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Just say no to the myth of shareholder democracy

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It is tiresome indeed to debate with people who never respond to your fundamental arguments. Instead, they wrap themselves in the spurious argument of “shareholder democracy”. If corporations were to apply the principles of citizen democracy, tourists-shareholders would not have the right to vote and newcomers to shareholding would have to wait a good period of time before acquiring the right to vote.

They basically claim that boards are incompetent, biased, conflicted and, thus, should not be left to decide what is in the best interest of the company. They rehash the quaint notion that management is, ipso facto, against the takeover of their company because of inherent conflicts of interest; yet, because of the changes in compensation system for executives and board members, the concern has become that management and boards may be too receptive to a takeover offer that may not be in the interest of the corporation and its stakeholders. The potential conflict of interest has switched side.

They might go so far as to claim that the Supreme Court of Canada has not clearly stated in BCE v. debenture holders (2008) that:
[38] The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation.

[40] In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.

Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule… It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation.

That seems a pretty clear interpretation of the fiduciary duties of boards by the ultimate authority in the land. Nowhere does it even open the door to the argument that shareholders are the prime stakeholder, solely entitled to decide the fate of a corporation.

Is it not obvious and strange that the Canadian securities commissions, at least since 2008, are acting in contravention of Supreme Court judgments, are in a sense imposing an illegal takeover framework on boards of directors?

It is stunning to watch the debate going on in Canada as screaming examples of cases in point go unheeded, if not unnoticed.

Osisko, the Quebec-based gold mine, was taken over eventually at a $1 billion more for shareholders because ingenious tactics managed to delay the application of the diktats of the Canadian securities commissions. Its management and board of directors remain convinced that they would have created even more value, had they been able to carry on with their strategy.

At the same time, the board of Allergan, a Delaware corporation, is politely telling Valeant and its agent, Bill Ackman’s Pershing Square, to go fly a kite. This case offers an eloquent counter-argument to those who wax poetic about the virtues of “shareholders”. Ackman, it is claimed, has acquired a stake of close to 10% in Allergan shares, thus supposedly making him a valued shareholder worthy of commiseration. Of course, he did not buy shares of Allergan but instead bought almost exclusively derivative calls at a fraction of the price of the shares, on which calls he has already made a paper profit of $1 billion. These are the typical “shareholders” that show up anytime a company is put in play. They should decide the fate of companies? That is ridiculous, indeed obscene.

Fortunately for Allergan, Delaware, a state where a majority of large U.S. corporations are incorporated, has developed one of the most enlightened corporate law regime. It allows boards of directors to reject a takeover bid that, in their judgment, is not in the long-term interest of the company.

This decision by boards of directors may be contested in courts if parties deem that the board has not acted in the long-term interest of the company but they will have to surmount the hurdle of the “business judgment rule”.

Wisely (actually because of the separation of powers between state governments and the federal government), the Securities and Exchange Commission (SEC) has no say in the matter of takeovers.

Indeed, Canadian corporate governance already incorporates what activist investors are fighting for in the United States; elimination of staggered boards and separation of power between the chair of the board and the CEO, both governance principles which already make it easier to carry out a hostile takeover in Canada.

Finally, large institutional investors, siding against any change to the Canadian takeover regime, should review the evidence that U.S. state laws to increase the power of boards to “just say no” to takeovers have indeed led to far fewer hostile takeovers; but the rate of successful takeovers actually increased and shareholders received a substantially better offer for their shares. In the U.S., boards of directors with enhanced powers have extracted better deals for their shareholders.

Reports & Studies

Les inégalités économiques et la rémunération des dirigeants d’entreprises

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Dans une prise de position en 2012, l’IGOPP affirmait que les fortes rémunérations versées aux dirigeants d’entreprises pourraient éventuellement créer des problèmes de légitimité pour le entreprises.

Si les conseils d’administration ont à cœur de s’acquitter complètement de leur obligation fiduciaire d’agir dans l’intérêt à long terme de l’entreprise, ils doivent se préoccuper de l’impact des montants payés à leurs dirigeants sur la légitimité sociale des sociétés privées. (« Payer pour la valeur ajoutée », IGOPP, 2012) 

Or, la rémunération des dirigeants est en passe de devenir un enjeu politique, une cause de ressentiment social, une faille de gouvernance dans la plupart des sociétés développées. Quels que soient les arguments invoqués pour expliquer et justifier les sommes considérables versées aux dirigeants, la criante disparité des revenus au sein de la société et au sein même des entreprises fait de cet enjeu, au mieux, un cri de ralliement pour ceux qui veulent une société plus équitable, et au pire, une plateforme pour démagogues.

