Fighting Shareholder Populism

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On the surface, Jeff Gramm’s book Dear Chairman is just a fascinating history of the investor rights movement told through activist letters dating back to the 1920s. As such, at least according to Charles Schwab, “It should be required reading for anyone who wants to participate in our great ownership system, as an investor or manager.” But you could argue that the book is equally suitable for inclusion on a reading list aimed at students of modern literature.

In an article about how we should view investor letters, New Yorker contributor John Lanchester highlights the changing nature of activist writing that Dear Chairman documents. In the early days, Benjamin Graham, the father of shareholder activism, took on entrenched leaders at targeted companies by striking a sincere and moral tone with prose that Lanchester describes as “Wharton School of Business meets Edith Wharton.” But by the mid-1980s, investors like Ross Perot were expressing their beefs with management in bullet points, and over the next two decades, activist penmanship took on the tone of Internet flame wars. In 2005, for example, investor Dan Loeb—aka the Hunter S. Thompson of activist writing—told one corporate boss: “It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.”

As Lanchester sees it, these changes in style and tone warrant considering investor correspondence as a literary genre.

Stephen Keith begs to differ. Indeed, while the seasoned corporate executive and director agrees that there is plenty of merit in studying the history of activist writing, he just can’t wrap his mind around calling it literary—which implies having intellectual or artistic value.

Keith’s opinion on the matter isn’t objective. As the former CEO of GrowMax Resources, a publicly listed Canadian company that used to focus on the fertilizer market in Latin America, he recently fought a nasty proxy battle against BullRun Capital, a relatively unknown British Columbia-based activist firm led by a former RCMP officer named Kulwant Malhi. Earlier this year, the activist convinced GrowMax’s shareholders that the company’s former focus on fertilizer was, well, crap. And as far as Keith is concerned, Malhi’s writing style has nothing in common with the investor prose of yesteryear.

True enough. During the heat of BullRun’s aggressive campaign to oust Keith, Malhi sent his adversary a series of profanity-riddled texts in which he called Keith a “piece of shit” and promised to use all available resources to seize control of GrowMax, while ominously noting he still had friends at the RCMP.

The activist frequently highlights his background as a former drug enforcement officer. But his relationship with the Mounties is cloudy, considering he retired from the force in 2010 following a long suspension related to impaired driving and hit-and-run charges that were thrown out due to court delays. And had he not retired, the RCMP reports, he would have faced an internal disciplinary hearing over the affair.

Whatever the state of Malhi’s current relationship with the force, the activist didn’t need help from his former employer to seize control of GrowMax. He didn’t even need a detailed alternative strategic plan for the company. All it took to oust Keith and his board was a populist revolt sparked by unsubstantiated accusations of wrongdoing that spread to unregulated investor forums with about the same reliability as a Fox and Friends report on the Trump administration. To fuel the revolution, of course, Malhi promised to use the unprofitable venture’s dwindling cash reserves to reward shareholders with a special dividend if they simply voted for change.

Welcome to the grave new world of what Keith calls “proxy populism.”

Most board meetings don’t start with a chairperson screaming, “Let’s get ready to rumble.” But it’s not a bad idea. After all, it was always only a matter of time before the spread of populism that has changed the political landscape globally spilled over into the world of corporate governance. And as a result, proxy advisory firms and executive development experts say managers and directors need to be ready to defend themselves like never before as disruptive forces threaten to stretch shareholder patience to the limits.

“You really can’t overstate the need for leaders to communicate effectively in the digital age, especially if the ship looks like it is drifting,” says Ivey Business School Professor Gerard Seijts. During Ivey’s Disruption Roundtables, Seijts notes that CEOs such as GM’s Mary Barra and RBC’s Dave McKay have stressed the need for organizations to disrupt themselves. “And as internal and external pressures force firms to shift strategic gears more frequently, it is only natural for stakeholders to be concerned and question management. The problem is that traditional means of communications have been disrupted by social media, which is why any digital-age corporate strategy needs to be supported by digital-age communications, especially in a proxy fight.”

