Canada: Trends In Shareholder Activism (Podcast)

In this episode of the podcast, guest host Teresa Tomchak, a partner in the litigation group at Osler, and David Salmon, President of Laurel Hill Canada dive into the topic of trends in shareholder activism. Teresa and David discuss ESG issues they are seeing in the shareholder activism space, steps companies can take to address and prepare for ESG issues and the role of proxy advisors.

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Transcript

JOHN VALLEY: In this episode of the podcast, we'll be diving into the topic of shareholder activism with our guest host, Teresa Tomchak. Teresa is a partner in the litigation group at Osler. With more than 20 years of experience, she has worked on multiple shareholder disputes, hostile take-over bids and proxy fights. Teresa will be joined by David Salmon, President of Laurel Hill Canada. David is responsible for the strategic shareholder solutions, business development and overall operations of Laurel Hill's Canadian division and routinely advises many of Canada's leading companies on strategies related to hostile and friendly acquisitions, proxy contests, executive compensation and corporate governance issues.

Teresa and Dave will discuss topics such as ESG issues they are seeing in the shareholder activism space, steps companies can take to address and prepare for ESG issues and the role of proxy advisors.

Over to you, Teresa.

TERESA TOMCHAK: Thanks, John. Dave, I'm so happy to do this podcast with you. And I'd like to start off just with a really general question. Can you tell me about what type of ESG issues you're seeing in the shareholder activism space at this time?

DAVID SALMON: Thanks, Teresa. It's a pleasure to be here. I think in the broadest terms, when we looked at activism that would go across shareholder proposals, transactional activism, and what most people associate with being board activism, certainly on the shareholder proposal side of the proposals that we've seen in the Canadian landscape this year, approximately 81% of them have been related to E and S. And then you go broader, it's obviously ESG across the table on those types of initiatives. As we get into transactional activism, we have seen some levels of ESG, and we can look at Suncor and the consideration that they had around some of the health issues there. It's not as prominent, certainly in the Canadian landscape, but we are seeing something more driven in the US right now. There's the issue around Starbucks, and we've seen Carl Icahn take that in terms of McDonald's and other issuers with some of the animal issues. So, I think that we are generally a bit of a fall off of what we see in the US side of the equation. So, I would expect that we are going to see some of these more ESG related items in terms of some of the activism as well. And then on board activism,it still is predominantly governance driven. Strategy always comes into play. What are you considering? What are you doing? Where are your financials? But even when you're seeing the strength of some of these companies, and we need to look further than the oil patch where they're all doing quite strong, but we're still seeing issues around governance and things of that like, so I think ESG as a whole has its place in governance. Certainly the G is always the basis of that as it relates to board activism.

TERESA TOMCHAK: And specifically, can you tell me a little bit about the kinds of issues that you're seeing in each of the categories of ESG?

DAVID SALMON: Yeah, absolutely. When it relates to the health and safety is certainly up there. Environment is certainly up there. Depending on the business and the sector, given that roughly 60% of our publicly traded companies are extrapolation industries, oil and gas and mining, you're going to see things about climate and climate awareness and sustainability. Those are typically on the agenda. As you move into other sectors, think about what's going on with REITs. Obviously, after Covid, they had a lot of activism. They were definitely vulnerable and susceptible to that. It's about the transitioning and how they're utilizing their spaces. So, I think that when you're looking at that from those perspectives in that areas, absolutely, you're going to continue to see very specific ES initiatives in regards to the industry themselves. With mining, governance, diversity, it's always up there, board accountability. So those would fall more under the S and the G side of the equation.

TERESA TOMCHAK: So Dave, is it right that if I've understood correctly and kind of what I've been seeing is that you've got more of the E and S in the shareholder proposal at this point in time and less in the board actual fights to replace the directors, whether that be withhold or nominees or any type of transactional?

DAVID SALMON: I'd say that's absolutely fair. Proposals are strongly driven by E and S, and you look at something like the say on climate proposal that made a lot of noise probably 2 or 3 years ago. It certainly is diminished down. We saw six of those proposals in the Canadian landscape in 2022. We saw seven, of which six of them were at the same firms. They did not garner great strength, and in fact, they've diminished in terms of their support year over year at those six where it was previously done. So, I definitely think that, yes, you are on the proposal side, going to continue to see the E and S. And I would note if you remember Robert Verdun, and I'm probably dating myself here, Robert Verdun was the individual. He's a farmer from Ontario. He put forward roughly 15 different shareholder proposals to the big banks. They were all generally opposed when he put them forward within a matter of 5 to 6 years, 11 of those 15 proposals were seen as governance standards and have now made their way into the everyday governance lifestyle.

