A recent battle for control of a large Canadian company has put dual-class share structures in the spotlight. Anthony Okolie speaks with Samantha McDonald, Vice President, ESG Research and Engagement, TD Asset Management, about ways to approach these structures from an ESG perspective.
Print Transcript
The recent fight for control of Rogers Communications has put dual class share structures in the spotlight. So what our dual class shares and how do they work? Joining us to talk more about this is Samantha McDonald. She's a vice president of ESG Research and Engagement at TD Asset Management. Samantha, we've read and seen the news about the Rogers drama now unfolding in the courts. Without taking sides, can you give us a sense of what's happening here?
Yeah, happy to do so and provide a quick summary of what's taking place right now. I think it's important to mention that this conflict is still unfolding as we speak, but essentially it was triggered when, at least what we know publicly, when Edward Rogers, the son of the late Ted Rogers and chairman of the Rogers Communications Board, had reportedly planned to replace the CEO, Joe Natale. Now the board disagreed with that plan, and so Edward had been proposed to replace five of the 14 board members with the directors of his own choosing via something called a written resolution. This is opposed to a typical shareholder meeting. Now, following this move, the board decided to vote to remove him as the chairman. However, Edward Rogers is also the chairman of the Rogers Control Trust. Now, Rogers Control Trust is the controlling shareholder of Rogers Communications, and it essentially holds all of the firm's voting power. And so Edward Rogers was able to call a board meeting and announce that the five board members that he had nominated are now elected to the board and that he remains the chairman of Rogers. Now, the existing Rogers board is challenging the legitimacy of this and and currently Edward Rogers has taken his case to the Supreme Court of BC. Outside of the unfortunate family drama that we're seeing take place in the public eye. You know, this conflict places a spotlight on dual class structures and why they can be problematic and can potentially hurt the interests of minority shareholders. So through the Rogers Control Trust, the Rogers family holds 97.5% of the voting shares or Class A shares for Rogers Communications. Yet it has less than 30% of the economic interest in the company. Whereas minority shareholders, they virtually hold none of the voting rights but the majority of the economic ownership, and this is largely through Class B shares. So there's an imbalance here, and Edward Rogers can essentially act or was attempting to act unilaterally on decisions that impact the firm and the board.
And is this kind of structure unique to Rogers?
Definitely not. There are many companies in Canada that have dual class share structures or multiclass share structures. And this is true across various industries, from Canadian Tire to Bombardier. I think there are well over 60 of them currently listed on the TSX. And often historically, these structures emerged to preserve family control while maintaining access to the public equity markets. And there are many that would argue that there are advantages still to this kind of setup. For example, proponents believe that controlling shareholders with the board and management can better focus on the long term success of the company without being distracted by satisfying the other interests of other shareholders. Dual class structures are also cited as being a way to encourage entrepreneur controlled companies to go public. And some believe that there could be an effective takeover mechanism here in terms of protecting against opportunistic acquirers.
So you mentioned certainly there are advantages to the structure, but there's also some potential downsides, of course, to this kind of structure. Can you elaborate more on the risks involved? And what is TD Asset Management's position?
There's definitely downside risk. For TDAM, the risks associated with these structures outweigh the potential benefits. They can serve to entrench management, encourage excessive risk taking and give way to other poor governance practices that may benefit the controlling shareholder at the potential expense of minority shareholders. So in times of poor performance or event driven controversies like the one playing out at Roger's right now, minority shareholders may end up bearing most of the loss despite having very little influence over the company's business strategy and oversight. At TDAM, we believe in the principle of equal rights: one share, one vote. Shareholder voting rights should be proportionate to their economic interests and their share ownership.
And how does TD Asset Management approach these companies where these structures already exist in its investment process from an ESG perspective?
Yeah. So I think the first key point is that these structures don't preclude us from investing in these companies. But the G in ESG, the governance, is highly important to how we view and identify investment risks. And it's not just the risks associated with voting structure, but we also look at things like board composition. Is the board majority independent? Does it reflect diverse perspectives? Are the governance practices that are in place, are they structured in the best interests of long term value to shareholders? So this is all incorporated into our evaluation process. And the other core aspect of ESG at TDAM is our stewardship efforts. So this is where we're able to express our policies and our expectations a lot more directly with companies. And they're kind of two components to this. There's one, our engagement activities, both direct and collaboratively with industry partners and then our proxy voting. So we're currently in a deep annual review of our proxy voting guidelines, which I'm proud to say will be made public in the coming months. And it's important to have that transparency not just for our clients, but for issuers, so that they're clear on where we stand on key governance issues like the topic of dual class structures. And so, as mentioned, we believe in the one share, one vote principle. And so we would generally vote against proposals to create a new class of common stock that had subordinate voting rights. On the flip side, we would support proposals that seek to unify multiple classes of shares and/or set sunset provisions on existing dual class or multi class structures. So we recognize that these structures already exist. But where they do, we are encouraging companies to review it on a regular basis, and we expect them to be transparent with shareholders on why this system is in the best interests of the firms long term value.