Il est vrai que les disparités de revenus et de richesse sont inévitables dans une société méritocratique et que les retombées bénéfiques d’une économie de marché sont indissociables d’une certaine inégalité dans le partage de la richesse mais ce n’est pas l’enjeu.

L’enjeu, le malaise, provient du niveau des inégalités et de la provenance de la richesse. Au-delà d’un certain seuil la société devient inconfortable, voire même hostile, face à la fortune d’une
minorité. Ce seuil tend à varier considérablement d’un pays à l’autre, d’une société à l’autre.

Puis, la perception, l’impression, que cette richesse n’a pas été honnêtement et franchement gagnée, qu’elle ne résulte pas d’une activité dont profite l’ensemble de la société exacerbe le malaise ou l’hostilité à l’encontre de la disparité des revenus et de la richesse.

C’est pourquoi la fortune des entrepreneurs, innovateurs, créateurs de grandes entreprises suscite moins d’hostilité. Il en va de même pour les vedettes du sport ou du cinéma. Par contre, les fastes
rémunérations récoltées par les spéculateurs financiers, traders et autres prestidigitateurs financiers soulèvent l’ire du peuple.

Or, justement, la crise financière de 2008 a révélé non seulement que les rémunérations des responsables de ce fiasco en furent une des causes mais encore que des gens des milieux financiers étaient payés des sommes gigantesques pour des activités sans grande valeur pour la société. Le mouvement « Occupy Wall Street » malgré sa courte vie réussit à créer un malaise quant à la part de la richesse détenue par le 1% de privilégiés dans nos sociétés.

Le problème était posé mais rien ou presque n’a changé depuis.
Or, un groupe d’économistes dont fait partie l’économiste français Thomas Piketty, a inventorié le phénomène des inégalités sur des dizaines d’années et dans plusieurs pays. Piketty est devenu la coqueluche de la gauche américaine, voire mondiale, avec son ouvrage « Le capital au 21ième siècle » dans lequel il dresse un tableau des inégalités et prédit l’inévitable concentration de la richesse si les États n’adoptent pas des mesures radicales.

En particulier, Piketty et ses collègues pointent du doigt la croissance marquée des inégalités dans les pays « anglo-saxons » (surtout les États-Unis et la Grande-Bretagne) en raison, selon eux, des énormes augmentations de «salaire » versées aux dirigeants de sociétés cotées en bourse.

Selon M. Piketty, ce phénomène découle du fait que les dirigeants fixent essentiellement leur propre « salaire » et qu’en raison de l’évolution des «normes sociales» au cours de l’ère Reagan et Thatcher, les dirigeants américains et britanniques peuvent se verser des sommes extraordinaires sans subir d’opprobre social.

Piketty et al. ont-ils raison et si oui, qu’en est-il du Canada et du Québec? 

Reports & Studies

Board Members’ Compensation and Governance: Issues and Challenges

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The requirements in credibility, availability and legitimacy of board members have increased substantially since 2000. In that context, directors’ compensation and its impact on their conduct and decisions become salient issues. Yet, directors’ compensation remains a little examined topic of governance. This is why the Institute for Governance (IGOPP) has produced a report prepared by Dr. Michel Magnan, Professor and Stephen A. Jarislowsky Chair in Corporate Governance from John Molson School of Business at Concordia University, to provide a general survey of the issue and propose some recommendations.

This IGOPP report highlights some important findings:

  • Over the 10 year period from 2001 to 2010, the average annual fees received by directors of Canadian public corporations have increased of 465%. However, this significant increase is not uniform among all corporations since the most substantial raises have occurred in the large financial institutions and in corporations in the oil and mining industries.
  • The level of compensation paid to directors of Canadian corporations remains below that of comparable corporations in the United States.
  • Directors’ compensation has not attained levels that can be considered excessive after taking into account the growth in institutional and regulatory requirements during the same period.
  • The debate over directors’ compensation and independence should be seen as an issue of board composition and functioning. If cases arise in which directors’ compensation is considered excessive, it only reflects more serious underlying governance problems that undermine the legitimacy, and possibly the credibility, of the board.
  • We are in a context of fiduciary governance. The directors will therefore concern themselves with legislative and regulatory compliance and with the implementation and monitoring of the mechanisms and systems governing the controls, incentives and accountability. Their remuneration is thus a function of this role.