TERESA TOMCHAK: Is it fair to say then you're seeing these coming from all sectors and into all different areas? You're talking about a farmer. What about institutional? What can you say about that?

DAVID SALMON: I think when we look at the target, it's a little different than we're looking at who's typically putting these forward. Robert Verdun was a bit of a unique individual. We genuinely are seeing more of the pension funds, more institutions like SHARE and BCIMC. A lot of these groups that are now taking these initiatives on behalf of underlying shareholders. So, I think that individual shareholders are probably not as prominent. Maddock out of Quebec certainly would be a firm that's generally putting these forward. But the target audience, as I alluded to on the say on climate, that was six of the Canadian financial institutions plus one of the large insurance companies. They're generally targeted towards the mega caps, the larger companies where they can make an influence, where they know they could potentially generate institutional support. You don't see these on the agenda of the smaller companies. They don't have the same media attention. They don't get the same exposure. And you're generally looking at a different shareholder composition that in all likelihood would not necessarily support these on the same level that's needed on the institutional basis.

TERESA TOMCHAK: So, you've given us some stats about what you're seeing on with shareholder proposals and success. What type of success are you seeing from the dissident shareholders on the board fights?

DAVID SALMON: It's a great question, Teresa. And certainly, it's quite surprising actually. So, we measure it in terms of two stats, those that actually go active and those that are fight rates. So, fight rate would be somebody where there is opposition but they don't take it to the next level. In other words, they don't formalize it through a public broadcast or the solicitation of proxies through actual proxy material. Starting there, in the last two years, we've seen 74 and 72% of fight rates go fully active. That's incredibly high. That's basically three out of every four fights where there's opposition, they're taking it to a formal level of activism. And the rationale behind that may be the results that they're getting. In 2022, activists won either the full or partial slate 88% of the time and last year, it was 79% of the time. Those are staggering numbers in support of the dissident. And generally, you're talking over a ten-year mark, dissidents generally have a bit of a stronger record, but certainly not at that level. So, it's telling us that the confidence that these activists have, in taking it from what I'll say is maybe rhetoric to formal action, is quite strong and being supported by many of the shareholder supporters.

TERESA TOMCHAK: I know in the past, I've seen behind the scenes a lot of proxy fights that settle before there's any public awareness of it. Do you see that going down?

DAVID SALMON: That's interesting. I don't see it going down. I think settlements are in everybody's interest. Activism is very expensive. When you look at it on a board activism level, it's a declining scale on transactional activism, and even less so as you get into shareholder proposals. But there still is a cost. When you look at certain proxy battles out there, there's rumors of one going on right now that's already cost the target company $9 million in fees, and it hasn't even gone to the full board battle yet. I think that there is absolutely a strong rationale for both parties. Obviously, if you're the activist and you win, you can request a claim for a return of the funds that you spent. But if you lose, that certainly isn't going to happen. And that's a big amount to come out of a firm's pocket and add to the bottom line of their investment. So, I think there's a strong rationale for people to settle before it gets out into the public market. And there's a lot of reputational risk that goes on with these and we just need to flip open The Globe and Mail from this week and see some of the reputational risk that's been going on with very well-known Canadian companies and their former CEOs.

TERESA TOMCHAK: Can you comment on the steps that you think companies can take to address ESG issues and be ready for those? I know we talked about settlement and kind of jumped to the end, but what about the beginning and to try to block that before they start?

DAVID SALMON: And I think the first and most critical step is engagement. I'm genuinely surprised how often folks don't have discussions on ESG matters, and generally there'll be engagement out there. They'll talk about strategy, they'll talk about the financial. And more often than not, that's with the portfolio manager. And that's all well and good and it should happen. But there's also the consideration from those that are executing on the ESG and undertaking the voting. They're not always the same parties. In many cases, the portfolio manager has no involvement in the actual evaluation of the voting. So, I think make sure that you're talking to the right party in that engagement and speak about ESG. Find out what's important to your key investors. And I think when you find out what's important to them, by no means wouldn't I suggest that's something that you simply just defer to – it should become a board discussion. The board then can make an informed decision on what their constituents are looking at, and then can come up with a policy that they can articulate and if it's aligned with them, fantastic. If it's not aligned, at least it's been well thought out. And I find most institutional investors are highly rational, and they'll appreciate that. They may not agree with it, but they'll appreciate it and understand it. So, I think that's probably the biggest step that any issuer can take in that process. And there's of course, don't make yourself vulnerable. You know, we always talk about what gets tracked, gets managed. When we look at so many of these things, particularly on the E and S side, they are being tracked. There's a lot of promises that were put out, particularly in the early part of this decade, and when you're tracking them and you're not actually then either meeting those targets or continuing to disclose where you are, that makes you vulnerable. And it's critical I think for individuals, these are tough goals. They were in an evolving time. It is a journey and a process that we're going through, particularly with E and S, and I think that people understand that and appreciate that and that needs to be articulated, that needs to be disclosed, and that needs to be considered through your engagement.