A corporate proxy battle occurs whenever an activist shareholder attempts to oppose management decisions and/or install alternate directors. To date, the most expensive of these contests was between Procter & Gamble and U.S. activist investor Nelson Peltz. As CEO of Trian Fund Management, Peltz oversees P&G shares worth billions, and while aggressively campaigning for a board seat, he promised to boost shareholder value through restructuring and cost-cutting. After both sides spent a combined $60-plus million, the 2017 vote was close enough for P&G to claim victory—but the company gave Peltz a seat anyway.

“Today’s proxy fights, like political elections, are not always decided by established truths or logical voter choices.”

Canadian proxy battles have yet to come close to the P&G price tag. Nevertheless, since the turn of the century, the annual number of proxy contests has jumped significantly (along with the number of times that companies quietly cave to activist demands to avoid a public battle) in this country, which has long been considered the land of milk and honey for activist investors thanks to regulatory advantages. And with the spread of populism, managers can now find themselves entering the ring at an even bigger disadvantage—because today’s proxy fights, like political elections, are not always decided by established truths or logical voter choices.

The frequency of proxy battles started to increase dramatically following the 2007/2008 global financial crisis, when the cash available for takeovers was scarce. Since then, various strategies have been developed to win shareholder support. As a 2011 Canadian Lawyer article on activist weapons development noted, one of the more dubious strategies created was dubbed the “scorched-earth approach” since it is based upon a dissident’s ability, relatively speaking, to say whatever they want when attacking a company’s governance and management.

The development of this strategy led to increased litigation as incumbent leaders turned to the courts to set records straight. But as I mentioned in a recent Financial Post Magazine column, court rulings often mean little in the world of proxy battle populism—where anyone with technical abilities can pull a Putin and influence corporate elections via social media.

If this doesn’t sound like something worth worrying about, try reading Yuval Noah Harari’s Sapiens: A Brief History of Humankind, which examines how Homo sapiens suddenly managed to rise to the top of the food chain. As the Israeli historian explains, until about 10,000 years ago, the world was home to several different types of human. Like us, our sibling species used tools, walked upright, and possessed the ability to learn. So, what made us outlive other forms of humanity? It wasn’t the amount of grey matter in our heads, since other species had bigger brains. Was it just luck? Not as Harari explains it. The difference was flexibility of language. That spawned gossip, fiction, and myths, which empowered Homo sapiens to form large cooperative groups of individuals not based upon intimate relationships.

As Harari writes:

 “The ability to create an imagined reality out of words enabled large numbers of strangers to cooperate effectively. But it also did something more. Since large-scale human cooperation is based on myths, the way people cooperate can be altered by changing the myths – by telling different stories. Under the right circumstances, myths can change rapidly. In 1789, the French population switched almost overnight from believing in the myth of the divine right of kings to believing in the myth of the sovereignty of the people. Consequently, ever since the Cognitive Revolution Homo sapiens has been able to revise its behaviour rapidly in accordance with changing needs. This opened a fast lane of cultural evolution, bypassing the traffic jams of genetic evolution. Speeding down this fast lane, Homo sapiens soon far outstripped all other human and animal species in its ability to cooperate.

What’s my point? Simple. Since spreading misinformation isn’t a legitimate management strategy, the ability to create new imagined realities isn’t shared equally between opponents during a proxy fight.

There is no question that ethical shareholder activism plays an important role in the pursuit of good corporate governance. But not all activists play fair, and existing securities laws do not adequately address the fact that control of public companies, along with their cash and assets, can be won by storytellers willing to mislead shareholders and foster discontent without providing anything near the level of disclosure typically required when raising money from retail investors.

As a result, today’s boards need to understand the power of gossip and myths in order to proactively prepare for the kind of populist revolutions they can ignite. Keep in mind that once any activist gains a foothold in the boardroom, the likelihood for executive turnover increases. An FTI Consulting study of 300 campaigns between 2012 and 2015 found that CEOs were three times more likely to be replaced within 12 months after an activist had been named a director.

This article examines the role imagined realities played in two recent proxy battles, then offers practical advice on how public companies can survive questionable attempts to incite a populist uprising.