The analysis shows that directors’ compensation is only one facet of the board of directors’ governance and is not necessarily the most strategic since it only adds little to the processes for the appointment and assessment of directors, which are already rigorous. The directors’ compensation should reflect the fact that their responsibility is joint, continuous and focused on the long-term oversight of the corporation’s interests as a whole, and not just the short-term interests of some shareholders. Consequently, this report propounds several recommendations, among which the following stand out:

  • The board’s priority in governance matters is to maintain and increase its legitimacy and credibility through rigorous practices and processes.
  • Directors’ compensation should not be based on the achievement of short-term objectives or goals.
  • Directors’ compensation must be sufficiently high to attract credible candidates that have integrity and specific skills corresponding to the corporation’s objectives.
  • The directors should hold a significant long-term investment in the corporation’s shares.
  • The directors’ compensation should be uniform across individuals with similar tasks.
  • Directors’ compensation must rationally reflect the specific risks they face.

Investors are not hesitating to challenge the skills of directors and their decisions. In this context, their compensation could become a major governance issue. Hence, this IGOPP report frames the debate with an analysis of the potential determining factors of directors’ compensation and suggests principles and recommendations which will serve as guides for the boards’ working on this issue.

Press Releases

Board Members’ Compensation and Governance: Issues and Challenges

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The requirements in credibility, availability and legitimacy of board members have increased substantially since 2000. In that context, directors’ compensation and its impact on their conduct and decisions become salient issues. Yet, directors’ compensation remains a little examined topic of governance. This is why the Institute for Governance (IGOPP) has produced a report prepared by Dr. Michel Magnan, Professor and Stephen A. Jarislowsky Chair in Corporate Governance from John Molson School of Business at Concordia University, to provide a general survey of the issue and propose some recommendations.

This IGOPP report highlights some important findings:

  • Over the 10 year period from 2001 to 2010, the average annual fees received by directors of Canadian public corporations have increased of 465%. However, this significant increase is not uniform among all corporations since the most substantial raises have occurred in the large financial institutions and in corporations in the oil and mining industries.
  • The level of compensation paid to directors of Canadian corporations remains below that of comparable corporations in the United States.
  • Directors’ compensation has not attained levels that can be considered excessive after taking into account the growth in institutional and regulatory requirements during the same period.
  • The debate over directors’ compensation and independence should be seen as an issue of board composition and functioning. If cases arise in which directors’ compensation is considered excessive, it only reflects more serious underlying governance problems that undermine the legitimacy, and possibly the credibility, of the board.
  • We are in a context of fiduciary governance. The directors will therefore concern themselves with legislative and regulatory compliance and with the implementation and monitoring of the mechanisms and systems governing the controls, incentives and accountability. Their remuneration is thus a function of this role.

The analysis shows that directors’ compensation is only one facet of the board of directors’ governance and is not necessarily the most strategic since it only adds little to the processes for the appointment and assessment of directors, which are already rigorous. The directors’ compensation should reflect the fact that their responsibility is joint, continuous and focused on the long-term oversight of the corporation’s interests as a whole, and not just the short-term interests of some shareholders. Consequently, this report propounds several recommendations, among which the following stand out:

  • The board’s priority in governance matters is to maintain and increase its legitimacy and credibility through rigorous practices and processes.
  • Directors’ compensation should not be based on the achievement of short-term objectives or goals.
  • Directors’ compensation must be sufficiently high to attract credible candidates that have integrity and specific skills corresponding to the corporation’s objectives.
  • The directors should hold a significant long-term investment in the corporation’s shares.
  • The directors’ compensation should be uniform across individuals with similar tasks.
  • Directors’ compensation must rationally reflect the specific risks they face.
  • Investors are not hesitating to challenge the skills of directors and their decisions. In this context, their compensation could become a major governance issue. Hence, this IGOPP report frames the debate with an analysis of the potential determining factors of directors’ compensation and suggests principles and recommendations which will serve as guides for the boards’ working on this issue.
News Articles

Thomas Piketty is no Marxist, he’s a Jacobin!

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Piketty totally misses the real driver of this huge increase in compensation of U.S. executives: stock options.

Thomas Piketty is a French economist and the omnipresent author of Capital in the 21st Century. Since the publication of the English version of his book, Piketty has become the coqueluche of the American left.

Although branded as a neo-Marxist by right-wing pundits, Piketty is actually a Jacobin, an heir of the French Revolution to which he refers in several instances and always favourably. Led by Robespierre, the Jacobins in the Reign of Terror passed radical legislation, hunting down and executing their opponents.

The gist of Piketty’s book, though, consists of a description of the pattern of income and wealth inequality over many decades and across several countries.

