engaged in strategy and demanding of management. As reported in the Journal of Applied Corporate Finance, value may be “left on the table”—which would invite sophisticated investors like Bill Ackman to come in.
There is absolute clarity under private equity what management is held responsible for. Boards of this caliber are much more engaged and focused on shareholder value. No stone is left unturned.
Lack of attention to shareholders
Many public boards in Canada do not meet directly with shareholders, or if they do it’s behind closed doors. Bill Ackman didn’t accept this and was unwilling to compromise or go away. This cozy Canadian environment has to change.
Most importantly, Canadian shareholders should have proxy access, or the right to nominate directors of their choosing and put those directors on to the proxy circular, which is another American development that makes sense. It should not take Pershing Square, a 14% shareholder of CP, the company’s largest, a long, protracted, expensive proxy battle to implement governance change. Shareholders should have the right to nominate directors to boards and fire ones who do not perform with ease and transparency. The threshold should be low, or even based on the company’s largest shareholders.
In addition, Canadian directors need to have a percentage of their net wealth at stake in the boards on which they sit for true shareholder accountability and alignment. This does not mean directors receiving shares for board service, but actually issuing a cheque from their savings. The CP board owned 0.2% of stock and it was given to them, not bought. According to Pershing Square, if a CP director had $100 million of his or her own wealth invested, the CEO would have been replaced.
Lack of attention to domain expertise
Lastly, the entire board of CP, other than the CEO, did not have rail experience prior to Pershing Square’s involvement. This is a direct consequence of the Dey guidelines from 1994, even though the research does not support independent directors and firm performance. The reason is that if directors do not understand the business or industry, they are under-engaged in strategy and their ability to monitor is compromised. They don’t understand. Look at the board of JPMorgan, which lost $2 billion last week. Other than the CEO, not a single director has banking experience. If a director does not have experience in the sector, they cannot identify the risks.
Pershing Square’s directors have been selected on the basis of railroad expertise, restructuring expertise, shareholder representation, entrepreneurial culture and a culture of equity ownership and shareholder value creation. What a breath of fresh air. Boards would be wise to take a page from the Bill Ackman playbook, or shareholders should themselves.
And most of the above Pershing Square directors are from Canada. The notion that we have a talent shortage is a myth. Boards need to reach into the C-suite and into shareholder communities. They need to diversify to mitigate groupthink. The directors exist. My own database contains hundreds.
The need for new guidelines
Shareholder accountability, strategic engagement and director experience are either non-existent or short-changed in the Canadian corporate governance landscape. This is exactly what Bill Ackman brings to the table. Welcome to Canada, Mr. Ackman.