GrowMax vs. BullRun

The seeds for a populist shareholder revolt at GrowMax were planted long before Keith was hired. Launched as a private venture called Americas Petrogas in 2005, the company went public on the TSX Venture Exchange via a reverse takeover in 2008. At one point, its shares traded at more than $4. But the business long lacked direction, with a mix of oil, gas, and fertilizer assets spread across Argentina and Peru. By 2016, when the company rebranded under the GrowMax name to focus on the fertilizer market, you could buy its shares for less than a quarter. And on August 31, 2017, when Keith was put in charge of leading company effort to start a new life as an industry consolidator in Latin America, the stock was worth about a dime.

Simply put, Keith—a geological engineer with over 20 years of experience working as an investment banker, executive, and director in the natural resources sector—signed on amidst an industry downturn to create value for shareholders by swallowing operational phosphate and potash assets at depressed prices before the supply and demand equation for fertilizers improved due to global population explosion and the decreasing availability of arable land. This plan fit well with the interests of the IFFCO (Indian Farmers Fertiliser Cooperative), which was GrowMax’s largest shareholder, with a 15 per cent stake when Keith took charge.

As GrowMax’s former boss explained during an interview with industry analysts in 2017: “I am confident that the markets will come back, but until then, we can focus on the Peruvian market.” At the time, the company was still burning cash. But selling off oil and gas assets had left working capital of $50 million. And that war chest opened the door to making strategic acquisitions before agricultural markets turned.

While seeking opportunities and planning for growth, Keith cut costs, including executive salaries and director fees, which were reduced by approximately 66 per cent from 2015 levels. He also refreshed the board, bringing in independent directors with significant operational and governance experience in natural resources, renewable energy, finance, and real estate. By the summer of 2018, GrowMax’s new board had identified a potentially transformative deal, involving an all-share acquisition of Brazil’s PrimaSea Holdings Ltd., which controlled a multi-generational operation with existing revenue streams in two growing premium market segments: plant nutrients and animal feed.

In the eyes of management, this deal would pave the way for a future with a stronger balance sheet, share price increases, sustainable dividends, and new opportunities as an industry leader. But it was a long-term play based on buying another unprofitable fertilizer venture that required shareholders to wait for markets to turn. And while Keith was negotiating terms, GrowMax’s cash was attracting investors who had no interest in the fertilizer business.

On July 6, 2018, when GrowMax shares were trading around $0.13—representing about a 30 per cent increase since Keith was named CEO—the company received a requisition for a special meeting of shareholders from BullRun. Announcing its intention to protect investors from what it billed as a self-serving team of managers and directors with excessive salaries and no vision, Malhi’s firm proposed ditching GrowMax’s raison d’être and using its capital to make unspecified acquisitions in “high growth sectors,” like the cannabis market, “where retail and institutional investors are investing.”

The dissidents’ requisition demanded a vote on the matter by the end of August. But Keith and his board set a late September date for the company’s annual general meeting (AGM), buying time to try to force BullRun to outline more than a “barebones” business plan before asking shareholders to decide on the future of the company. But instead of offering more significant details in its proxy circular, the activist firm implied the company was overpaying unethical directors. BullRun, for example, promised to cap director fees at $100,000 while reviewing past deals to see if they had been “negotiated in bad faith.” (According to Keith, GrowMax’s highestpaid director at the time received under $50,000 annually as a committee chair plus an additional $1,500 per meeting.)

As the AGM approached, BullRun gave investors another thing to think about by announcing that its board nominees believed they could, if elected, issue a cash dividend in the amount of $0.075 per share and still serve the interests of all shareholders by simply making great investments in other sectors. Doubting this deployment of capital was in the best interests of investors who had bought GrowMax stock years ago, management then delayed the AGM after concluding the proxy contest had been tainted by misinformation and weak disclosure.

Long story short, the fight ended up in court. After examining accusations of improper behaviour levelled by both sides, an Albertan judge determined that Keith and his board had acted prudently and professionally while finding that the activist firm had issued materially misleading information related to the possibility of paying the promised dividend. With that cleared up, BullRun was ordered to pay court costs and GrowMax was ordered to let shareholders vote on who they wanted to run the company.