The Financial Times ignited a virulent controversy when it questioned some of his statistics. There were bound to be some inaccuracies and debatable “corrections” in such a massive undertaking. Though the issue will certainly do some damage, the “errors” are minor and do not change the overall picture the book describes.

However, Piketty’s policy prescriptions to solve the problem of inequality have become the controversial and questionable part of his book. Even people who share a discomfort with the present level of income and wealth inequality should recoil at his proposed remedies: 80% marginal tax on income and a global tax on wealth.

It should be noted that Piketty himself has now soft-pedaled on the book’s radical prescriptions, claiming they were merely put forth to stimulate discussion and debate.

But the book suffers from its broad-brush depiction of complex phenomena, and as a result is often superficial and misses out on important insights. In other words, Piketty bites off more than he can chew.

Take his “analysis” of the vastly increased inequality of income and wealth in “Anglo-Saxon” countries (U.S., U.K., Canada, and Australia) as compared to European countries. Piketty attributes a large part of the blame to the huge increases in “salary” paid to executives of listed companies.

This phenomenon, claims Piketty, flows from the fact that executives essentially set their own “salary.” Therefore, given the change in “social norms and acceptability” since Reagan and Thatcher, U.S. and U.K executives can pay themselves stupendous amounts without any social push-back.

In fact, the salary and bonus of U.S. executives in constant dollars do not increase much from the 1950s to the 2000s.

Piketty totally misses the real driver of this huge increase in compensation of U.S. executives and its contribution to wealth inequality: stock options and share-related compensation. In fact the term “stock options” does not even appear in the index of the book.

Stock-related compensation for executives began on a small scale sometimes in the 1970s, grew in the 1980s to 26% of total compensation for the 50 largest American companies; during the 1990s, grew to 47% and to 60% during the period 2000-2005. In 2010, stock-related compensation made up 62% of the total compensation of S&P 500 CEOs and 55% of total compensation for the CEOs of TSX 60 companies.

Up to the 1990s, this form of compensation was virtually absent in Europe (except for the U.K.). Even by 2008, the compensation package of European executives was made up of only 19% in stock options and stock-related incentives.

Then, connect the compensation of U.S. executives, which is made up of this large chunk of stock options and stock-related compensation, to the performance of the U.S. stock market. For instance, the value of the S&P 500 index was multiplied by 10 during that 30-year period.

So, prior to 1980 there was no correlation between total compensation of U.S. executives and the stock market. But beginning in the 1980s there is, not surprisingly, an almost perfect correlation between total compensation of U.S. executives and the stock market.

Given that the life of stock options is usually 10 years, given the general, though not universal, practice of granting stock and stock options every year, it is obvious why the compensation and wealth of American executives exploded during this period of 30 years. But Piketty seems unaware of these dynamic influences on wealth and income.

Piketty also misses out on another very powerful driver of unequal wealth distribution and concentration of riches in the top 1% and top 0.1% of Americans: the peculiar evolution of the American (and U.K. and Canadian) finance industry.

Below the radar, unseen by the public, a large number of specialized, privately-owned outfits carry on financial transactions, trading, speculating, and creating immense wealth for their partners and managers.

One such group, about which the veil of ignorance is lifted ever briefly once a year, is made up of so-called hedge funds.

The magazine Alpha manages to collect and report the cash income of the 25 most successful hedge fund managers each year. In 2014, it reported that these 25 guys earned $21.15-billion, with income ranging from $300-million to $3.5-billion. That, by the way, means that these 25 “managers” earned 3.5 times the total compensation of all CEOs of the S&P 500 companies, those very people who are subjected to virulent criticism for their extravagant paycheque.

Those who believe that wealth and income inequality must be reduced, that, at its current U.S. level, it becomes a socially explosive phenomenon, must come up with realistic and effective policies.

Certainly not the prescriptions of Professor Piketty!

Memoranda and Opinions, Memoranda and Opinions

The Canada Business Corporations Act

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The Institute for Governance (IGOPP) submitted his comments to Industry Canada in response to the Consultation on the Canada Business Corporations Act (CBCA).. We will examine these issues individually to formulate specific recommendations in each case.

In its comment document, the IGOPP covered the following topics:

  • Shareholder advisory votes on compensation packages
  • Diversity of board membership
  • Equal treatment of shareholders
  • Parties who can claim oppression
  • Adding a minimum holding period for the right to nominate directors

The IGOPP’s previous positions on say on pay, board diversity, and majority voting can be viewed at: http://bit.ly/1m0dhmV

Press Releases

Consultation on the Canada Business Corporations Act

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The Institute for Governance (IGOPP) submitted his comments to Industry Canada in response to the Consultation on the Canada Business Corporations Act (CBCA).. We will examine these issues individually to formulate specific recommendations in each case.

