September 20, 2020

Insurable Interest

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Proxy advisory firm walks a fine line on Crescent Point dissident decision

3 min read
ISS recommends shareholders should support just two of the four nominees advanced by the dissident shareholder Cation Capital

Based on a careful reading of the 47-page proxy analysis and benchmark policy voting recommendations prepared by ISS for the upcoming meeting of Crescent Point Energy, it seems that proxy advisory firms walk a fine line in making recommendations in line with their guidelines and policies.

How else to explain ISS’s decision that shareholders should support just two of the four nominees advanced by the dissident shareholder Cation Capital Inc.?

ISS recommended shareholders withhold their votes for Cation’s other nominees, two investment industry executives who between them own about twice as much stock as the non-executive board nominees advanced by the company.

Skin in the game — the four Cation nominees own about 0.30 per cent of the outstanding shares — apparently doesn’t rank highly with ISS.

Those recommendations were made after ISS said the dissident “has made a reasonably compelling case for some change to the incumbent board to facilitate improvements to capital allocation decisions, to enhance profitability and to ensure appropriate alignment of executive compensation.”

The battle at Crescent Point comes as the company’s share price has underperformed its peers over the past one, three and five-year periods. Since Jan. 1 2013, Crescent Point’s share price is down by almost 80 per cent.

So how bad does it have to get before the proxy advisory firm recommends shareholders do a straight swap — in with the four nominees advanced by the dissident and out with four company nominees?

ISS’s split recommendation seems unusual given that its policy does not require “a detailed plan” when dissidents seek a minority of the board seats.

The proxy firm says shareholders should support two dissidents (Dallas Howe and Herbert Pinder) “who have considerable and relevant board experience.” It also recommends shareholders withhold their votes for two of the company’s nominees: Mike Jackson (chair of the compensation committee) and Rene Amirault (chief executive of Secure Energy Services. In 2017, Crescent Point paid Secure $12.9 million “in the normal course of business.”)

ISS said Amirault is a “non-independent board member,” while Jackson “lacks prior board experience and not does not appear to possess substantial relevant experience in the industry.”

Maybe ISS was swayed by the ratio between the board seats demanded and the size of the board (in this case the dissidents wanted 40 per cent) because throughout the report it points out many instances in which the board hasn’t done a proper job in overseeing management.

For example: Over the past three plus years, Crescent Point has lost its premium valuation, a lower multiple ISS said “seems to point to the market’s doubts regarding effectiveness of the company’s capex program.”

In addition, Crescent Point’s costs are also higher than those of its peers. “The company’s operating performance shows that at the SG&A level it has not participated in the industry wide cost-cutting efforts to the same degree as peers. Its stock performance, on the other hand, might be reflective of market doubts on capital allocation and leverage.”

And that leverage is more than 20 per cent greater than that of its peers. “In hindsight the route chosen by the company to fund its capex program may have been an additional factor playing against its stock price.”

For good measure, ISS noted, in terms of corporate governance, “it does not appear” the nominees added over the last few years “have been ideal choices in terms of improving board oversight.”

Apart from that the board has done a wonderful job.

Finally, ISS also recommended shareholders vote against the “say on pay” motion, in part because the “significant underperformance that was not reflected in the CEO’s total compensation.”

Financial Post

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