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	<title>IGOPPActionnaires &#8211; IGOPP</title>
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		<title>The Age of ESG: new issues for corporate governance ?</title>
		<link>https://igopp.org/en/actionnaires-et-parties-prenantes-quelle-gouvernance-a-venir/</link>
		<comments>https://igopp.org/en/actionnaires-et-parties-prenantes-quelle-gouvernance-a-venir/#respond</comments>
		<pubDate>Sun, 09 Aug 2020 18:01:18 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Actionnaires]]></category>
		<category><![CDATA[Parties prenantes]]></category>
		<category><![CDATA[Shareholders]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">https://igopp.org/actionnaires-et-parties-prenantes-quelle-gouvernance-a-venir/</guid>
		<description><![CDATA[For 40 years or so, corporations listed on stock markets were expected to pursue diligently, if not exclusively, value creation for their shareholders. A number of factors had pushed corporations away from an earlier “stakeholder model,” prime among them the revolution in executive compensation. Then, in the new century, a perennial criticism of business corporations [&#8230;]]]></description>
		<content><![CDATA[For 40 years or so, corporations listed on stock markets were expected to pursue diligently, if not exclusively, value creation for their shareholders. A number of factors had pushed corporations away from an earlier “stakeholder model,” prime among them the revolution in executive compensation.

Then, in the new century, a perennial criticism of business corporations and “capitalism” suddenly took on new urgency, with the capitalist system being held responsible for the wealth and income inequality it produces and the environmental havoc it has wreaked. This time around, though, the complaints did not issue from some leftist organization but from the very heart of the system, from large institutional shareholders who have recently converted to the church of ecological sanctity and social responsibility. In this new view, corporations should henceforth be accountable for their financial performance, yes, but also for achieving set targets in matters of environment (E), society (S) and governance (G). The ESG triplet, tacitly fostering a “stakeholder” doctrine on corporations, has created new challenges for corporate governance.

A year ago, this revised doctrine received a surprising endorsement when 181 CEOs of large American companies signed on [1] to a new “purpose” for the corporation: a fundamental commitment to all of our stakeholders (customers, employees, suppliers, communities and shareholders). “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.” 

So, institutional funds and others now require specific ESG action plans, target metrics and linkage of executive compensation to these metrics.

But there are unresolved issues with this “stakeholder” model of the corporation:

When the interests of various stakeholders are divergent, how should the interests of the corporation be understood? How should the board proceed in determining a fair trade-off between the interests of various stakeholders and which of them are entitled to such consideration? 

A second concern: How are business corporations to cope with ESG demands when facing tough competitors, domestic and international, who are not subjected to these same pressures? A recent study shows that activist hedge funds treat ESG targets as a signal of management’s less than absolute devotion to shareholder interest. Firms spending more than average on corporate social responsibility activities have double the probability of being targeted by “activist” hedge funds.

At a more fundamental, philosophical, level: Should ESG targets go beyond what government regulations call for? In a democratic society, is it not, rather, the role of governments, elected to protect the common good and represent the general will of the people, to regulate business corporations so as to achieve society’s social and environmental goals? But, perhaps the recent ESG focus and re-discovered “corporate purpose” are but maneuvers to fend off popular pressures on governments to impose stringent regulations.

In any case, the achievement of ESG targets will require changes in management incentives. Executive compensation in its current format is in large part linked to financial performance, with major components highly sensitive to stock price. Linking compensation to some ESG targets will call for re-tooling the way executives are compensated, a difficult task. In 2019, 67.2% of S&#38;P/TSX 60 firms incorporated at least one ESG metric in their incentive plans, but only 39.7% related to environmental factors. Some 90% of the firms include ESG metrics in their annual executive incentive programs but rarely in their long-term incentive programs. Willis Towers Watson also noted in a recent study that only four per cent of S&#38;P 500 firms used ESG metrics as part of their long-term incentive awards.

Finally, if a company is to be stakeholder-driven, why only shareholders get to elect board members? That nagging question may come to haunt some of the promoters of the “stakeholder model” as it opens the door to board membership by other stakeholders, such as employees. It may not be what the institutional funds had in mind when pushing their ESG agenda.

A sharp debate is now raging (in academia at least) about the pros and cons of the stakeholder model. Be that as it may, in the business world, the relentless pressure from investors has converted most corporate management and boards of directors to the ESG religion despite many unresolved issues.

&#160;

Opinions expressed herein are strictly those of the authors.