Samantha, thank you very much for your time.
Thank you.
Yeah, happy to do so and provide a quick summary of what's taking place right now. I think it's important to mention that this conflict is still unfolding as we speak, but essentially it was triggered when, at least what we know publicly, when Edward Rogers, the son of the late Ted Rogers and chairman of the Rogers Communications Board, had reportedly planned to replace the CEO, Joe Natale. Now the board disagreed with that plan, and so Edward had been proposed to replace five of the 14 board members with the directors of his own choosing via something called a written resolution. This is opposed to a typical shareholder meeting. Now, following this move, the board decided to vote to remove him as the chairman. However, Edward Rogers is also the chairman of the Rogers Control Trust. Now, Rogers Control Trust is the controlling shareholder of Rogers Communications, and it essentially holds all of the firm's voting power. And so Edward Rogers was able to call a board meeting and announce that the five board members that he had nominated are now elected to the board and that he remains the chairman of Rogers. Now, the existing Rogers board is challenging the legitimacy of this and and currently Edward Rogers has taken his case to the Supreme Court of BC. Outside of the unfortunate family drama that we're seeing take place in the public eye. You know, this conflict places a spotlight on dual class structures and why they can be problematic and can potentially hurt the interests of minority shareholders. So through the Rogers Control Trust, the Rogers family holds 97.5% of the voting shares or Class A shares for Rogers Communications. Yet it has less than 30% of the economic interest in the company. Whereas minority shareholders, they virtually hold none of the voting rights but the majority of the economic ownership, and this is largely through Class B shares. So there's an imbalance here, and Edward Rogers can essentially act or was attempting to act unilaterally on decisions that impact the firm and the board.
And is this kind of structure unique to Rogers?
Definitely not. There are many companies in Canada that have dual class share structures or multiclass share structures. And this is true across various industries, from Canadian Tire to Bombardier. I think there are well over 60 of them currently listed on the TSX. And often historically, these structures emerged to preserve family control while maintaining access to the public equity markets. And there are many that would argue that there are advantages still to this kind of setup. For example, proponents believe that controlling shareholders with the board and management can better focus on the long term success of the company without being distracted by satisfying the other interests of other shareholders. Dual class structures are also cited as being a way to encourage entrepreneur controlled companies to go public. And some believe that there could be an effective takeover mechanism here in terms of protecting against opportunistic acquirers.
So you mentioned certainly there are advantages to the structure, but there's also some potential downsides, of course, to this kind of structure. Can you elaborate more on the risks involved? And what is TD Asset Management's position?
There's definitely downside risk. For TDAM, the risks associated with these structures outweigh the potential benefits. They can serve to entrench management, encourage excessive risk taking and give way to other poor governance practices that may benefit the controlling shareholder at the potential expense of minority shareholders. So in times of poor performance or event driven controversies like the one playing out at Roger's right now, minority shareholders may end up bearing most of the loss despite having very little influence over the company's business strategy and oversight. At TDAM, we believe in the principle of equal rights: one share, one vote. Shareholder voting rights should be proportionate to their economic interests and their share ownership.
And how does TD Asset Management approach these companies where these structures already exist in its investment process from an ESG perspective?
Yeah. So I think the first key point is that these structures don't preclude us from investing in these companies. But the G in ESG, the governance, is highly important to how we view and identify investment risks. And it's not just the risks associated with voting structure, but we also look at things like board composition. Is the board majority independent? Does it reflect diverse perspectives? Are the governance practices that are in place, are they structured in the best interests of long term value to shareholders? So this is all incorporated into our evaluation process. And the other core aspect of ESG at TDAM is our stewardship efforts. So this is where we're able to express our policies and our expectations a lot more directly with companies. And they're kind of two components to this. There's one, our engagement activities, both direct and collaboratively with industry partners and then our proxy voting. So we're currently in a deep annual review of our proxy voting guidelines, which I'm proud to say will be made public in the coming months. And it's important to have that transparency not just for our clients, but for issuers, so that they're clear on where we stand on key governance issues like the topic of dual class structures. And so, as mentioned, we believe in the one share, one vote principle. And so we would generally vote against proposals to create a new class of common stock that had subordinate voting rights. On the flip side, we would support proposals that seek to unify multiple classes of shares and/or set sunset provisions on existing dual class or multi class structures. So we recognize that these structures already exist. But where they do, we are encouraging companies to review it on a regular basis, and we expect them to be transparent with shareholders on why this system is in the best interests of the firms long term value.
Samantha, thank you very much for your time.
Thank you.