Handling corporate proxy fights

The market is seeing more examples of multiple activist investors taking opposing positions when pushing companies for change, which can turn into three-way battles if the company has its own strategy in mind. The stakes get upped further if a proxy battle for board control ensues — all of which can leave financial advisors wondering who to believe and what actions to take.

There are many competing interests and potential conflicts when multiple activists, management, entrenched boards, and proxy advisory firms do battle. The arguments get heated and misdirection abounds, leaving advisors the task of finding the meat of the issue.

Last fall, the board of Gildan Activewear Inc. ousted its co-founder and CEO over a disagreement centred mostly on succession planning. In short, the CEO wanted to stay and grow the company, while the board wanted to fulfil a succession plan that had been years in the works. The market was shocked by the move, and the stock dropped immediately by 11%. Three months on, it has only somewhat recovered.

Several institutional shareholders quickly entered the fray and demanded the reinstatement of the CEO. As the sides became entrenched, the market was treated to a rather un-Canadian public autopsy of the affair. The board said the CEO had struggled for four years to do his job, and that trust in him had been eroding for the past two. But what took the board so long to act if this was indeed an accurate assessment?

The board also took a divide-and-conquer approach, garnering the support of one vocal shareholder (Coliseum Capital Management) in exchange for a board seat. The board soon doubled down and further claimed that it was investigating the actions of the CEO prior to his departure, including his interactions with some of the activists now on his side.

From an advisor’s perspective: Generally speaking, evidence dug up after the fact to support a previous action can be reasonably ignored because it wasn’t relevant to the original decision. This approach can help you focus on the core issues at hand.

In the other corner, activist investor Browning West has taken up the mantle for reinstating the CEO, backed by as many as eight other Gildan investors, and has pushed forward a proxy fight, demanding the replacement of most of the Gildan board. The activists and the former CEO have not responded to many of the allegations made by the board, and by not doing so, have managed to hone their argument. A shareholder vote to resolve the proxy fight is scheduled for late May, and investors are faced with a decision.

You should keep a few issues in mind to help cut through the noise.

First is the share price performance since the announcement of the CEO’s departure, which has lagged the S&P/TSX composite index by more than 1,300 basis points. The market can often handicap which side is favoured in a convoluted back and forth. Second is the way the board handled the succession, keeping major shareholders out of the loop and isolating the CEO from the final process despite claims of an open and civil environment for the transition. Third, the board accelerated the switch by one full year and dispensed with previous plans for a post-succession handover period between the former CEO and his successor.

You could form a decision based on who you think should lead the company as CEO. But, just as important, the situation has morphed into a referendum on board competence, which partly explains why the board has gone to as great lengths to defend its process as it has to defend the qualifications of the new CEO.

This is more than a Gildan matter, and something that you might need to pay more attention to in the future. Similar dynamics are playing out at Walt Disney Co., with a three-way proxy fight between the company and competing activist shareholders. 

Regardless of the situation, remember that activists tend to put shareholder returns first and foremost — they have the same job as advisors in that regard. Management and boards, on the other hand, might consider their personal entrenchment and egos just as important, which makes them more inclined to use delay tactics and muddy the waters with extraneous information. It’s a good rule of thumb to identify the parties whose interests are most aligned with yours when seeking the best path forward for your clients.

Mark Rosen

Investments

Mark Rosen, CFA, MBA, CFE, heads ARC Research, providing independent equity research to investment advisors across Canada.