[1] https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans]]></content>
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		<title>On becoming an «activist board»&#8230; In the age of activist shareholders</title>
		<link>https://igopp.org/en/on-becoming-an-activist-board-in-the-age-of-activist-shareholders/</link>
		<comments>https://igopp.org/en/on-becoming-an-activist-board-in-the-age-of-activist-shareholders/#respond</comments>
		<pubDate>Mon, 12 Jun 2017 19:57:55 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[Books]]></category>
		<category><![CDATA[Actionnaires]]></category>
		<category><![CDATA[Activism]]></category>
		<category><![CDATA[Activisme]]></category>
		<category><![CDATA[Gouvernance créatrice de valeurs]]></category>
		<category><![CDATA[Hedge funds]]></category>
		<category><![CDATA[Parties prenantes]]></category>
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		<category><![CDATA[Stakeholders]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/on-becoming-an-activist-board-in-the-age-of-activist-shareholders/</guid>
		<description><![CDATA[After some 15 years of tweaking and polishing the theory and practice of “good” governance, perfectly independent board members remain surprise-prone, estranged from the goings-on in the company, partially informed and lacking the wherewithal to challenge management. No doubt that the legitimacy and credibility of boards have suffered as a result. In the current age, [&#8230;]]]></description>
		<content><![CDATA[After some 15 years of tweaking and polishing the theory and practice of “good” governance, perfectly independent board members remain surprise-prone, estranged from the goings-on in the company, partially informed and lacking the wherewithal to challenge management. No doubt that the legitimacy and credibility of boards have suffered as a result.

In the current age, institutional shareholders have all become “activist” investors. Some funds make it their mission to push aggressively on boards of directors to implement measures that they (the activists) deem likely to boost stock prices. Other funds may be less vocal and less aggressive but will support the “activist” funds as well as put forth their own expectations in private meetings with management and the boards.

Boards will have to raise their game, move to a value-creating sort of governance. Corporate boards of the future will have to also become “activists” in their quest for information, their willingness to stand up to short-term pressures and their ability to question management’s strategies, compensation and performances.

This book proposes a “revolutionary” form of governance building on some of the steps taken by the more thoughtful boards: more involvement in strategy making, creation of ad hoc committees, more substantive training for board members and their extensive exposure to all facets of the business, independently sourced information transmitted to board members, etc. But that does not suffice, as this book demonstrates.

Getting to a more effective form of governance will call upon unusual, even controversial, measures by boards. It will also require institutional investors to change a number of their policies and practices and for governments to level the playing field.

This book makes, we believe, a forceful case for a different kind of governance system capable of delivering long-term value to all stakeholders and to society at large.
]]></content>
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		<title>The case for dual class of shares</title>
		<link>https://igopp.org/en/the-case-for-dual-class-of-shares/</link>
		<comments>https://igopp.org/en/the-case-for-dual-class-of-shares/#respond</comments>
		<pubDate>Fri, 13 May 2016 19:37:44 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
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		<category><![CDATA[Actions multivotantes]]></category>
		<category><![CDATA[Dual-class shares]]></category>
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		<guid isPermaLink="false">https://igopp.org/?p=6274</guid>
		<description><![CDATA[With the Bombardier saga and the Couche-Tard warning bell, the usual litany of arguments against dual class of shares was again dusted off. Commentators opposed to this capital structure seem to forget or overlook the inconvenient truth that many of Canada’s industrial champions are controlled corporations often through a dual class of shares. That is [&#8230;]]]></description>
		<content><![CDATA[With the Bombardier saga and the Couche-Tard warning bell, the usual litany of arguments against dual class of shares was again dusted off. Commentators opposed to this capital structure seem to forget or overlook the inconvenient truth that many of Canada’s industrial champions are controlled corporations often through a dual class of shares.

That is the conclusion one may draw from the Ontario Institute for Competitiveness and Prosperity study which identified 77 Canadian industrial champions; only 23 of them were widely-held corporations; 33 were listed controlled corporations, 19 of them via a dual class of shares; another 16 were privately held! (Flourishing in the global competitiveness game, working paper 11, September 2008). Furthermore, 23 of the 50 largest employers in Canada were dual class companies (Canada’s 50 biggest employers in 2012, Globe and Mail, June 28th 2012)

That is a fundamental point:

Without a controlling shareholder, without a dual class of shares, there would be no aeronautical industry in Canada, no C-Series to compete with Boeing and Airbus, a singular Canadian feat, no Magna in Ontario (a dual class company until 2010), no Rogers Communication, no Teck Resources, no Canadian Tire, no Weston, no CGI, no Shaw and so on. 

And why is that?

In a period such as the 2002-2003 when the U.S. dollar was worth close to C$1.60 and the stock market was seriously depressed, all these Canadian companies would have been bargains for U.S. acquirers. Canada would have reverted to the branch-plant economy of the 1950s.