When this battle was covered by Financial Post Magazine, BullRun declined to discuss communications between the two companies, or address questions raised by proxy advisory firms, arguing the baseline position of these third-party shareholder advisors “is to support the incumbent.”

What did proxy advisory firms think? Institutional Shareholder Services (ISS) and Glass Lewis disagreed over the merits of GrowMax’s proposed PrimaSea acquisition. Looking forward, ISS concluded the deal was an attractive opportunity, especially with the expertise on GrowMax’s refreshed board, to acquire an operational business with scalable production capacity, proven harvesting, processing, and sales capabilities, and high-margin products commercialized internationally. But Glass Lewis focused on trailing revenue multiples and advised shareholders to reject the dilutive nature of the proposed transaction after concluding its financial aspects were not justified.

“We are concerned the Dissident may be attempting to gain control of the Company’s cash balance for self-serving purposes.”

That said, both ISS and Glass Lewis warned shareholders against handing control of the company to BullRun. After examining GrowMax’s new strategic direction, along with its performance relative to peers under Keith and the recent positive changes to the company’s governance, ISS concluded that there was no reason to portray current leadership in a negative light. And given BullRun’s questionable criticism of the company along with its lack of a detailed alternative business plan, the proxy firm advised shareholders not to see a compelling case for change. Glass Lewis also raised the alarm over BullRun’s failure to articulate a clear strategy, advising shareholders to question the credibility of the activist firm’s stated case for board representation as a relatively new shareholder. In its report, Glass Lewis stated: “We are concerned the Dissident may be attempting to gain control of the Company’s cash balance for self-serving purposes.”

But this was a fight for retail investors, who rarely read court decisions or proxy advisory recommendations. And on March 8, 2019, GrowMax shareholders voted to trust Malhi to serve the best interests of all shareholders. Before the vote, Keith tried to get investors to focus on the facts and consider the potential of a fertilizer-focused future. But too many shareholders couldn’t hear his pitch over populist chants of “drain the swamp.” Keep in mind that when Joe and Jane Average seek investor information, they typically do so online, where Keith was repeatedly blamed for GrowMax’s long history of value destruction despite having run the company for less than a year when BullRun launched its activist campaign.

Some investors were simply too frustrated to consider management’s position. As one shareholder on the Stockhouse investor forum put it: “I have ridden this tired horse far too long and I’d rather saddle up with a Bull and take my chances. Nothing personal.” But other investors were convinced that they were being played for fools by managers happy to let “shareholders eat cake.” Throughout this fight, the impression that Keith was a corporate snake was reinforced by misinformation posted online, where investors continued to express outrage over the accusations that BullRun aimed at Keith and his board even after they were dismissed in court. One Stockhouse user even falsely reported that the court ruling had found management guilty of oppression.

After Malhi became GrowMax’s new chairman and CEO (with a combined salary over $100,000), the honeymoon with investors was short lived, and not just because he reduced his stake in the company from 12.23 per cent to 3.4 per cent in May. GrowMax’s shareholders were told to expect strategic deployments of capital focused on cannabis and hemp ventures that were “in favour with investors and offer attractive returns.” But when the company’s first investment outside the fertilizer market was announced, the target firm was a speculative private venture from BullRun’s portfolio, which is developing tools for emergency responders with Malhi as its board chair. According to a press release, the $1.05 million deal was exempt from “formal valuation and security holder approval requirements” since the money being invested was less than 25 per cent of GrowMax’s market capitalization.

Shareholders were also recently disappointed by the sudden resignation of Alfred Wong, a former BullRun executive who had been named a director and president at the supposedly new-and-improved GrowMax. What about the promised $0.075 dividend? The payout was reduced by more than 50 per cent in early September, when investors were handed $0.03 per share. And after watching Malhi reduce his ownership stake while investing their money in BullRun’s portfolio, GrowMax shareholders on Stockhouse are now debating whether there is any good reason for them to expect anything more than a few pennies out of this rebellion.

Johnston Press vs. Custos

Our second case—which examines a boardroom battle between a self-proclaimed champion of shareholder rights and Britain’s Johnston Press, a 251-year-old media empire that publishes hundreds of newspapers across the United Kingdom, ranging from The Scotsman to The Falkirk Herald—highlights the fact that populist sentiment is not just something struggling junior companies need to worry about.

