An interview with Ian Robertson, CEO of Kingsdale Advisors.

Looking back on 2023, what was the most memorable or indeed successful campaign for Kingsdale Advisors?

The most successful and, I think, interesting campaign this year was the proxy fight defense we were involved in at First Capital REIT. It saw a total of five activists, who were not working together, all independently swarm the company at around the same time each using different approaches and tactics. That introduced a multifaceted front in a war that required us to think very differently compared to how we would in conventional situations.

The five parties all had very different views and different objectives, particularly when it came to the composition of the board. Given that there was a dispersed vote from those five parties, it allowed the company to think strategically about how it could stitch together a winning coalition. Secondly, the company was cognizant of the fact that coming out of the COVID-19 pandemic, there needed to be some change as a recognition of where things were at in the market, and that the board could lead that change, as opposed to having shareholder activists lead it. The board was very clear-headed in terms of making fast decisions and moving quickly.

The lead activist in that campaign was Sandpiper. And because we were able to stitch together a winning coalition and gain support from the other activists, it ended with Sandpiper settling for zero seats. The company didn’t even pay reimbursement for any of the fees as part of a settlement, which was also quite unique. I think it sent a message to others who might be looking at a company or other boards that those directors may sit on that if you’re going up against this team of directors, you’re going to be in for a fight.

In 2023, Kingsdale appears to have principally worked with companies, as regards public campaigns.

That’s only from a public perspective. Our numbers basically tell us that only one third of the situations that we’re involved in ever become public. If you look at the increase in settlements this year, and, again, that’s only the public settlements, it will give you an indication of what’s happening behind the scenes. When we work for an activist, we are very successful in being able to bring companies to their knees pretty quickly, without a shot ever being fired publicly.

What makes our company different from others is the “shock and awe” approach we take to campaigns. The traditional approach is to look at a campaign from the time an activist initiates their position straight through to the counting of votes at a meeting. But the reality is, very few of those get to an actual vote count. Very few even get to the point where you’re mailing a circular. What we focus on is structuring a highly aggressive campaign where you bring maximum force, either for the activist or for the company against their opposition to achieve their objectives as quickly as possible, and usually at a reduced cost.

What standout trends have you noted in 2023?

There would be three things I would point to. The first one was a record year for activism, with 69 proxy contests in Canada. But what was interesting is that only seven of those fights were initiated by what we would call a “capital A” activist, a brand name activist fund. The vast majority of the campaigns were initiated by long-term investors, institutional investors, company insiders, who you would not traditionally think of as activists. What has changed is with the markets down, many of them are stuck in their positions. They have limited levers to affect change at companies, so the only thing that they can do is affect the governance. What we’ve seen is a recognition both by institutional investors, and I would say the general market, that activism has become an effective strategy to mobilize change at companies and it doesn’t always need to be in an aggressive fashion.

The second thing would be as it relates to annual meetings in Canada. There’s no longer such thing as a routine annual meeting. Director votes are down across the board. We’re even seeing auditor votes being hit in Canada. It has created a new environment between this and the first trend I noted, where if a board looks at their shareholder list and they don’t see a brand name activist on their list, that doesn’t mean that they should be complacent or think that things are going to be fine for the annual meeting. That’s a big wake up call for boards, in Canada, but right across North America, because we have seen it in our U.S. office as well.

The third thing that’s really changed is that it used to be that ISS and Glass Lewis were the primary decision makers and determinants in terms of the outcome of proxy contests, or even routine annual votes. What we’ve seen is an increased divergence by institutional investors from their traditional adherence to ISS and Glass Lewis.

Part of that has been the rise of in-house governance teams, the adoption of bespoke governance policies that are often stricter than those of the proxy advisors. The real check they need to be doing is figuring out how frequently and to what degree their shareholders follow that advice, and to what degree they follow their own policies. One of the things that we’ve done at our firm, based on our 20 years of voting history and relying on the newfound capabilities of AI, is we’ve been able to go back and regression test investor votes to really identify how they are voting and how are they actually making their decisions.

According to DMI data, investor support for “say on pay” in Canada saw a decrease in 2023. Do you expect that executive compensation will continue to face such investor scrutiny in 2024?

It’s important to note that the current environment has changed considerably in terms of recession fears, continued inflationary pressures and geopolitical instability. All of that points to another busy year for “say on pay” votes. What we’ve seen is a decrease in support across the board. This year was a record low in terms of average support for “say on pay”. When you couple this with lower total shareholder returns (TSR), you’re going to see an increasing divergence between the experience of shareholders and how their executives are being paid.

And, yes, we expect that to be an increasing focal point in the year ahead. Now a layer on top of the “say on pay” vote are calls to integrate things like diversity, cybersecurity, ESG disclosures – all of that comes into play. We think that it’s not just going to be a discussion about what is the actual figure executives are being paid but also a lot of discussion around the actual construct of the compensation plans themselves.

Any other trends you are anticipating in 2024?

I think the other thing is going to be increased opacity in the voting system. The reason why we exist, and firms like us exist, is because it’s very hard to track a vote through the system and identify where it’s coming from. When you look at the decentralized or pass through voting policies coming online at BlackRock, State Street, Vanguard and Charles Schwab, and see that democratization of shareholder voting that’s taking place, it’s going to be increasingly hard for companies to not only identify where negative votes are coming from, but also to understand why those votes are being voted the way that they are.

What we’re encouraging companies to do is increase their focus on offseason engagement with their investors, making sure that they have a close relationship with them, so that they don’t have to rely on a negative vote to let the boards know their points of view and they’re able to share those with the boards and management in real time.