In any case, at one point or another, their success would have attracted foreign buyers. May we mention Tim Horton, Alcan, Falconbridge, etc. That is the reason why so many sensitive industrial sectors are legally protected in Canada from foreign takeovers (banks, telecoms, airlines, media companies)

And wisely so! For the Canadian regulatory context is one of the most hospitable to unwanted takeovers, much more so than in the United States. And don’t count on the toothless Investment Canada to block foreign acquisitions.

American companies have multiple measures (although waning in effectiveness) at their disposal to rebuff an unwanted takeover of their company (staggered boards, poison pills of unlimited duration, board’s authority to just say no, etc.) So, because of these American conditions, Boeing may carry on with its long-term investments without fear of an unwanted takeover in difficult times, and they have had quite a few.

Then, financial markets have become populated by short-term so-called investors and analysts fixated on the next quarter’s earnings per share and stock performance; they have become the locus of nasty financial games played with and around publicly listed companies.

Thus, the new breed of American (and Canadian) entrepreneurs not only do they want to be shielded from unwanted takeovers they also seek to insulate themselves from the quarterly pressures of analysts and short-term investors.

In 2015, according to Prosoaker Research (2016), 24% of all new share offerings (IPOs) in the U.S. were made with a dual class structure, a sharp increase from 15% in 2014 and 18% en 2013. So, young companies such as Alphabet (i.e. Google), Facebook, Groupon, Expedia, (and, in Canada, Cara, BRP, Shopify, Spin Master, Stingray) have issued two classes of shares, one with multiple votes which assures them of an unassailable control over their companies and makes them relatively indifferent to the short-term gyrations of earnings and stock price.

Furthermore, in Canada since 1987 (but not in the USA), companies issuing a class of shares with multiple votes must adopt, as a requirement to be listed on the Toronto stock exchange, a coat-tail provision. That provision essentially ensures that all shareholders will receive the same price for their shares, should the controlling shareholders decide to sell out. That twist, by itself, has removed most of the potential financial benefits of control through a dual class of shares.

Add to the mix of dual class companies the much stricter contemporary rules of corporate governance and the presence of a majority of independent directors on their boards and you have a recipe for success, for long-term strategic thinking, and for bold job-creating investments. It turns out to be a demonstrably optimal arrangement for all investors: controlling shareholders with their wealth at stakes managing, or supervising management, and taking a long-term view of the company.

Financial performance

If getting good steady returns is what investors are looking for, dual class companies are indeed a good bet. The evidence is now pretty compelling that these companies perform better than conventional companies; or at least, perform as well and provide the added benefit of keeping their ownership and headquarters in the home country.

The following table provides some of that evidence from recent studies (but with different time periods):

Performance of Canadian dual class firms, compared to single class firms (or reference index) over 5, 10 and 15 years periods

 [1]

Conclusion

Setting aside cases of extraordinarily attractive companies, such as Amazon where Bezos still owns 18% of the shares, it is difficult for companies to undertake gutsy investments and implement strategies unfolding over many years without some buffer from the short-term pressures of contemporary financial markets. That may not be to the liking of some financial players but so be it.

That pressing reality must be acknowledged by all, including policy makers, who do not have a vested interest in making lots of money quickly. Don’t be fooled by specious arguments merely disguising self-interest. Investors who would have bought a basket of shares in Canadian dual-class companies would have done well over the last ten years better than by holding shares in a portfolio of single-class companies.

Do not be swayed by the spurious argument of shareholder democracy. If shareholders were the equivalent of citizens in a democracy, then tourists (i.e. transient shareholders) would not vote and all new shareholders (i.e. immigrants) would have to wait for a considerable period of time before acquiring the right to vote.

Dual-class companies account for a good number of Canada’s industrial champions; indeed dual class shares are a pillar of our industrial structure. That ownership structure should be encouraged, promoted and blessed, provided proper safeguards are in place to protect minority shareholders.

Opinions expressed herein are strictly those of the author.

