In order to get a better understanding of what it means for the board of directors to be active in their role, and what affects their ability to fulfil their role, we spoke with Walied Soliman. Soliman is the Chair of Norton Rose Fulbright Canada, LLP and Co-Chair of its special situations team, which encompasses Canada’s leading hostile M&A, shareholder activism and complex reorganization transactions.
Over the past several years, Soliman has been involved in almost every major proxy battle in Canada, acting for both issuers and activists. He is widely regarded as one of the leading special situations practitioners in Canada. In addition, his practice focuses on mergers and acquisitions, restructurings, financings, corporate governance and structured products.
Christopher P. Skroupa: What does it mean for the board of directors to be active in their governance oversight?
Walied Soliman: Despite the perceptions we sometimes encounter, Canadian corporate laws state that management is to get its powers from directors, not the other way around. Directors, in turn, get their powers from shareholders. So being an active director means asking management the questions a reasonable shareholder would have.
Active directors also work hard to understand the business. For instance, we often see directors doing things like site visits. Spreadsheets will never tell directors the whole story. The best directors also know what they don’t know; they are always working to improve their knowledge of the company and its industry, and to work with the right outside experts when the company faces a critical situation like a proxy contest or contested transaction, which can be unfamiliar experiences even for the most seasoned directors.
Skroupa: How can management affect the board’s involvement to create more value in the company?
Soliman: There are lots of small things management can do to help directors be active and increase value. In a constructive board-management relationship, one of the most important is for management and the board simply to help each other do their jobs.
For management, that means flagging risks and opportunities to directors and actively seeking their guidance. It also means producing high-quality meeting materials that afford true insight into the organization. These things may seem obvious but are often honored more in the breach than the observance.
Skroupa: What kinds of questions should the board and management ask one another for an effective conversation towards long-term value creation?
Soliman: Directors – especially non-management directors – need to be willing to speak out, and to ask questions that may be uncomfortable. If a director has a question that strikes management as uncomfortable, it will usually be far more uncomfortable when an angry shareholder is asking it. When a nomination committee is picking directors, it should pick directors who appear willing to exercise independent judgment. Just like directors, management also shouldn’t be afraid to ask where they don’t know.
Skroupa: What effect are shareholders having on board and management communication?
Soliman: Shareholders have in many ways become more demanding than ever before. Directors can quickly find themselves subjected to personal attacks from shareholders. Directors need to be able to account for management’s strategic decisions and explain why the company is making the choices it’s making.
Because shareholders have become more demanding, directors need to be getting relevant information from management on an ongoing basis, not just at meetings. Good governance requires more than just showing up a few times a year.
Skroupa: Is this the desired effect? Do you foresee any changes in the future?
Soliman: To the extent that shareholder activism is introducing market discipline to boards and management teams, then yes, that is a desirable consequence. Activism is an important part of healthy capital markets. Our firm is especially struck by the shift of many institutional investors toward a somewhat more activist stance, and we expect this to continue.
One of the more interesting developments in this area was the formation this past year of the Investor Stewardship Group, when institutional investors managing upwards of US $17 trillion got together to agree on some fairly specific, albeit non-binding, principles of corporate governance.
Skroupa: Is there anything to look out for in next year’s board, management and shareholder engagement?
Soliman: One thing we’re seeing a lot more of is short-selling activism. Few things have the potential to expose weak board-management engagement more clearly than an activist short play. One tweet from a credible short seller can wipe away a considerable percentage of a company’s value very quickly.
Boards and management need to be on the same page about how to respond to situations like that, down to the point of scripting their responses preemptively. There should be basic agreement around narrative and how the company wants to tell its story when pushed.
Walied Soliman will be the moderator for a panel entitled, The Board Perspective: How Boards View Defense at the Shareholder Activism conference on January 25 in New York, NY.