TERESA TOMCHAK: So you've talked about engaging with your shareholders and knowing the right people at your shareholders, particularly those who are going to be involved in voting. Can you comment on what type of role you're seeing the proxy advisors ISS and Glass Lewis playing in these ESG issues?

DAVID SALMON: Yes, our friends at the proxy advisory firms are certainly playing a key role in here. I think from the initial standpoint, what they wanted to see was oversight on the environmental side, climate sustainability also in terms of human capital, cybersecurity as well. So certainly, that oversight was what they were looking at previously. They've now gone a little bit further in terms of what they are reviewing. Glass Lewis in particular – Glass Lewis is looking for board accountability on climate related issues that previously was targeted at the climate 100 that is now moved on to the TSX 60, where they are looking, if there are any concerns, any failures, they want to make sure that there's board accountability and board responsiveness at that level. The second consideration from Glass Lewis is human capital management. If there are any concerns, if there's anything that happens that is material to the business, they want to make sure that the board has the oversight and again responds accordingly. The third one is cyber risk oversight. And if there is a material issue, they want to make sure that the board has an appropriate response. Keeping in mind that they've already stated that they expect there to be cybersecurity oversight at the board. ISS they've more focused on the S side at this point. I certainly want to see the oversight and climate and sustainability. But as you know, Teresa, they've added to their diversity side. And both Glass Lewis and ISS had 30% minimum threshold in terms of gender diversity. But they've expanded on that as many institutional investors are and they're now looking at ethnic diversity as well. They're looking for at least one member of the board to be ethnically diverse for the TSX composite.

TERESA TOMCHAK: And if companies are not hitting these standards that are put out by ISS and Glass Lewis, what's the consequence of that?

DAVID SALMON: They're Brightline tests. Let me start off there. So, if you're sitting at 29.8%, they don't round up. You need to be at 30%. And I know that we've seen this on multiple occasions, we're having a discussion with a client right now who will fall just within that range. And unfortunately, that is an initiative that's been provided to the proxy advisory firms from their underlying shareholders, your institutional investors as an issuer. So, they are looking for that minimum standard. In the absence of that target being obtained, they will withhold on the chair of the nominating and/or governance committee. If it's a regular issue, then possibly look at expanding that to the entire committee or even possibly the chair of the board.

TERESA TOMCHAK: Have you ever seen a situation where they recommend withhold on more than just a committee?

DAVID SALMON: We haven't seen anything in terms of a broad board, if that's what you're referring to. But certainly we have seen it in terms of the committee, where there is a lack of response and they do have a policy in place that's called the board responsiveness policy. So, with things like "say on pay" or a director gets less than 80% support, they do look at what have you done as the issuer to address these issues. What were the issues and how are you going to correct these moving forward. So, in the absence of that, with the continued concern around what those issues were, you are certainly seeing withholds on committees, not necessarily the broader boards.

TERESA TOMCHAK: And where ISS and Glass Lewis have expressed some concerns. Do they normally give the issuers an opportunity to address that with them directly, or are they expecting to see some type of disclosure in their proxy circular, for example, or both?

in the circular and in both is the answer. Outside of proxy season, they allow issuers to actually reach out to them through their various portals and engage in discussion and speak with them. It's generally a listen mode for both Glass Lewis and ISS, and they will articulate some of their policies around why they drew the conclusion that they did. Having that dialogue with them certainly is helpful, but they do look for it further in the circular, so that it does get a much broader scope of understanding amongst the shareholders.

TERESA TOMCHAK: And with respect to ESG issues generally, and I'm moving off of the proxy advisor questions, what size and type of company, I think you commented on, I think mining, and what other companies and what other size of companies are you seeing that are most prone to ESG issues?