[1] https://igopp.org/wp-content/uploads/2016/05/Table-dual-class.jpg]]></content>
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		<title>Capturing long-term investors the Toyota way</title>
		<link>https://igopp.org/en/capter-des-investisseurs-a-long-terme-a-la-facon-de-toyota/</link>
		<comments>https://igopp.org/en/capter-des-investisseurs-a-long-terme-a-la-facon-de-toyota/#respond</comments>
		<pubDate>Wed, 01 Jul 2015 20:37:22 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Actionnaires]]></category>
		<category><![CDATA[Actions multivotantes]]></category>
		<category><![CDATA[Dual-class shares]]></category>
		<category><![CDATA[Entreprises privées]]></category>
		<category><![CDATA[Gouvernance créatrice de valeurs]]></category>
		<category><![CDATA[Institutional investors]]></category>
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		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/capter-des-investisseurs-a-long-terme-a-la-facon-de-toyota/</guid>
		<description><![CDATA[In the on-going quest for innovative capital structures, Toyota has recently provided an interesting twist and tied in knots a number of institutional investors. Toyota believes that developing the next generation technologies will require massive investments over many years. It also believes that the current state of investment practices, the prevalence of roaming funds and [&#8230;]]]></description>
		<content><![CDATA[In the on-going quest for innovative capital structures, Toyota has recently provided an interesting twist and tied in knots a number of institutional investors. Toyota believes that developing the next generation technologies will require massive investments over many years. It also believes that the current state of investment practices, the prevalence of roaming funds and the general emphasis on short-term stock prices, all work against the required investor stability for such long-term undertaking.
“As a result, we have determined that, in raising capital for research and development of next generation technologies, it is desirable to match to the extent possible the period in which investments in research and development contribute to our business performance with the period in which investments are made in us by investors. To that end, we have decided to issue the First Series Model AA Class Shares with voting rights and transfer restrictions that assume a medium to long term holding period”.
Reference document of the 111th ordinary general meeting, p.32
In a historical vote on June 16th 2015, Toyota shareholders adopted with a 75% majority the proposal to issue Model AA Class Shares. These shares will be sold only in Japan; they will not be listed, but will have voting rights. They will be priced at 120% of the ordinary shares and will be paid a dividend at a rate lower than ordinary shares but at an increasing rate every year. The company will commit to buy back the shares at the original price after five years. But at that time, holders of these shares will have the option of converting their shares into ordinary common shares at a conversion ratio yet to be determined.

Toyota will thus enlist the support for at least five years of patient shareholders, mostly Japanese retail investors, in order to pursue fundamental research into future technologies. It will raise an initial US$4 billion and is authorized to issue up to US$12billion of these shares for that purpose. If that endeavour is successful, all shareholders will benefit; of course, the impatient and the fickle may miss out but won’t be missed.
There seems to be no legal impediment for a Canadian company adopting this type of capital structure provided, alas, it gets the support of its actual shareholders.
Many “foreign” pension funds voiced their opposition to Toyota’s proposition. The influential CalSTRS (the pension fund of California teachers), Ontario Teachers’ Pension Plan, the Florida State Board of Administration, and somewhat surprisingly, Canada Pension Plan Investment Board (CPPIB) have all declared their intention to vote against the new Toyota shares.

As the CEO of the CPPIB has been doing an active and persuasive advocate of long-term investment agenda, one would have expected the CPPIB to support an innovative capital structure designed to draw in long-term investors and partly shield the company from the short-term pressures of financial markets. It appears however that the CPPIB still clings to the obsolete notion whereby two classes of shares are a capital sin that “can entrench management against shareholder pressure for change” (CPPIB proxy voting guidelines). Which shareholders and what change are questions best left unanswered.

In a rare instance, the two largest proxy advisory firms issued opposing recommendations to their clients. ISS recommended voting against the Toyota proposal while Glass Lewis came out in favour of it! ISS, it seems, worries that “a rise in the number of stable investors could lead to overly cozy relations between the company and its shareholders. This would make it difficult for the market to exercise adequate oversight of the company's management”. So, stable investors are bad; the “market” is always right!

In a press release, CalSTRS Director of Corporate Governance argued that “[…] the new share class proposed by Toyota would be structured as debt instruments, with guaranteed and defined dividend payments. Yet, these shares would also have voting rights equal to those of common stock that don’t enjoy this equity risk exposure shield.” Fundamentally, CalSTRS is also sticking to the dogma about “one-share-one-vote”. One has to wonder if these funds, out of principle, have refused to buy shares of Berkshire Hathaway; Alibaba; Google; Facebook; Groupon; Expedia, UPS; Tyson; Ford, Nike, The NY Times; News Corp; CBS, Comcast, Blackstone; KKR; Apollo; Pershing Square Holdings, Third Point, etc.

All in all, the Toyota innovation should be closely examined by all who believe that currently dominant capital structures open the door wide to all types of stock market agitators and tourist investors. It is an empirical fact that these sorts of “shareholders” pressure management and boards of directors to deliver quick boosts in stock price, even if it means cutting down on R&#38;D and capital expenditures.

Toyota is thinking “out of the box”. It is high time for institutional investors to clear their own thinking of shackles and cobwebs.

Opinions expressed herein are strictly those of the authors.
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