Needless to say, the art of small-cap stock-picking has attained some sophistication in the $12 trillion-deep (CDN$) public securities exchanges of the United States, due to advancement by such specialty managers as T. Rowe Price New Horizons Fund. The close integration of Canadian and American exchanges has ensured significant cross-border transfer of related investment methods and practices, where possible, in recent years.
The proceeding indicates a wealth of information concerning the nature and scope of small-cap public equity investing in Canadian exchanges. Unfortunately, this is not matched by comprehensive data regarding pension participation in this process. This topic comprises the balance of this section, however, based on the feedback of pension managers, market analysts and practitioners and some documents obtained from them by the CLMPC.
Much of the energy and resources of public exchanges is channeled into the trading of share ownership that, in felicitous circumstances, bids values up. Today, close to one-quarter of all Canadian households, an increasing proportion of which are middle-income, benefit from the wealth generation capacity of this activity.
Shareholder activism in the United States sprung to life in the 1980s when that country's largest owners of public equity - pension funds - first crafted anti-takeover resolutions directed at a small group of investee firms. In a milestone event, CalPERS, CalSTERS, SWIB, and the United Brotherhood of Carpenters and Joiners of America filed 1987 proposals to rescind "poison pills" or business defence mechanisms against unwanted acquisitions. Interestingly, poison pills remain a top target of mounting shareholder resolutions, along with a multitude of other corporate governance concerns, such as director elections, management powers, executive compensation, control transactions, major re-organizations and issues of good corporate citizenship.
At the forefront of shareholder activism in the United States are public sector and Taft-Hartley (jointly-trusted, private sector) pension funds. This movement has been boosted by several legal decisions, including the 1988 pronouncement of the federal Department of Labor (DOL), agent for the Employee Retirement Income Security Act. DOL stated that fiduciaries are obliged under the law to vote pension shares on matters of corporate management and accountability to protect share values. This obligation was later extended to proxy, or trustee-delegated voting.
One result has been phenomenal growth in shareholder proposals from a mere smattering just ten years ago. In 1998, around 740 proposals were submitted (down from 820 in 1997) nearly one-half of which came to a vote at shareholder meetings. Leading 1998 topics included executive pay, declassification of boards, review of key business developments (e.g., sales, and restructurings) diverse voting issues and independence of board directors. Resolutions based on social objectives (e.g., environmental protection) are also prominent (see The Newest Activists). Many of these shareholder proposals are pension-led.
A standard-bearer in this new activist role is the Corporate Governance Program at CalPERS. CalPERS' aggressive assertion of its ownership rights over the past two decades has helped to prompt major changes in American boardroom relationships whereby regular, private consultations and negotiations on shareholder concerns or disagreements, previously almost unheard of, are today more common. Of course, this has occurred to avert resolutions and bad publicity over conflicts. CalPERS persists with high profile intervention, however, as leverage with perceived under- performing firms. One tactic is annual publication of a list of ten "corporate financial laggards" in the pension portfolio whose unsatisfactory governance behaviours are targeted for reform. This approach is supported by a 1995 Wilshire Associates study revealing a 52.5 percent increase in excess returns of selected firms (compared to the Standard and Poor's 500), following various CalPERS initiatives.
In 1994, CalPERS added "workplace practices" to its corporate governance priorities, noting that research clearly indicated enhanced firm-level performance from positive labour relations, fair employment policies, co-operation, worker empowerment and provision of training. Without the productivity benefits such factors yield, firms with substandard records were found to have weaker financial fundamentals.
Sources: CalPERS, Corporate Governance, 1998; IRRC, 1998; Pensions & Investments, "Pension funds led corporate governance revolution", February 9, 1998.