DAVID SALMON: It's interesting because when you look at activism historically in the Canadian landscape over the past decade, we've tracked the numbers at Laurel Hill, and you will see that approximately 70% of the activists on a board level are targeted towards micro-cap and small cap, below the $250 million market cap. It's a much more susceptible target base. It's much more retail, can get a toehold position, so the success levels there are also stronger. That being said, when you look at those that make the media pages, they are the mega caps. They're the large companies. Those are the ones that get the sensational stories out there. People still reference Telus, they still reference CP. Those were well over a decade ago. Obviously, Gildan is in the papers right now. So, I think that those are ones that people are much more aware of. But the day-to-day activism happens in the trenches in the 250 market cap and lower. On the ESG side, though, as we talked about earlier, ESG is generally looking at shareholder proposals and those that have the responsibilities around whether it's regulatory or are actually doing this because of their large institutional base and the policies that they have. They're large in mega cap. So, you get that nuance there, where the vast majority of activism is in the micro-cap space and certainly there're regulatory pressures on them for ESG are less doesn't mean they're not there. They're far less. Whereas when the activism happens with the bigger cap markets, you will see more ESG and much more prominence in those ones when they do target them.

TERESA TOMCHAK: With the increasing requirements on disclosure of various climate issues that are coming up, I'm not going to delve into all that level of detail, But with that coming up for all companies at all stages, in a situation where we're not just into shareholder proposals, do you expect that there's going to be more activism at those smaller companies that are ESG related?

DAVID SALMON: I think so, and I think it's going to go down to what we talked about before. If you're measuring something and you're not meeting those goals, you make yourself incredibly vulnerable. And I do believe that there were unfortunately, many in this space that felt it was a good practice to say that they were going to do certain things and they may not have executed it, or even if they tried to execute it, it was more challenging than they had initially thought. Whether that be resources, whether that be complexity of what they're looking to measure. There's a host of different considerations that came in there, and I think that is certainly going to any time that an activist is out there, they're looking at your vulnerabilities, and that's going to be one that is certainly going to come front and center.

TERESA TOMCHAK: And is it fair to say that companies sometimes want to say what shareholders want to hear without thinking about the consequences, that they might not be able to meet that down the road? Do you experience that?

DAVID SALMON: Politics is alive and well in the markets. There's a lot of promises that may not necessarily be kept, and I do believe that a stock price can wash away a lot of sins. But when you get an activist in there, and as I alluded to before, the defense ten years ago was to have a strong stock price. Not always the easiest thing to do, but that was your defense. That's not the case now. And I referenced Suncor earlier. Suncor stock price was doing incredibly well but Elliott (Investment Management LP) still went after them. So, I think that when you look at those vulnerabilities making promises, the board really needs to be thorough and thinking these through, not just rubber stamping them and seeing what some of their peers have done. Every company is different, everybody needs to be able to speak to a different shareholder base. You and I have talked in the past, Teresa, I'm not a fan of the playbook. I think it doesn't help individuals, every company, culture, people, shareholder base, sector, they're always different. And if you don't take these considered nuances into how you approach something, I think you're just begging for failure.

TERESA TOMCHAK: With respect to governance. So now talking about the "G" part of it, which is what we've historically seen in so much shareholder activism, can you tell me a little bit about what you're seeing in the G space?

DAVID SALMON: Yeah, 2022 and 2023 really didn't differ much. I think as we were coming out of Covid and looking into going to Covid, people were focused elsewhere. It was really about the survival of the company, the survival of what they were doing, making sure that they were protecting their people. So, you can understand why governance didn't really develop as much as it had done in the earlier stages. Fast forward to 2022, 2023, you then saw the governance start to build on other aspects of it. So, as I alluded to before, you talk about diversity that came in in 2015, that diversity is now expanded and it's expanded not only in terms of what the proxy advisers are looking for in terms of the ethnic diversity, but the CBCA definition and the four different designated groups in there. So, I think that the definition of what diversity is, is certainly a good example of what we're seeing in terms of the growth of general governance. Outside of that, the one area that's quite interesting and we're seeing is auditors. Auditors have significantly increased in terms of their withholds. And this was generally a rubber stamp, it was 99% across the board. You're now seeing an influence from Europe coming through where they're saying they want independence of auditors. They're looking basically at that ten-year threshold where you're starting to see a decline in the support for the auditors. And as you increase the 15 to 20 and the 25, it drops significantly in terms of percentage. For the first time ever, we've seen actually support for auditors dropped below 90% when they're in that 15 year range. So, there are ways to address this issue and certainly talking about the processes that you go through in terms of looking at your auditors, switching partners, switching offices, doing an RFP, all these types of things, they do help with that process. But keep in mind, when you're looking at a lot of these institutional investors, key to what you want to look at is what type of institutional investors do we have? Are they passive? Do they outsource their voting? Do they simply just go through the check the box? And if it is a check the box or it's outsourced, if they have a policy that says after ten years your auditors conflicted, there's nothing you're going to be able to do with any disclosure on that. So, understanding who that shareholder base is, I think as a management team, making sure that you get ahead of that and the board of directors generally don't get involved in that level of minutia. But I think what they do see is the end vote results. And there was a very large oil company a couple of years ago that had a 71% support on their auditors and I know for a fact that the board took that seriously and wanted to address it in the future. I think you are seeing a significant drop in year over year. I think we went from 96% to 92% just in auditor's support overall.

