Tilting at Windmills or Contested Norms? Dissident Proxy Initiatives in Canada

• Author: Dean Hennessy,Kimberly Bates
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00810.x
• Date: 01 July 2010
• Published date: 01 July 2010

Tilting at Windmills or Contested Norms?

Dissident Proxy Initiatives in Canada

Kimberly Bates* and Dean Hennessy

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Do shareholder activists inf‌luence standards of legitimacywith Dissident proxy initiatives? What

are the antecedents and consequences of Dissident proxy initiatives?

Research Findings/Insights: Weuse a longitudinal Canadian sample to evaluate the dynamics of Dissident proxyinitiatives.

Firms with lower legitimacy are more likely to receive governance- and performance-oriented Dissident proxy initiatives.

Firms with higher legitimacy were more likely to settle proxy initiatives of all types, and avoid publishing activist

shareholders’ concerns to all shareholders, but this relationship did not hold for governance-oriented proposals. Firms that

received more governance- and performance-oriented proposals subsequently had lower legitimacy.

Theoretical/Academic Implications: Dissident proxy initiatives are legitimation contests, where shareholders contest the

legitimacy of corporate management’s conduct. The dynamics that produce proposals and management responses are

consistent with the predictions of institutional theories of legitimacy, institutional entrepreneurship, and legitimation

contests. Because the ownership structure of Canadian corporations makes passage unlikely, they resemble a ritual for

inf‌luencing legitimacy of a wide variety of practices.corg_810 360..375

Practitioner/Policy Implications: Management’s response to Dissident proxy initiatives makes a statement about the

legitimacy of their conduct. Settling proxies may enable management to contribute to the acceptance or rejections of

emerging practices. Management should consider whether attempts to decouple adoption of some practices from core

operations are wise in the long term. Shareholder activists should consider whether managementis seeking to ceremonially

adopt policies demanded in dissident proxies.

Keywords: Corporate Governance, Institutional Theory, Shareholder Resolutions, Legitimation Contest, Canada, Proxy

Fights

INTRODUCTION

What do dissident proxy initiatives accomplish, really?

Most do not pass, and are often dismissed as “gadf‌ly”

activism by those within the boardroom, even when

acknowledged legal experts lead initiatives (e.g., Colvin,

2007). Dissident proxies propose to change corporate man-

agement’s policies on everything from the identity of the

auditor, to executive compensation, to the composition of

the board, to the disclosure of data on human rights. If the

purpose of each and every initiative were to gain enough

votes to pass, then f‌iling them would be ill-considered at

best, becausef‌iling to win def‌ies rationality. Clearly, winning

is not the point of the exercise. Yet most countries within the

Anglo-American corporate governance sphere have similar

rules for f‌iling dissident proxy proposals, and many are f‌iled

ahead of annual general meetings. Through confrontation on

a wide variety of topics, activist shareholders contest how

management runs the corporation, without the expectation

of winning proxy initiatives.

Within Anglo-American corporate governance, the sepa-

ration of ownership and control (Berle & Means, 1932)

creates an agency problem (Jensen & Meckling, 1976) that

has come to def‌ine the corporate governance problem: that

managerial agents may fail to act in the best interests of

shareholders (Dalton, Hitt, Certo, & Dalton, 2008; Shleifer &

Vishny, 1997). The agency problem itself has become insti-

tutionalized as a logic or rhetoric that dominates approaches

to practice, policy, and research into corporate governance

(Dalton et al., 2008; Shapiro, 2005). Yet, while the framing of

the agency problem has achieved a taken-for-granted status,

decades of research have failed to produce convincing evi-

dence that it can be solved (Dalton et al., 2008; Dalton, Daily,

*Address for correspondence: Trent University, Business Administration, 1600 West

Bank Drive, Peterborough, Ontario,Canada K9J 7B8. E-mail: kimberlybates@trentu.ca

360

Corporate Governance: An International Review, 2010, 18(4): 360–375

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00810.x

& Cannella, 2003). The theory proposes three primary

approaches to solving agency problems through corporate

governance: independence of board members to better

monitor management (Fama, 1980; Fama & Jensen, 1983a,

1983b; Jensen & Meckling, 1976; Mizruchi, 1983); equity

incentives to align the interests of shareholders and manage-

ment (Fama & Jensen, 1983b; Jensen & Meckling, 1976); and

the market for corporate control (Fama & Jensen, 1983a;

Jensen & Ruback, 1983; Manne, 1965). Dissident proxy ini-

tiatives fall loosely under the rubric of monitoring manage-

ment, but are not central to the independence approach.

