May 22, 2012 / 12:32 PM / 6 years ago

Analysis: Ackman's CP Rail win puts Canada boards on notice

TORONTO (Reuters) - The unprecedented boardroom rout that storied Canadian Pacific Railway (CP.TO) suffered this week at the hands of a brash New York hedge fund is a flashing warning signal for other members of the Canadian corporate establishment.

If a blue-chip bastion like CP Rail, Canada’s second-largest railroad, can succumb to an activist’s push for change, companies of all stripes best prepare for closer scrutiny of their boards and challenges to their authority, experts say.

“There’s a lot more shareholder activism coming,” said Thomas Caldwell, chairman of Caldwell Securities, a Toronto investment management firm. “Frankly, I think a lot of shareholders have been let down by management and boards.”

Pershing Square Capital Management’s bold campaign to shake up CP - carried out with a brashness rarely seen in Canada’s staid business culture - sent a powerful message about the clout activist funds can wield, investors and academics say.

“It just needed people to become aware that they could do this,” said Ian Lee, a business professor at Carleton University in Ottawa, Ontario. “We were asleep in Canada, so to speak, I mean we were in a deep slumber.”

Late last year, when Pershing first announced it was buying up shares of industry laggard CP, few would have guessed it could persuade institutional investors to reshape the board and replace the CEO. But Pershing founder William Ackman, known for his stubborn persistence, proved the naysayers wrong.

Still, it took deep pockets to fund Ackman’s months-long campaign: an estimated $10-15 million on top of the $1.4 billion he spent buying up a 14.1 percent stake in CP.

Canadian hedge funds may lack those resources, but their U.S. counterparts don’t, said Kai Li, a finance professor at University of British Columbia in Vancouver. Li co-authored a paper published in the Journal of Finance that hailed hedge funds as “corporate angels” rather than vultures.

Ackman’s proxy victory may presage a bigger push by U.S. hedge funds into Canadian companies, she said. It may also mean that more small Canadian funds will team with their U.S. counterparts in proxy fights.

“Corporate Canada needs to be mindful. If you are underperforming, you might end up being targeted by activist shareholders,” Li said.


To that end, there’s no shortage of Canadian companies that are limping along with underperforming shares and weak management, said Barry Schwartz, vice president and portfolio manager at Baskin Financial Services in Toronto.

“That’s what you want, when a company has no direction in terms of management and no strong shareholder ownership,” he said.

SNC-Lavalin Group Inc (SNC.TO), Canada’s largest engineering and construction companies, is a good example, he said.

SNC’s shares have dropped more than 20 percent since it revealed an internal probe over improper payments in late February. Its CEO later resigned and the company is still looking for a replacement.

Magna International Inc (MG.TO), long criticized for its corporate governance practices, could attract an activist investor looking to sell the cash-flush company as the market for its auto parts recovers, Schwartz said.

Shoppers Drug Mart Corp SC.TO, the country’s No.1 drugstore chain, could attract interest from a grocer, he said, as it feels the squeeze from government reforms that cut prescription drug margins and growing competition.

Progressive Waste Solutions Ltd BIN.TO, whose stock is lagging U.S. competitors, might also attract activist interest.

For some other Canadian corporate icons, directors played a part in their recent falls from grace, Caldwell said. He sees overly complacent boards at Nortel Networks Inc, the erstwhile telecom-equipment giant, and at Research In Motion RIM.TO, the now-struggling maker of the BlackBerry smartphone.

“Nortel had the cream of Canada’s corporate establishment serving on that board,” he said. “Similarly, you take a look at companies like RIM. Again, where were the directors?”


In the final rounds of Ackman’s match with CP, many heavyweight shareholders said publicly they would back Pershing’s slate and withhold support from the railway’s incumbent directors.

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which is made up of institutional investors, sees Pershing as part of a gradual awakening among institutional investors.

“They’re sending a message,” he said. “They will flex their financial muscles when it’s appropriate to do so.”

That’s a break from the past, when Canada’s pension funds and big shareholders could be counted on to support management.

CP’s boardroom beauty contest also played out in the public, whereas such skirmishes are normally resolved behind closed boardroom doors in Canada.

“We are much more quiescent, we’re much more reserved, we are much less willing to make a scene. And this, I hope, sets an important precedent,” said Lee.

While shareholder activism gathered steam in the late 1980s in the United States, Canada trailed, owing in part to cultural and market size differences, Lee said.


Not everyone sees the battle for CP as a turning point. Some corporate governance experts say that activism is not absent in Canada - it just takes place away from the media glare.

“There is a very active institutional ownership base that has existed in this country for a long time,” said David Denison, chief executive of the Canada Pension Plan Investment Board, one of the country’s largest pension fund managers.

Vancouver-based Shareholder Association for Research and Education, which annually surveys proxy votes in Canada, has seen more shareholders breaking with management recently.

Executive Director Peter Chapman said it is important not to underestimate how much change comes from shareholders talking with boards.

Still, “there’s a long way for us to go yet to develop a stronger culture of share ownership and active ownership in Canada,” he said.

Additional reporting by Andrea Hopkins

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