TERESA TOMCHAK: And you talked about outsourcing of the vote. Can you expand on that a little bit?

DAVID SALMON: When you look at the accountability of directors and even executive compensation, you're seeing that the influence of the proxy advisors is still quite strong. And every company should understand when they're going through and their engagement. Who does your voting? How do you do your voting? In many cases, they will subscribe to a proxy advisory firm, but they'll have their own internal policies that are generally stricter. So, they don't necessarily outsource their vote, but it has a key influence in terms of how they are going to vote. And you can look at the adherence numbers on that. A firm like ours would be able to provide that. But there's also many that outsource their vote to other institutions, such as SHARE by way of example, and you need to understand what their policies are so that you can actually address those and manage those. But I think finding out through your institutional engagement how they vote, who does their voting, what's relevant for them, instead of going hat in hand when you actually have that resolution on the table, it's much better to get in front of that then behind.

TERESA TOMCHAK: And you mentioned earlier about the proxy advisory ESG and you commented more on Glass Lewis than on ISS, in part because ISS does not have as many policies on ESG as Glass Lewis does. What has your experience been when you have been exposed to those companies where they're outsourcing or companies internal policies with respect to ESG? Are you finding them to be quite a bit stricter than what the proxy advisories have come out with? I know it's somewhat of a new area, relatively speaking.

DAVID SALMON: I think so. I think the rationale is if you're going to outsource it beyond the two main proxy advisors being ISS and Glass Lewis, it's generally because you are looking at this with a more strict view on it, whether that's environment, climate, sustainability, the social aspect of it, human capital, cybersecurity, it generally has one of those areas, if not more, that they are far more stringent on. And again, the proxy advisors, just by way of example, they don't have a policy on the auditors. But why are we seeing that auditors drop 4% in terms of year over year? That speaks to the stricter nature of some of these firms and some of those that are outsourcing in terms of the policies.

TERESA TOMCHAK: Earlier you talked about Covid and what we're seeing since Covid, since 2022, 2023. Can you comment on virtual meetings and what your experience has been with virtual meetings since that time?

DAVID SALMON: Yeah, that's a hot topic, Teresa. I'm sure you've had this question yourself.

TERESA TOMCHAK: I certainly have had some experience with it and it generally has not been good, in a contested one. I think we need to acknowledge that, certainly in my view, and I'd be curious to know yours, I think there is a lot of benefits from virtual meetings or hybrid meetings in a non-contested situation. My personal view is, in a contested situation, I think having virtual meetings has been problematic.

