Shareholder Activism: The Swinging Pendulum

Article excerpt

ROWLAND FLEMING

President and CEO, Toronto Stock Exchange

The explosive growth of funds has distanced the real owners from the companies in which their money is invested, and armed institutional investors with unprecedented power to affect corporate policies and performance. But can the new shareholder activism go too far and hobble management to the detriment of the corporation and its owners? Will institutional investors in turn be faced with shareholder activism by the real owners on whose behalf they invest? What about gadfly activism that pursues personal social or political agendas in the guise of investor interest? Since nearly every adult Canadian is a shareholder whose welfare is vitally affected by shareholder value, should this be a priority for public policy, alongside such concerns as job creation and environmental conservation? Speech to the Canadian Corporate Shareholder Services Association, March 19, 1998.

You and I share the same goal: enhancing shareholder value. That sounds like a basic objective, but at times it is one that receives too little attention -- from government, the media, and other institutions that help shape the public agenda.

Take one current example--the proposed [Royal and Bank of Montreal] bank merger. Obviously there are a number of significant pros and cons to the proposal, and before giving a go-ahead the federal government will have to consider all aspects of the national interest. We have seen considerable discussion about a number of possible effects of this merger. Will it cause layoffs? Will it reduce jobs? What impact would a merger have on service levels and access to loans? Will branches be closed?

But one question we almost never hear is the most obvious: what impact will a merger have on the value of the capital belonging to the shareholders of the two banks?

It is perfectly reasonable that politicians and others would focus on the possible effect on jobs, communities, and small business. Those factors have impact on a great many people. But long-term investor value has impact on even more people. One-half of all adult Canadians own shares in one of the five banks. In this day and age, when pension funds represent one of the largest pools of capital in Canada and when our largest demographic group is looking at retirement in 15 to 30 years, policymakers should not forget that Canadians are not just workers and consumers. Increasingly, they are also investors.

The scant attention that has been given to that aspect of the merger issue--investment value -- symbolizes a lack of understanding of the importance of building financial equity. Increasing value for the investor--in pension plans, mutual funds, and other investment instruments--determines for many individuals and families their ability to achieve economic independence, help their children obtain advanced education, and ensure financial security for a large part of their lives.

Enhancing investor value is one of our most important priorities.

We are advancing the goal on a number of fronts--technological, educational, and structural. Two of our important focal points in recent years have been the issues of corporate governance and continuous disclosure.

Three years ago we sparked considerable debate with our report "Where were the Directors?" It was based on a year-and-a-half study by the Dey Committee which included public meetings in cities across Canada and more than 150 submissions by interested parties.

This afternoon, I would like to pick up on the governance issue -- and its relationship to shareholder activism.

What corporate governance comes down to is how effectively corporations are able to represent and respond to the interests of their shareholders. Obtaining the views of shareholders is an increasingly complex challenge in an era in which institutional investors and mutual funds hold about 40% of the value of publicly-traded shares. …