In its comment document, the IGOPP covered the following topics:

  • Shareholder advisory votes on compensation packages
  • Diversity of board membership
  • Equal treatment of shareholders
  • Parties who can claim oppression
  • Adding a minimum holding period for the right to nominate director

The consultation was launched by Industry Canada on December 11, 2013 to ensure that the governance framework for CBCA corporations remains effective, fosters competitiveness, supports investment and entrepreneurial activity, and instills investor and business confidence.

IGOPP in the Medias, IGOPP in the Medias, IGOPP in the medias

Should shareholders rule? Yes, it’s the law

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“Yvan Allaire’s recommendation would have securities regulators abdicate their statutory responsibilities.

Despite having declared elsewhere that governance by directors of public corporations is “a fiduciary façade for shareholders … largely a mirage” (The limits of “good” governance: Confession of the former chairman of SNC-Lavalin, 2013), Mr. Allaire repeats his earlier argument, suggesting that securities regulators should defer to the Supreme Court of Canada’s interpretation of the Canada Business Corporations Act (CBCA) and leave decisions concerning takeover bids to target directors. But he does not address the fact that the current regulatory treatment of poison pills implements our takeover bid legislation.”

The Supreme Court does not administer this legislation; securities commissions are mandated to do so. In fulfilling this responsibility, they are not “placing themselves above the Supreme Court” in interpreting the CBCA. They are applying securities legislation, in this case in the manner contemplated by the Parliament of Canada when, in 2001, it repealed the CBCA’s takeover bid provisions to leave takeover bid regulation,including the then well-established regulation of poison pills, to provincial securities regulators” …  Read More

 

News Articles

Should shareholders rule? No, let boards decide

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Boards of directors have the best record at extracting good deals for their shareholders.

In an opinion piece published in the Financial Post on May 6, (Shareholders should decide takeovers), Mr. Philip Anisman responds to my piece published in the Financial Post of April 30 (Canada needs a new takeover regime).

Mr. Anisman recycles the key arguments of “market discipline” and boards having to dedicate themselves to the singular goal of “maximizing shareholder value” when assessing an unsolicited offer to buy the company.

Of course, he has to acknowledge that “the fiduciary standard adopted by the Supreme Court of Canada in its BCE decision… would permit directors to just say ‘no’ to a takeover bid and would limit the unique market discipline provided by takeover bids. Whatever the merits of this position under corporate law, it does not govern the takeover bid provisions in the securities laws administered by our securities regulators.”

But that is my very point. Shouldn’t the provincial securities regulators adopt a regime for takeovers which is consistent with Supreme Court decisions? Is it appropriate for securities regulators to place themselves above the Supreme Court as interpreter of the Canadian Business Corporation Act? Is it not possible that the long-term interest of the company, not “maximizing shareholder value”, may call for the rejection of a particular hostile bid?

Why have many U.S. states adopted anti-takeover laws? Why should Canada, with a more vulnerable economy and a smaller industrial base, be more open than the U.S. to the vagaries of unchecked takeover games?

Carol Liao, having interviewed 31 Canadian legal practitioners, reports that, in their view, “directors are in the best position to unlock share value, as it is their fiduciary duty in the best interests of the corporation, but directors are being denied the proper tools to do so” (“A Canadian Model of Corporate Governance: Insights from Canada’s Leading Legal Practitioners”, Carol Liao, 2013).

Mr. Anisman refers to one study purporting to show the discounting effect of “poison pills” on share value. Well, in this area, academia is very uncertain as studies contradict each other and results are contingent on methodology, time frame, samples, etc.

But a comparison of two decades of M&A activity in the U.S., the 1980s – a period of unbridled takeovers – and the 1990s – a period subsequent to the adoption by some 30 states of laws granting boards more power in dealing with hostile takeovers – provides interesting data, as seen in the table nearby.

It would appear that the changes in U.S. state laws have indeed led to far fewer hostile takeovers; but the rate of successful takeovers actually increased and shareholders received a substantially better offer for their shares. Boards of directors with enhanced powers have extracted much better deals for their shareholders.

Mr. Anisman argues that hedge funds and arbitrage funds must have bought their shares from other shareholders and therefore one may conclude that these shareholders “can be viewed as supporting the bid.”

But there are other, plausible, reasons in the Canadian state of the investment and takeover market for this phenomenon to occur.