DAVID SALMON: I would agree. In a contested situation, virtual meetings, certainly they can create significant complexities, particularly if you're not aligned between the two groups beforehand and their advisers generally will speak and make sure that there is some level of agreement, not always the case. And when that's not the case, it can make for a very long and challenging day and ultimately quite possibly end up in court. But I do think in terms of what we're seeing in the marketplace. So, if we look at 2023 by example, 52% of the meetings of the TSX composite were virtually held. The other 48, I think it was 20% were hybrid and 28% were in person. So, you are seeing strength in terms of that virtual meeting. But I expect that that's going to decrease and it's going to decrease not only because CCG put it quite well in their commentary in The Globe and Mail, where they said those that control the technology control the meeting. So, they put out an op ed in the Global Mail, which I'm sure you saw, they represent over 55 institutional shareholders in Canada in the trillions of dollars, and they basically expressed their opposition to virtual meetings. You then saw BCGEU locally here that also expressed their opposition to virtual meetings, and you are seeing quite a few institutional investors that do not support it because they are concerned about the manipulation of the technology. Now, that's not to say that there's not opportunities, and I think there's a lot of advantages in terms of virtual meetings. It certainly increases the participation. I think what we're seeing in terms of the gold standard is a hybrid or some form of in-person, with a webinar not necessarily allowing shareholder participation from the virtual side of it. You still have to attend the meeting, but it's meeting both goals and allowing most people to attend. And the reality is, of the vast majority of virtual meetings, you're not necessarily getting a host of questions. You're not necessarily getting a lot of voting on the platforms themselves. It's more of a listen mode than anything. So, I think that having a webinar certainly will accommodate that. It is going to be challenging moving forward in terms of just having that virtual meeting and when, again, I know I keep harping on the proxy advisory firms, but they certainly do have an influence. ISS doesn't take a position in terms of virtual meetings. They just want to make sure that it's aligned as closely to an in-person meeting, and the rights and responsibilities of both parties are being met. Glass Lewis and of course, the CSA came out with more stringent approaches. Glass Lewis has four considerations that they need to see in your circular. Doesn't necessarily mean that it's going to result in a withhold on the chair of the governance committee, but it's not a risk that I would recommend any of our clients take. And it's effectively it needs to be aligned with what the same rights of a shareholder would have in the meeting. And that being, can they ask questions? Can they make comments? What happens if there's technical issues who do they contact? So, it's those types of considerations that they're looking for to be clearly defined in the circular. In the event that you are going to proceed with a virtual one.

TERESA TOMCHAK: Do you know whether most companies actually comply with the disclosure that you just described that Glass Lewis requires?

DAVID SALMON: We did an analysis on that of the meetings that happened last year, and the vast majority did not. About two thirds of them, in fact, did not comply with those standards, as per Glass Lewis.

TERESA TOMCHAK: What's been your experience with the platforms themselves that are being used virtually? Are you finding a lot of technical issues? I feel like every time you get on a call, somebody's got a sound issue or a video issue or something of that nature. What's been your experience with that?

DAVID SALMON: They've improved significantly over the past four years. I think when we started, you never saw a virtual meeting prior to Covid. They were so rare. Once when Covid came through, you saw quite a few more of them and they were pretty basic. It didn't allow for much engagement. There were a lot of issues that surrounded them. You're absolutely correct. I think throughout the years the main providers, including those that offer it as a scrutineer, have really refined it. It's become much stronger, and they have really gotten more aggressive in terms of making sure that the training, the experience, the testing is all done well in advance, as opposed to 15 minutes before the meeting, so that it eradicates many of those issues that you and I would have seen over the past 2 or 3 years.

TERESA TOMCHAK: In summary, can you describe what you would say are recommended tips if you have them, for companies trying to deal with their ESG issues?

DAVID SALMON: Yeah. And I think the first thing is you and I would both agree engagement is critical. If you're not engaging, you're just putting yourself behind the eight ball. You're asking for trouble. And even in the terms of activism, if you don't agree with somebody, that's fine. But when they can say that we've never even spoke to management or the board that puts you behind the eight ball, you want to make sure that as a reference that we use is you're wearing the white hat, not wearing the black hat. You want to be in the good. You want to be able to say that we've spoken to them, we've articulated our position. They still continue to acquire stock in spite of the fact that they understand where we're coming from. So, I think that engagement and it needs to go beyond, again, the strategy of where the company is going, maybe the financial aspect, make sure you're speaking to the right people as it relates to voting, as it relates to ESG. When you look at some of these big players, the Blackrocks the State Streets, the Vanguards, they have ESG departments, they have engagement departments that will speak with individuals throughout the course of the year, not only during your voting session. So, I think getting in front of them, building that relationship is probably one of the most critical steps and one that I am continually surprised that it is not done, whether that be at a board level or management level.

TERESA TOMCHAK: When you're talking about engagement, you often talk about institutionals and knowing the right people. Is your recommendation really having engagement at that level, the institutional, your big shareholders, or you also talking about engagement with other shareholders?

