In a Canadian corporate culture long resistant to activist shareholders, the U.S. hedge-fund manager sounded a rousing wake-up call by ousting a chairman, a chief executive officer and four directors, said Karl Moore, professor of business strategy at McGill University in Montreal.
“New York-style capitalism has landed in Canada with both feet on the ground,” Moore said yesterday in an interview. “It will be a shot across the bow for any publicly traded corporation in Canada. It will make directors ask themselves if they have been active enough, or whether they have just been sitting back and letting the CEO run things.”
The board exits marked an about-face for a railroad that fought Ackman after his Pershing Square Capital Management LP became the largest investor in October. Until the end, Canadian Pacific backed CEO Fred Green, who presided over a slide that left it as the least-efficient of its North American peers.
“Our institutional investors should be more vigilant,” said Michel Nadeau, former vice president at pension-fund manager Caisse de Depot et Placement du Quebec. “Why did they wait for Pershing Square to come in and shake things up? They should have moved much earlier. As a Canadian, I am embarrassed.”
Green resigned and five directors, including Chairman John Cleghorn, opted not to seek re-election only hours before the railroad’s annual meeting, draining the event of the drama that would have surrounded a contested vote. Ackman, 46, and the six members of his slate won seats on the 16-member board as he seeks to boost profit.
“If you get to a point where you have to have a proxy fight, typically something happens,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “A proxy fight is a symptom of corporate malaise.”
Pershing Square’s stake is 14 percent. Canadian Pacific’s stock price reflected how shareholders welcomed the fund’s investment as the country’s second-largest railroad lagged behind bigger rival Canadian National Railway Co. (CNR) on benchmarks such as operating ratio, a measure of expenses against sales.
The shares fell 2.9 percent in the five years through Oct. 27, the day before New York-based Pershing disclosed its holdings, while Canadian National gained 50 percent. From Oct. 27 through yesterday, they switched: Canadian National rose 3.2 percent, while Canadian Pacific jumped 25 percent. Canadian Pacific fell 3.1 percent, the most since March 6, to C$74.11 at the close today in Toronto.
‘Not Good Governance’
“Canadian investors by nature are not violent,” said Nadeau, who is now executive director of the Montreal-based Institute for Governance of Private and Public Organizations. “We are a gentle people, so a conclusion such as the one we saw at CP is going to get people’s attention. It’s a sign that CP’s board failed to do the job. But it’s not good governance.”
Shareholder activism -- and boards that respond -- are no guarantee of a turnaround.
Stephen Jarislowsky, whose Jarislowsky Fraser Ltd. is the biggest investor in SNC-Lavalin Group Inc. (SNC), criticized the Montreal-based engineering company last month for inadequate oversight before a probe of incorrectly booked payments led to the CEO’s resignation. The shares have slumped 3.2 percent since his April 30 broadside, extending the year-to-date drop to 29 percent.
Research in Motion Ltd., the maker of BlackBerry mobile devices, has lost another third of its market value since a new chairman and CEO were brought in to the Waterloo, Ontario-based company in January.
Carol Stephenson, a General Motors Co. (GM) board member and dean of the Richard Ivey School of Business at the University of Western Ontario, said she didn’t see Ackman’s Canadian Pacific victory as a watershed moment.
“Directors monitor performance, and they’re not necessarily a nice jovial group,” Stephenson said. “The difference here is that it became quite public because it was a proxy battle. But don’t think there aren’t a lot of tough discussions that go on around board tables in Canada.”
David Denison, CEO of the C$161.6 billion Canada Pension Plan Investment Board, said working behind the scenes is what his fund did with Canadian Pacific. Canada Pension was one of several Canadian institutional holders to back Ackman’s cause.
Results, Not Publicity
“If we can affect change without all those headlines, without all the cost involved of what we’re seeing with CP, and get the end result that we’re looking for, that’s a good outcome for us,” Denison told reporters in Toronto yesterday. “We’re not looking for publicity, we’re looking for outcome.”
Ackman said he initially had trouble persuading Canadian Pacific investors to publicly support his slate after starting the proxy fight, even among shareholders upset with the railroad’s direction.
“People were generally afraid to sort of speak up,” he said at the Bloomberg Canada Economic Forum in Toronto May 8. “A lot of the institutions we spoke to in Canada about participating with us here said: ‘If this were in the United States, we’d have no problem joining you, but because it’s in our home country and I’m concerned our CEO is going to get a phone call from someone on the board, we can’t do it there.’”
His tussle with Canadian Pacific wasn’t his first with a Canadian board.
In 2006, when Pershing Square held shares of Sears Canada Inc., Ackman was among investors upset by the retailer’s rejection of a December 2005 offer from parent Sears Holdings Corp. (SHLD) to buy the 46 percent of the Canadian company it didn’t already own. He accused Sears Holdings of bullying minority shareholders.
Success at Canadian Pacific may lead Ackman to focus on other laggard companies in Canada, said Moore, the professor at McGill’s Desautels Faculty of Management.
“This is a market signal” to Pershing Square, Moore said. “They are probably thinking: ‘If this occurred here, there may be other opportunities.’ They will ask their Canadian friends for other targets. The phones are alive, I’m sure of that.”
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