The current shareholders at the time the bid is made public know that, given Canadian regulations, there is a high probability that the takeover bid will be successful and that their individual interest is to sell at the price approximating the bid price even if they believe that it is not in the long-term interest of the company. (In fact more than 85% of hostile bids are successful in Canada.)

So, elementary financial calculus and their own fiduciary responsibility would incite an investment fund (mutual fund, pension fund, etc.) to sell its shares at the going price soon after the takeover offer; if the takeover bid were to fail (or be blocked by governmental bodies), the fund could buy back the stock at the pre-bid price and yet post a nice return boosting its yearly performance.

For the arbitrage funds and like-minded “investors”, the calculus is far different. It is remarkable that one would leave the fate of a company in their hands when the whole point of their actions is to support a quick completion of the takeover at the best price. That’s how they make their money!

Indeed, Canada needs a new takeover regime!

News Articles

Boards should decide takeovers

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In an opinion piece published in the Financial Post on May 6th, (Shareholders should decide takeovers), Mr. Philip Anisman responds to my piece published in the Financial Post of April 30th (Canada needs a new takeover regime).

Mr. Anisman recycles the key arguments of “market discipline” and boards having to dedicate themselves to the singular goal of “maximizing shareholder value” when assessing an unsolicited offer to buy the company.

Of course, he has to acknowledge that “the fiduciary standard adopted by the Supreme Court of Canada in its BCE decision would enable such directors’ decisions [i.e. preventing a takeover bid]. By encompassing the interests of all stakeholders within directors’ fiduciary duties, the Supreme Court has, in effect, adopted the substance of many U.S. state anti-takeover laws, allowing directors to determine whether the interests of stakeholders other than shareholders should prevail in any given case. Like Mr. Allaire, the BCE decision would permit directors to just say “no” to a takeover bid and would limit the unique market discipline provided by takeover bids. Whatever the merits of this position under corporate law, it does not govern the takeover bid provisions in the securities laws administered by our securities regulators.

But that is my very point. Shouldn’t the provincial securities regulators adopt a regime for takeovers which is consistent with Supreme Court decisions? Is it appropriate for securities regulators to place themselves above the Supreme Court? Is it not possible that the long-term interest of the company, not “maximizing shareholder value”, calls for the rejection of a particular hostile bid?  […] Read more

News Articles

Counterpoint: Canada needs a new regime for hostile takeovers

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In this era of speed trading and hedge funds, securities commissions need to adapt to protect  long-term shareholders

Ideology can be blinding, even apparently when one’s secular faith involves the simple creed that those who own stocks are presumptively selfless while those who manage corporations are presumptively selfish and untrustworthy.
Leo Strine, Chief Justice of the Delaware Supreme Court, Columbia Law Review, 2014.

First, let’s be clear. The issue of boards’ duties and responsibilities in matters of unsolicited takeover offers is not a Quebec issue but a Canadian one.

Whether Valeant, a nominally Quebec-based corporation, succeeds in its efforts to take over Allergan should rest with the Allergan’s board and its assessment of the long-run interests of the company. Some seem to think that this Delaware approach to takeovers gives total, unchecked, authority to the board; but it is not a free lunch. The would-be buyer may call upon the courts to determine if indeed the board of the target company is acting in the best interest of shareholders.

Already back in 2007, the federal government in response to public outcry at the takeovers in short succession of Alcan, Falconbridge, Inco and others, set up the Competition Review Panel. In its report, the Panel recognized the untenable position of securities commissions and recommended that:

  • “Securities commissions should repeal National Policy 62-202 (The policy that stripped boards of directors of all authority in takeover situations).
  • Securities commissions should cease to regulate conduct by boards in relation to shareholder rights plans (“poison pills”).
  • Substantive oversight of directors’ duties in mergers and acquisitions matters should be provided by the courts.
  • The Ontario Securities Commission should provide leadership to the Canadian Securities Administrators in making the above changes, and initiate action if collective action is not taken before the end of 2008.”

In the U.S., boards of directors with enhanced powers have extracted much better deals for their shareholders. But not in Canada.

Take the case of Osisko. But for intricate financial gymnastics (involving the Caisse and CPPIB) that managed to stall the process and give the board enough time to arrange a better offer, Osisko would have been sold to Goldcorp for roughly $1 billion less than will ultimately be received by shareholders.