DAVID SALMON: I think I'd start off with you key shareholders. And the first thing is people always say, well, how do I start this? What's my first step? And start off with your key shareholders. Maybe look at developing a deck, speaking about your governance, speaking about what your ES plans are and having that dialogue, why you got there. It may even be that you don't have an ESG strategy as of yet and finding it with their position is a lot of the research can be done in advance. And you can have then help us understand what your position is. What's your adherence to this? What are you looking for? So, I think that part of the dialogue with your key institutional investors is critical, but it doesn't mean dismiss. And when you look at activism, activism is not just simply anymore the evil hedge fund from New York, as I paint them into a corner, activism has changed dramatically. It's private equity firms. If you're looking at some of the activism in the Canadian landscape. It's long institutional Canadian investors Letko has been well in that space. CI recently launched some initiatives, you've also seen retail shareholders band together. So, it's changed dramatically and you don't simply want to just isolate one demographic because you don't think that they carry enough weight, or you may just simply overlook them. So, once you start to establish things like your ESG platform, you start to establish any governance platform it allows you to put out things like your corporate social responsibility or environmental reporting and communicate this. I often say that your management information circular needs to be more than a legal document. That's a chance that you have each and every year to communicate to your shareholders. Make it interesting, tell your story, make it your narrative, because ESG is not going away. It is going to continue. Yes, there's pushback. Yes, there's concerns about greenwashing. But this is real. And it is seen as, at the very least as risk mitigation. I think that that needs to be communicated from the board level to all of your shareholders, maybe on a broader level, and not direct one on one engagement as it would be with some of your key institutional shareholders.

TERESA TOMCHAK: When you do get concerns or hear rumors, sometimes it's not even direct. What would your recommendation be for how companies respond in those circumstances?

DAVID SALMON: It's interesting. I just had some discussions in terms of short selling, and I'll steal a phrase from somebody that I really like. When do you break the glass? And I think if you're hearing commentary from any of your shareholders or stakeholders, you should break the glass immediately. I am continually astonished how often we get brought in to something, and we find out that this has been going on for three months, four months, a year. I just don't understand why there would be that delay. I think you need to take these concerns legitimately. Again, wearing that white hat, engage with them, understand what's critical. It may not be relevant, but at least you're taking the right steps, you're putting yourself in a position to defend your actions. Being dismissive of them is at your own detriment. I think you're going to cause some significant issues about that. I think when you're looking at this, how you address them is going to be case by case in my mind. You look at a short seller, do you want to go out there and counter point by point, what they say in the public domain? Well, it could give it oxygen and it may not be the best move. And this goes back to that playbook response. I think you need to look at your shareholder composition. You need to look at your stakeholders, management, your board, the critique that's being levied at you, and take the appropriate response there. But at the very least, a private engagement with that individual, as my parents used to tell me, two ears, one mouth, do more listening than talking. And I think that that's something that is relevant when you have that initial engagement.

TERESA TOMCHAK: And you talk about not being dismissive and not going by a playbook and treating each case on its facts. I'm curious what your comment is with respect to some of what we're seeing in the US, where some of these companies have decided to be aggressive with their shareholders and not only not put forward their proposals but try to go to court to attack them. Curious about your comment on that with respect to ESG proposals?

DAVID SALMON: Well, the approach in the US litigation is never uncommon and you know this from the M&A side of the world where once you announce an M&A transaction, the litigation comes out of the woodwork. So, I can't say I'm entirely surprised by that sort of binary approach in the US. From a Canadian landscape, litigation is generally not well received when you're in an activist file. And I think when you go on the attack against your shareholders, I would like to think that there would have been an early engagement, there would have been a discussion, there would have been the ability to try to come to some negotiated settlement prior to opposing them vehemently and taking it to that next level. It certainly is a bad look, I think, for the organization.

TERESA TOMCHAK: And when you talk about a negotiated settlement, are you talking with respect to the composition of the board or other things? Can you comment on that to the extent that you can, not asking you to tell us any details about confidential settlements.

DAVID SALMON: You know, from what we've seen, I would say at least half of the activist files that we're involved in are settled. And in fact, I'd say it's higher than that, probably closer to 60%. And again, it goes down to what we talked about earlier. But I think when you're looking at that, most people are going to be rational. They don't want to have the reputational risk for themselves. And these can be they can get very, very ugly. Nobody wants to see their face on the front page of The Globe and Mail. So, I think there's always an avenue if you're acting rationally and you're leveraging your advisors. I've often seen where the target is, the CEO or a board member, and it's hard to pull somebody who is an alpha person back from responding. And maybe they can. I hope they can. Most of these individuals are professional senior folks, but are they the best individual to be in the negotiation room when they're the target of the issue? So, I think there's an opportunity between advisors to have those discussions, rational discussions, not only with your clients first and foremost, but also with the other side, and find out what they're really looking for and how to get to a solution that is going to be amicable for everybody, including all the other shareholders.