In November 2018, after Johnston Press failed to find a buyer willing to cover its liabilities, control of the company was handed to a group of bondholders led by billionaire Steven Tananbaum, whose New York hedge fund GoldenTree Asset Management had negotiated a debt-for-equity restructuring that wiped out previous shareholders. Following this transaction, the company was reborn as JPIMedia, emerging from months of restructuring with its debt cut to $139 million due in 2023, rather than $359 million due in a matter of months. The new owners also injected $57 million in cash into the business, making the deal worth $277 million, which was more than any non-debtholders were willing to offer.

Despite the company’s new lease on life, Tananbaum wasn’t exactly welcomed as an ideal proprietor for the storied company. As a staunch capitalist from across the pond, more than a few Brits assumed he was unlikely to passionately care about local journalism or issues. As The Daily Telegraph noted, GoldenTree’s CEO “divides his time between a five-bedroom, six-bathroom apartment overlooking Park Avenue in Manhattan and a beachfront mansion in Palm Beach, Florida,” while running a business “driven purely by financial returns and usually over a short timescale.”

But while most company stakeholders don’t know it, they should probably thank their lucky stars that bondholders ended up in control. After all, it could have been worse—much worse—if the publisher and its assets had been entrusted to Sweden’s Custos Group, which was the media company’s largest shareholder prior to the restructuring.

When Johnston Press launched a strategic review of its limited options in March 2017, Custos had just started entering the media game. About a month earlier, under the leadership of a controversial Swedish billionaire named Mats Qviberg, the firm spent about $6.8 million to acquire Sweden’s Metro newspaper, which had famously sparked a worldwide industry revolution after launching as a freesheet targeting transit users in 1995.

Shortly after Custos bought Metro, Qviberg was pushed out of the investment company by an equally controversial Norwegian named Christen Ager-Hanssen, who somehow managed to acquire Qviberg’s controlling stake in the firm for one Swedish kroner, according to local media reports.

Ager-Hanssen never had anything to do with developing the disruptive Metro business model that spread internationally like wildfire. He also wasn’t responsible for building the Swedish version of Metro into a publication with a daily readership of almost one million. Nevertheless, just over a year after taking control of Custos, he started scooping up shares in Johnston Press at bargain-basement prices, and then set out to convince panicking stakeholders to see him as Odin’s gift to distressed media empires.

In multiple press interviews and social media postings, Ager-Hanssen drummed up populist support to oust Johnston Press chairwoman Camilla Rhodes and other company directors by labelling them corrupt and incompetent “fee suckers.” Using his ownership stake in Metro to bill himself as an industry visionary, he insisted the company could easily be saved by someone with his track record and bold thinking, while pushing a vague plan to save British journalism by trading promotional opportunities to entrepreneurs in return for equity stakes in their ventures. The Norwegian also garnered attention by claiming to have Chinese lenders already lined up to refinance the company’s massive debt at lower interest rates if shareholders simply put him in charge.

Early on in this tale, Ager-Hanssen appeared to be seriously attempting to force a real proxy fight. But a clause in Johnston Press’s bond agreements required the immediate repayment of debt in the event of a shareholder coup that ousted most of the existing board members. Without explaining why that poison pill posed a problem since Custos claimed to have new lenders standing ready, Ager-Hanssen insisted the company had unethically blocked his initial rescue attempt while vowing a takeover by Custos was still inevitable because he was destined to become the Rupert Murdoch of the digital age.

“Winter is coming,” Ager-Hanssen repeatedly warned the British company’s board, deploying the battle cry used by noble lords of the North on TV’s Game of Thrones. But while promising to use his brilliance to save the company for months on end, Ager-Hansen never actually filed a proper request for a special meeting of shareholders. In fact, the Norwegian never even handed the company an official proposal to address its problems. Instead, he simply kept generating publicity for himself—while actively seeking investors in Custos.

“If you need to make a GoT comparison, Ager-Hanssen isn’t anything like the heroic Jon Snow—he is the Night King, the destructive leader of brain-dead zombies.”