Take the recent case of Inmet Mining Corp. and First Quantum Minerals. Inmet’s board was dead set against a takeover by First Quantum. The latter made a bid; no other bidder has shown up. Despite the board’s opposition, Quantum simply put its offer to the shareholders. As enough of them handed in their shares the deal has been consummated. Under Canadian regulations, the board of Inmet had no other recourse; they believed that it was not in the long-term interest of Inmet to be acquired by Quantum at the offered price but were powerless to act. That does not make any sense.

How can anyone defend this dysfunctional regime? How can one pretend that this system is best for stable, long-term shareholders?

In a world of financial derivatives, speed trading, arbitrageurs, momentum players, hedge funds of all sorts, as soon as a takeover offer is made public, the shareholder base of the target company is swiftly and radically transformed. To consider these newcomers as the sole “deciders” of company’s fate, needing the benevolent protection of securities commissions against malevolent, conflicted management, seems like an imaginative scenario of times past.

Indeed, the funds of the hedge, mutual, institutional or arbitrage sorts are merely money managers for the real owners, their investors or future pension beneficiaries; but are these owners ever consulted in the matter?

Although many in Canada are not aware of the fact, Canadian corporate governance already complies with what the activist investors are fighting for in the United States; elimination of staggered boards and separation of power between the chair of the board and the CEO, both governance principles which make it easier to carry out a hostile takeover; combined with the widespread practice of majority voting for board members, these features of Canadian corporate governance provide shareholders with the means and tools to punish an errant board.

Finally, the quaint notion that management is, ipso facto, against the takeover of their company because of inherent conflicts of interest must be updated; because of the changes in compensation system for executives and board members, the concern has become that management and boards may be too receptive to a takeover offer that may not be in the long-term interest of the corporation and its stakeholders. The potential conflict of interest has switched side. Securities commissions should be alert to that phenomenon and assess measures to limit this sort of conflict of interest.

But, the Canadian securities commissions, with the OSC taking a leading role, should modernize a regime that has become disconnected from the current realities of financial markets and harmful to long-term shareholders as well as to Canadian society.

News Articles

Two cheers for Barrick Gold

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After the bruising treatment that Barrick had to endure last year for its indefensible pay packages, the company got the message. The compensation plan it has made public on March 31st goes a long way towards the kind of pay system that all companies should adopt.

Having published a policy paper on executive compensation in 2012 («Cutting the Gordian knot», IGOPP, May 2012) that proposed the kind of changes now put forth by Barrick, we applaud the company for this bold, innovative step in the right direction.

The new reward system has several key features:

  • The elimination of stock options, the prime culprit for short-term thinking in business management;
  • Variable compensation based on performance measures that are both quantitative and qualitative; excellent performance is not measured only by the achievement of financial ratios but equally by more subtle but critical variables such as «Reputation and license to operate», «People development», and «Strategic execution»;
  • None of the quantitative measures are linked to stock-price performance; while the actual amount of financial rewards will, in the long run, be influenced by the stock price, the quantitative measures are tied to performance largely under the control of management: Return on invested capital, Free cash flows, Dividends to shareholders, Strong capital structure, Capital project performance;
  • The performance units are earned each year on the basis of targeted performance goals. These units vest after three years and are then converted in shares of the company; these shares are bought in the open market so that there is no dilution effect for shareholders;
  • Abandoning, for all intents and purposes, the flawed practice of benchmarking compensation against a supposedly comparable set of companies, the weakest link of current ways of setting compensation;
  • The company has adopted a claw-back provision in case of re-statement of past performance; it has also adopted a policy prohibiting hedging of the economic exposure to share ownership;
  • The company has raised substantially the required value of the share ownership by all executives;
  • The executives cannot cash the shares they have earned until they retire or leave the company.

Overall, this new compensation system represents a huge improvement over previous reward systems at Barrick and at most Canadian and American corporations for that matter.

I have one serious reservation: the concept of restricting the cashing of all earned shares until retirement or departure from the company may well prove counter-productive.A forty-five year old executive with a substantial paper worth in accumulated shares at risk of general stock market melt-down at a most inopportune time may find that an early leave from the company is an attractive option. Waiting until retirement to cash in any part of this vulnerable paper wealth may prove counter-productive.

It may be more appropriate to allow the cashing of earned shares over and above the threshold value set for executive share ownership. As long as executives keep a substantial part of their wealth in shares of the company, the convergence between their interest and the long-term interest of the company is assured.

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Barrick Gold unveils new pay scheme, may add directors

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[…] “Yvan Allaire, executive chairman of the board of the Institute for Governance of Private and Public Organizations, was positive about the plan overall

“It’s a giant step in the right direction,” said Allaire, praising the move towards share awards over stock options.