TERESA TOMCHAK: And when you see discussions happening with the shareholders, who's typically doing those discussions, is it the company? Is it you? Is it counsel? And if it's the company, who at the company? And again, it might be case dependent, but can you comment on that?

DAVID SALMON: Yeah, I think generally you'll see it being led by three parties. I'd say it's generally a director or a manager, a senior manager or CEO, depending on the size of the organization. Absent that, I think legal counsel tends to be involved in these quite a bit more, and legal counsel is removed from the situation in terms of personal attacks. So that's one of the things where we see where they do tend to generate a better result and a better solution. And then in many cases, firms like ourselves have been involved in it because we play in this space, we know a lot of the parties, so we've been able to negotiate a few of them as well.

TERESA TOMCHAK: Dave, so do you have any additional concluding comments that you'd like to make? I know you talked about shareholder engagement being important, not overselling. I don't think those were the words that you used, but not overselling and then just making sure that you're not dismissive of activists. is there anything else you want to add?

DAVID SALMON: You know, I think the only thing I would add, obviously the engagement, don't be dismissive. But also, what we talked about earlier is that which gets tracked, gets measured. So, if you're going to put out information, make sure you're aware of it, don't make yourself vulnerable. And if you are, make sure to address it down the road.

TERESA TOMCHAK: Dave, I've read about some ESG rating agencies. Can you comment on those?

DAVID SALMON: Yes, they can be quite polarizing. I think when we look at the rating agencies, the latest reports are saying there's upwards of about 250 different rating agencies as it relates to ESG. There was a Globe and Mail article that came out last year that talked about the disparity for Canadian companies in terms of the rating agencies, where you can get a ten from one and a one from another, obviously completely polar opposite. So, I think when we're looking at the rating agencies, again, the most critical thing is tell your own story, make it your own narrative. The way these rating agencies generally work is they look at material that you publish and then either take that directly or they do their interpretation of it. So, I think what's more important than having a rating agency tell your story is you tell your story, you build your narrative, you go directly to your shareholders. You can do that through your engagement. You can do that through your sustainability or climate reporting, your CSR reporting. But I think these are things that are going to be highly relevant, that you build your own narrative. When you look at some of these things that are coming out from the rating agencies, you're not going to be able to look at the 250 that are out there. You just don't simply have the time or the resources. So, posting certain scores from the rating agencies to me doesn't seem relevant because there could be another rating agency that could be saying the exact opposite thing about you. If you're going to go out there, it's build your story. And then, of course, as we stated earlier, if you're going to put something out there and Teresa, you spoke to this quite well in your tips for activism video that you did. And that was if you're going to put information out there, make sure that you follow up on it, make sure that it's accurate, and make sure that you're going to keep disclosing that information.

TERESA TOMCHAK: And can you comment on the rating agencies versus the proxy advisers? Do they work together? If you're a company, should you be paying attention to one, not the other? How are they intertwined, if at all?

DAVID SALMON: Certainly, the proxy advisors have their own scores as it relates to E, S, and G and for that matter, one of the things that ISS has recently done is they now have a cyber security score as well. So, they are actively engaged. They do it on a point system based on the disclosure that's out there. But there are many, many others. MCSI, a host of other rating agencies that are putting out that information and you really not necessarily aware of them unless you're subscribing to them all. So there's a broad, broad swath of those various rating agencies.

TERESA TOMCHAK: And does Glass Lewis have one?

DAVID SALMON: They do. Yes. They also track and monitor your ESG scores.

TERESA TOMCHAK: And for companies, would they be getting scores from both ISS and Glass Lewis?

DAVID SALMON: You'll get them in your annual report. So, if they generate a shareholder vote report i.e. where they make a recommendation in terms of your voting, you will see the quality score in ISS and the score for Glass Lewis in those reports as well.

TERESA TOMCHAK: I'm curious because the rating agencies, these 250 rating agencies that you referred to, have this broad disparity. Are you finding that there's a wide disparity with ISS and Glass Lewis or they're closer than some others are?

DAVID SALMON: I think they're generally closer. Their models are not too far different from what we can tell. But again, they're taking information that is publicly available and then they're interpreting through their model.

TERESA TOMCHAK: Well. Thanks, Dave. I really, really appreciate you joining me today and answering all of my questions. It was engaging as always, and thanks.

DAVID SALMON: This was fantastic. Thank you for the opportunity. I really enjoyed it.

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