There was never good reason for anyone to see Ager-Hanssen as a trustworthy potential saviour. As I pointed out when covering this story  in the Financial Post, he has a Trumpian fondness for fibbing, and as someone who sees most other people as mindless “jellyfish,” who drift wherever emotional currents take them, he has long practiced the fine art of manipulating journalists looking for a good story, movers and shakers seekin

g greater glory, and investors in need of a corporate knight in shining armor. As a result, if you need to make a GoT comparison, Ager-Hanssen isn’t anything like the heroic Jon Snow—he is the Night King, the destructive leader of brain-dead zombies.

According to its ever-changing marketing material, Custos has a long prestigious history. But that’s misleading because the famous firm sold its name in 2004 after merging with another investment house. Under Ager-Hanssen, Custos claims to be “100% equipped with deep insight into business models, AI, Big Data, Technology, Leadership, Knowledge and Network Capital.” And yet, during the battle for Johnston Press, the firm’s website was unsecured, with a blank portfolio page. “It looks like it was made by a teen with zero design or branding acumen,” noted a corporate tech specialist, who reviewed the site for the Financial Post.

Furthermore, while making life difficult for the leadership of Johnston Press, Ager-Hanssen was being pursued by tax authorities in Scandinavia, where he has a reputation for being a modern-day Viking linked to a string of business failures, including one that cost Sweden’s pension system a historic loss during the dot-com boom. As one local journalist put it, he’s widely seen as “a kind of hostile takeover guy who happily drains company resources to line his own pockets.”

In North America, the Norwegian’s reputation is even more notorious. In 1999, Ager-Hanssen conned a leading Canadian PR firm into issuing fake material news on behalf of a Swedish tech company called Netsys, which had quietly replaced him as managing director months earlier over conduct unbecoming a corporate officer. Netsys—a joint venture between Ager-Hanssen and the venture arm of Sweden’s pension system—was always just a Scandinavian reseller of software developed by Canada’s Open Text, but Ager-Hanssen wanted the world to think it owned the software and was ready to start selling it globally at an 80 per cent discount to Open Text’s prices. The goal was to drive down the share price of the Canadian company, which was forced to defend itself against a takeover via an expensive share buyback program.

I covered the Johnston Press story for the Financial Post because I worked at the PR firm that was manipulated into helping Ager-Hanssen manipulate the Canadian market in 1999, and briefly led investor relations for Cognition—his previous investment firm—which skillfully attracted naive investors to a pre-IPO story designed with smoke and mirrors during the tech boom in 2000. Back then, my repeated attempts to blow the whistle on this fact fell on deaf boardroom ears, and I eventually found myself ejected for allegedly lacking the “gravitas” required to work finance in London’s Square Mile.

After starting a new career as an investigative journalist focused on exposing corporate tomfoolery, I helped institutional investors go after the Swedish pension system for unleashing Ager-Hanssen on the world. And when the related stock manipulation lawsuit was privately settled, I exposed the Open Text/Netsys affair in a Canadian Business magazine feature that referred to Ager-Hanssen as Norway’s Gordon Gekko—a nickname that he shamelessly promotes to this day. (For the Wolf of Wall Street generation, Gordon Gekko was the unethical market manipulator played by Michael Douglas in the movie Wall Street.)

After Ager-Hanssen started investing in Johnston Press, company officials were suspicious “on first contact,” and not just because the Custos website failed to impress. Unfortunately, British journalists didn’t dig deep enough, and they presented Ager-Hanssen as a controversial but legitimate contender for control. And while the press was billing him as a billionaire media tycoon with new financing and digital-age ideas that could save the company, they repeatedly published his unfounded allegations that Johnston Press was being run into the ground by self-serving crooks.

This mythical narrative was reinforced early on when a company spokesperson made the mistake of telling a reporter: “As a major new shareholder, and with his experience, we of course welcome a conversation with Christen and a meeting has been set up.” Insiders quickly realized it would have been better to have said the company is always open to credible ideas properly presented in the best interests of all stakeholders. Ager-Hanssen’s credibility was further boosted by big-name Brits that he claimed were ready to join his cause. At one point in the battle, Alex Salmond, Scotland’s former first minister, and Steve Auckland, a former Evening Standard chief executive, were put forward as proposed members of Ager-Hanssen’s dream team.