Options have fallen out of favor in recent years in part because of concerns they encourage short-term thinking, and offer executives gains if their company’s stock rises without downside risk if it falls.

But Allaire also said the plan could cause retention issues.

In an emailed statement, Harvey said the system is meant to create a management team “personally vested” in Barrick’s success.

“In developing our new system, we looked at other companies who use a similar approach and they have found that it is actually a motivating factor in the retention of key executives,” he said.

“WE HEARD THE SHAREHOLDERS”

Thornton’s total compensation was $9.5 million in 2013, including a $5 million cash award that he has committed to use to buy and hold Barrick shares. Last year, he bought shares with his controversial $11.9 million signing bonus.

Barrick said all shares awarded under the long-term compensation plan will be bought on the open market to avoid dilution. It also laid out new minimum ownership requirements, which among other things will require the chief executive to own shares worth 10 times base salary by 2020.

Last year, proxy advisory firm Glass Lewis had recommended that its clients withhold votes from three Barrick directors at the annual meeting, criticizing Thornton’s signing bonus and the severance paid to outgoing Chief Executive Aaron Regent, among other things.

“In terms of large, discretionary packages, I think we heard the shareholders on that,” Harvey said. “I think we’ll be very hesitant to do that kind of thing.” (Editing by Jeffrey Hodgson, Andre Grenon, Peter Galloway and Lisa Shumaker).”

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“Quebec securities regulator seeks compromise with provinces on takeover rules”

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“Quebec’s market watchdog says it is pursuing talks with other provinces to try to strike a compromise on changes to Canada’s takeover bid and defensive tactics regulation.

“The vulnerability of our public companies is a Canadian problem, not only a Quebec one,” Louis Morisset, chief executive of the Autorité des marchés financiers, said in the text of a speech to the Canadian Club of Montreal Monday. “[We need to] re-establish a proper balance of power between a board of directors and an opportunistic buyer.”

The comments come amid a heightened public sensitivity toward hostile takeovers in Quebec as parties campaigning in the April 7 election vow to better protect head offices in the province. Montreal miner Osisko Mining Corp., the subject of an unsolicited $2.6-billion bid from Vancouver-based Goldcorp Inc., is playing up its local roots as it searches for a white knight.

“It’s urgent that after the election, Quebec’s finance minister convince his provincial counterparts of the merits of the Autorité’s proposals,” said Yvan Allaire, executive chair of Montreal’s Institute for Governance. “Unwanted takeovers are a Canadian issue.”” … Read more

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How Quebecor’s press can distance itself from former boss Péladeau

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[…] “Péladeau has also insisted he is committed to the code of ethics of the province’s legislature.

But provincial academics and experts aren’t confident that goes far enough.

“These measures are insufficient,” Yvan Allaire, the executive chairman of the Institute of Governance and professor at the L’Université du Québec à Montréal, wrote in an opinion piece that ran in LaPresse, a rival to Quebecor’s papers.

Allaire proposes that Quebecor’s media assets be placed into the business fold of TVA and the company’s controlling stake in the television unit reduced to under half.

That would require issuing new shares to other investors that would dilute Quebecor’s ownership in the enlarged TVA company, Allaire suggests.

Péladeau would continue to own control of Quebecor, whose principle business would remain cable and wireless company Videotron.

It is a complicated process but one that would preserve the objectivity of the bulk of Quebec’s French-language media outlets, Allaire said in his commentary.

“The risks of interventions, conflicts of interest, complacency and self-censorship [by journalists and editors] would be greatly reduced.” » Read more

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Quebec’s tough anti-takeover talk is all to protect eight companies

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[…] «That may be true. As Yvan Allaire of Montreal’s Institute for Governance wrote in an opinion piece this week: “The legislative measures the working group is proposing are draconian.”

Among them: Allowing Quebec companies to adopt variable voting rights that could increase the longer shares are held (the aim being to keep the influence of what Caisse de dépôt boss Michael Sabia calls “investor tourists” lower than longer-term shareholders). The panel also proposes enshrining into Quebec law a number of provisions found in many U.S. states making a hostile deal less appealing to a potential acquirer. These include prohibiting the removal of directors before their term is up and prohibiting a hostile bidder from merging or selling assets representing 15% or more of the company for five years (the intention being to stop a bidder from financing a deal with the target’s assets).

The measures stretch past the power-enhancing steps for boards enacted in places such as Delaware, Mr. Allaire says, inching closer to the dissuasive regime in states like Pennsylvania, which aims to quash all the potential benefits from a non-friendly deal” … Read more