We propose that confrontation between shareholders and

corporate managementthrough dissident proxy initiatives is

best understood as a challenge to the legitimacy of corporate

management’s conduct in running the corporation. Institu-

tional theory (DiMaggio & Powell, 1983; Meyer & Rowan,

1977; Oliver, 1991; Scott, 2008c) provides a lens for under-

standing what is at stake because it proposes that organiza-

tions seek to maintain legitimacy by responding to demands

for change from relevant actors within their organizational

f‌ield (Greenwood & Hinings, 1996; Greenwood, Suddaby,

& Hinings, 2002; Oliver, 1991; Suchman, 1995). Early

formulations of institutional theory emphasized the pro-

cesses that led to conformity to institutionalized norms for

behavior (DiMaggio & Powell, 1983; Meyer & Rowan, 1977).

However, Oliver (1991) proposed a more active role for how

organizations respond to isomorphic pressures, drawing

attention to how organizations might resist or manipulate

demands for change. Others have focused on institutional

entrepreneurs outside organizations that challenge conven-

tional norms and seek to redef‌ine what constitutes legiti-

macy (Fligstein, 1997; Green, Babb, & Alpaslan, 2008; Rao,

1994, 1998, 2004). We identify dissident proxy initiatives as

legitimation contests: attempts by institutional entrepre-

neurs, as arbiters of legitimacy, to impose practices on cor-

porate management using the tools of corporate governance

(Fligstein, 1997; Scott, 2008a). As such, they are a regulative

institution (Scott, 2008c) within the Anglo-American f‌ield of

corporate governancethat facilitate institutional processes of

change by providing a mechanism for discourse about cor-

porate conduct. We develop hypotheses about the anteced-

ents and consequences of dissident proxy initiatives using

this theoretical lens, and test them using a Canadian sample.

DISSIDENT PROXIES IN THE

CANADIAN CONTEXT

Canada shares many features of its governance environment

with other members of the Anglo-American sphere, such as

the concentration of ownership through institutional hold-

ings and rules for dissident proxy initiatives, yet also shares

many features with resource-oriented developing econo-

mies such as family ownership, dual class shares, and cross

holding of shares (La Porta, Lopez-de-Silanes, & Shleifer,

1999). There is considerable overlap between practices in

Canada and the United States (US) due to extensive cross

listing of Canadian shares on US exchanges and widespread

coverage of the US in the Canadianbusiness press. Canadian

corporate governance practices have received considerable

scrutiny over the last two decades from international

bodies like the Organization for Economic Cooperation and

Development (1998), government regulators, exchanges,

professional associations, and journalists. Many changes in

Canadian practices are similar to those in other parts of the

Anglo-American sphere, and are consistent with the institu-

tionalization of the agency problem in other developed

countries as well (Enrione, Mazza, & Zerboni, 2006).

Recent changes favor public confrontation between inves-

tors and managers (Chowdhury & Wang, 2009). During the

1990s proxy solicitation rules were contested in a series of

legal cases, and in 1999 the Senate Banking Committee rec-

ommended changes for corporations under federal jurisdic-

tion. In 2001 amendments under the Canada Business

Corporations Act removed the restriction on investors that

required them to prepare a formal proxy circular for dissi-

dent proxies and bear the expense of distributing it. A

similar restriction had been removed in the US in 1992. This

change not only made Canadian corporate governance more

similar to the US in strengthening the role of shareholders, it

also further legitimized the notion of an agency problem

between shareholders and corporate management. Since

2001 dissident proxy initiatives have become commonplace

in Canadian corporate governance.

Its small size, relative to the other countries that share its

approach to governance, makes it relatively easy to identify

and evaluate the actors that shape Canadian corporate gov-

ernance. In our Canadian sample spanning six years, about

50 per cent of dissident proxy proposals were introduced by

organizations that were members of the Canadian Coalition

for Good Governance, which represents primarily institu-

tional investors, or by individuals employed by institutional

investors. Approximately 25 per cent were f‌iled directly by

institutional investors. These include mutual funds, public

pension funds, and private equity funds. The remainder

were introduced by other individuals, often blockholders,

and a few who might be classif‌ied as “gadf‌ly” investors.

Therefore, roughly three-quarters of dissident proxy initia-

tives were f‌iled by institutional investors or their represen-

tatives. Many of these funds, individuals and associations

are well known in Canada, and regularly featured or inter-

viewed in the Canadian business press. The population of

large Canadian corporations likely to attract the interest of

governance activists is also relatively small, with 90 corpo-

rations receiving dissident proposals over six years, and

only 26 receiving more than three proposals across the six

years. Management of these larger corporations is also rela-

tively well known and often featured in the business press.

Both those who f‌ile dissident proxy proposals and those

who respond to them f‌it the prof‌ile of inf‌luential actors

and arbiters of legitimacy in the conduct of Canadian

corporations.

The importance of corporate governance practices in the

Canadian environment is evident in a variety of ways that

suggests the agency problem is well understood. Several

corporate governance ratings schemes have been developed

that place considerable normative pressure on corporations

to adopt “best practices” in governance and provide legiti-

macy to a canon of practices designed to improvemonitoring

by boards (Anderson, Melanson, & Maly, 2007). The Cana-

dian Institute of Chartered Accountants (CICA), the Institute

of Corporate Directors, and TheConference Board of Canada

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