The unexpected resignation of Johnston Press’s CEO Ashley Highfield—who Ager-Hanssen had repeatedly attacked as an over-paid buffoon before he stepped down in May 2018—didn’t help matters. After signing on to the lead the company’s efforts at digital transformation in 2012 and taking it through an earlier restructuring in 2014, the former BBC executive managed to cut debt almost in half. He also made a bold move to acquire Britain’s i newspaper, which helped dramatically improve Johnston Press’s books. But incentives triggered by these positive accomplishments briefly made Highfield one of Britain’s best paid media executives, and that allowed Ager-Hanssen to mock him in the press and on Twitter as “Cashly Highfield,” fueling resentment amongst investors who had watched the company’s market value crash by more than 90 per cent under his watch.

With the remainder of Johnston Press’s debt coming due in early 2019, more than a few stakeholders desperately wanted to believe the story being spun by Ager-Hanssen. Long-term shareholders naturally felt they had little to lose. But naive investors followed Custos into the stock, and they lost everything when the media empire fell into the hands of GoldenTree and other lenders as a result.

Simply put, while the board of directors of Johnston Press was trying to find a legitimate solution that would ensure the media empire’s survival and limit the hit to all concerned, they were forced to deal with a manipulative shareholder who falsely claimed to be a champion of good governance with visionary expertise in media-sector disruption, and who insisted he could easily pay off bondholders and restore revenue without a painful restructuring.

When Johnston Press was looking for buyers, Ager-Hanssen promised to block any sale of assets that didn’t meet his approval. After the company struck a deal with bondholders, the Norwegian attacked the move as a “pre-planned corporate theft,” vowing to take legal action to protect the media empire’s employees from their new hedgefund masters.

“For us, this is not about money,” a Custos statement said. “It is about good corporate governance for the benefit of all; by that we mean a company’s shareholders and employees collectively and not, as the disgraceful Board of JP have demonstrated, only the bunch of incompetent, arrogant, self-serving directors whose only goal has been to enrich themselves and their pals on other people’s expense.”

Meanwhile, as this statement was being reported in Britain, Sweden’s once-mighty Metro was literally being trashed by mismanagement. This summer, according to local media reports, the general public started using the legendary newspaper’s empty street delivery boxes as garbage bins after Metro was driven out of business by unpaid bills. Blaming unions and previous owners for the closure, Norway’s self-proclaimed Murdoch of the digital age now insists, “journalists no longer fit into our business plan.”

Countering Populism

As Justice L. Bernette Ho of the Alberta Court noted while presiding over the fight for control of GrowMax, proxy battles have become “increasingly common and sophisticated in Canada, as incumbents and dissidents wage war for shareholder votes, relying upon strategic and tactical guidance of legal, communications and proxy specialists.” But even with a top team of advisors, facing off against an activist firm playing shareholder frustrations can seem futile at companies with large numbers of retail investors. After all, while it seems obvious that ensuring the long-term interests of a business and its stakeholders requires being careful about voting for a change in control, explaining the big picture to disgruntled investors screaming “lock them up” is no easy task.

In this type of situation, you can quickly find yourself fighting with one hand tied behind your back. “I am not sure why anyone would want to list a company in Canada,” Keith says, noting “the costs and scrutiny are significant, while the benefits are few, especially in a weak market. In a lot of situations, it makes more sense to stay private.”

Despite his recent experience, the former CEO of GrowMax still passionately believes in the right of shareholders to remove corporate directors. But he thinks regulators need to seriously step up to ensure proxy fights can’t be won by spreading misinformation. “Regulators focus on public companies, reviewing every press release and public statement,” Keith says, but dissidents and their anonymous online supporters are pretty much left free “to say and do anything they want.” And until that changes, companies can’t rely on shareholders acting rationally when an activist plays the populist card.

I originally covered the battle for GrowMax in my Financial Post Magazine column because one naive investor on the Stockhouse forum insisted that someone in the mainstream press should expose the company’s previous leadership as corporate charlatans. An objective examination told a different story, but it was published after the battle was lost. In the Johnston Press case, there was plenty of attention from professional journalists, but it ironically worked against the media empire. According to an inside source, company officials are still dumbfounded by the weak British media coverage of Ager-Hanssen’s past, which has not been fully reported in the United Kingdom to this day.

The lesson here is that public companies need advisors who understand how to ensure facts dominate fiction. In my humble opinion, it isn’t a bad idea to have someone with a journalism background on corporate boards. Corporate communications experts have a lot to offer, but professional journalists are experienced at asking the right questions and they know how to look for trouble. That said, the best defense against a populist uprising at any public company is managing shareholder expectations before a proxy battle starts.

As proxy strategist firm Kingsdale Advisors pointed out in “Encountering the Evolving Shareholder and Governance Landscape,mom and pop investors can make the difference in contested situations, acting as a structural deterrent to activism or a hostile bid. But the go-to source of information for this crowd is online opinion—not court rulings, corporate documents, balanced media reports, or independent expert advice on how to properly assess proxy items about governance or compensation alignment. So, getting the retail crowd onside and prepared to defend you requires a comprehensive retail investor relations program that actively counters misinformation while effectively helping all shareholders understand how the company is working to serve their interests. And communicating your story honestly, effectively and convincingly needs to be a priority year-round, not just an initiative tied to annual meetings.

Unfortunately, since retail investors have traditionally sat on the sidelines as passive investors, too many investor relations programs still focus on institutional stakeholders. Furthermore, when support from the average investor is required during contested situations, the information that they typically receive is written in lawyer speak, which often confuses the situation or simply remains unread after being lumped in with annoying junk mail. This doesn’t incentivize retail shareholder participation.

As Kingsdale put it: “Simply checking a box and sending out what your lawyers and bankers tell you to without critically reviewing it from the perspective of a mom or pop shareholder is a missed opportunity. We are amazed at the number of Q&As in circulars we see that require shareholders to sift through references to multiple acts when a simple yes or no might be all that is required. It’s important not to confuse disclosure with communication.”

Before an activist arrives, as FTI Consulting highlights in “Ten Strategic Building Blocks for Shareholder Activism Preparedness,” companies also need to actively assess vulnerabilities that can fuel a shareholder rebellion. And today, that means monitoring frustrations with performance to see if they have shareholders ready to trust anyone but incumbents to make companies great again.

Once a populist proxy battle starts, of course, companies now need to campaign for support like political parties that skillfully take the fight directly to voters. And when facing off against an activist with a questionable agenda, as one source involved with the Johnston Press restructuring notes, it pays to be prepared to trust your gut. “There will be a publicity battle and you’ll be on the back foot. Agree on your strategy for engaging or not engaging and stick with it. Try to keep your patience, your nerve, and your dignity. Good advice helps.”

3 responses on “Fighting Shareholder Populism

  1. Niel Colins

    “Jane and Joe Average”, “Mom and Pop investors”… language eerily similar to the “basket of deplorables.” These ignoramuses should trust the “ruling elite” who pontificate from ivory towers. Because retail investors are too uneducated, ignorant, and unsophisticated to properly discern puffery and misrepresentations during proxy battles. They are gullible and believe everything they read on stock forums, so they need the intelligent grads from Ivey to guide them.
    Here’s a simpler explanation: retail “mom and pops” are actually more sophisticated than you think, and they are growing impatient seeing their savings leaked into the hands of execs who care more about their own pockets than their investors.

  2. Tom Watson

    Thanks for reading, and I appreciate your perspective. All investors deserve respect, so “deplorable” is not a word I would ever use to describe retail investors. This article is aimed at the deplorable actions of some professional market players. Keep in mind regulators have long distinguished between retail investors, accredited investors and professionals, which is why disclosure rules exist to protect less experienced market participants. And the goal here is to identify a hole in oversight that can be used by unethical players to manipulate frustrations, which happens. Also, while IBJ is published by the Ivey Business School, this publication is independently managed. Thanks again for reading.
    Tom Watson

  3. Marvin Marke

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