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		<title>Changes to capital gains taxation: insidious consequences for the intergenerational transfer of Canadian controlled companies?</title>
		<link>https://igopp.org/en/changes-to-capital-gains-taxation/</link>
		<comments>https://igopp.org/en/changes-to-capital-gains-taxation/#respond</comments>
		<pubDate>Tue, 21 May 2024 19:41:45 +0000</pubDate>
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		<guid isPermaLink="false">https://igopp.org/la-fiscalite-et-le-risque-de-transformer-nos-fleurons-en-etoiles-filantes/</guid>
		<description><![CDATA[Two weeks after the budget was tabled, Finance Minister Chrystia Freeland now intends to ask Parliament to approve proposed changes to capital gains taxation in a stand-alone bill. This measure has met with an abundance of reactions. The people affected are an assorted group with very high incomes, of course, but these incomes often reflect, [&#8230;]]]></description>
		<content><![CDATA[Two weeks after the budget was tabled, Finance Minister Chrystia Freeland now intends to ask Parliament to approve proposed changes to capital gains taxation in a stand-alone bill.

This measure has met with an abundance of reactions. The people affected are an assorted group with very high incomes, of course, but these incomes often reflect, among other things, a unique situation: a significant capital gain arising from the sale of a business, a revenue property, a family cottage, etc. Few comments have been heard about the taxpayers who are by far the most affected, and for good reason: these are people who die and are taxed on their capital gains, calculated as if they had sold all their assets at the time of their death and for which payment must be made immediately, often forcing the estate to sell the assets to raise the necessary cash.

Even before the increase in the inclusion rate, capital gains taxation was already a major issue of concern for many entrepreneurs and families who control their businesses, and it's one that should be of concern to governments as well.

Indeed, how is it possible to transfer the company to one's estate, when the calculation of the tax payable on the transfer is based on the value of the shares used to maintain control? And, as is also often the case, the family that holds this control—although appearing to be wealthy on paper—does not have the liquidity to pay this tax bill, as the family fortune is largely tied up in the value of the shares. So, to settle the tax bill, the choices are limited and disconcerting to say the least: sell shares and reduce the stake below the threshold of control (and thereby make the company vulnerable to hostile takeover bids) or sell the company.

Of course, there are ways to ensure a temporary deferral, notably by setting up trusts. Some tax experts will suggest schemes to prolong this deferral somewhat. But all in all, these solutions are highly imperfect since they involve sophisticated planning and extremely restrictive choices.

More than 35% of the companies making up the S&#38;P/TSX Composite Index are controlled companies, including many of the major companies often referred to as flagships in different provinces or regions of Canada. At a time when a review of tax measures associated with capital gains taxation is underway, our governments have an opportunity to act by adjusting the tax system to allow tax
deferral on the transfer of a controlled company: this is a lever that our governments must explore.

Why take action?

The tax collected by the government at the time of transfer can be a seemingly large amount that helps make up for deficits. But the risk of seeing a company sold for the purpose of paying tax is an ill-advised gamble for our governments. Numerous studies have demonstrated the essential role played by the head offices of large—and not-so-large—companies in provincial or regional economic ecosystems. Indeed, these companies are deeply rooted in the social and financial fabric of their communities, helping maintain well-paid jobs in addition to providing a significant revenue source for numerous direct and indirect suppliers, including services provided by professionals of all kinds.

The amount of the taxes collected by governments on all the employment income associated with these companies, not to mention the direct tax revenues from the companies themselves, represents much more attractive annual and sustainable revenue than a one-off collection from the transfer to the estate.

Offering a tax deferral to families who control a company is therefore an investment. And a deferral means that, unless these families maintain control, any sale will eventually result in the payment of the amounts owing to the government.

However, an investment is not a gift. Several G7 countries have introduced rules to facilitate such transfers by allowing a form of tax rollover, conditional on preserving employment thresholds and maintaining activities locally. The ideas and solutions proposed by these countries to help maintain local businesses should be considered.

In the absence of any other mechanism for deferring the tax owing on the transfer of shares, it may seem preferable—all the more so since the announced increase in the inclusion rate—for the controlling shareholder to sell the company before their departure; in this way, they will potentially obtain a 30-40% premium for their shares, which, after the tax bill is paid, will leave them (and any heirs) with a net after-tax value equivalent to their current value, but without any increased wealth for the stakeholders and the community.

For those entrepreneurs who can still maintain control and transfer it, let's hope we don't, one day, have to announce the sale of their company to foreign interests for tax reasons. It's not too late to act. The long-term control of our economy is at stake.
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		<title>Corporate Purpose, ESG, stakeholders: what’s the deal?</title>
		<link>https://igopp.org/en/corporate-purpose-esg-stakeholders-whats-the-deal/</link>
		<comments>https://igopp.org/en/corporate-purpose-esg-stakeholders-whats-the-deal/#respond</comments>
		<pubDate>Tue, 17 Nov 2020 15:15:16 +0000</pubDate>
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				<category><![CDATA[Commentary]]></category>
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		<category><![CDATA[American governance]]></category>
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		<guid isPermaLink="false">https://igopp.org/raison-detre-esg-parties-prenantes-a-quoi-cela-rime-t-il/</guid>
		<description><![CDATA[Since the publication in 1932 of Berle and Means’ The Modern Corporation and Private Property, “capitalist” societies have been engaged in a forlorn quest for an appropriate definition of the role, justification and “raison d’être” of large corporations. Except for the legal fiction of shareholders as owners, corporations of the 1950’s, 60’s and 70’s, were [&#8230;]]]></description>
		<content><![CDATA[Since the publication in 1932 of Berle and Means’ The Modern Corporation and Private Property, “capitalist” societies have been engaged in a forlorn quest for an appropriate definition of the role, justification and “raison d’être” of large corporations.

Except for the legal fiction of shareholders as owners, corporations of the 1950’s, 60’s and 70’s, were not really “owned” by anyone but controlled by management. In this context, the manager had to be a man (or a woman) of many constituencies, a nimble balancer of conflicting interests, an impartial purveyor of amenities to one and all, a human synthesizer of the rights and interests of all parties which might directly or indirectly be affected by the actions of the corporation. Whether managers actually internalized these norms of conduct is a moot point. That concept of the corporation gave rise to formidable, dominant companies, such as IBM, Johnson and Johnson, GM, GE.

However for the last 40 years or so, with the rise of “financial capitalism” and the clever linking of executive compensation to share price, “creating shareholder value” became the driver of management, the rallying cry of the executive corps. That worked well for the managerial class. No matter that all large corporations proudly brandish statements about their Vision, Mission, Values and Ethics, recriminations and discontent simmered and eventually crystallized around a bundle of expectations now assembled under the ESG banner. [Environment, Social and Governance]

Institutional funds, pension funds, asset managers of various stripes and index funds particularly have joined, indeed led the bandwagon, relentlessly pushing corporations to include ESG issues in their management. Most corporations have given in to the pressure with various degrees of enthusiasm.

The proxy advisory firms (ISS in particular), their noses firmly in the wind, have sniffed the trend and now intend to include ESG factors in their assessment of corporate governance.

That’s the context which led some 181 CEOs of large (mainly American) corporations, under the aegis of the Business Roundtable, to sign a solemn undertaking, a year ago or so. They committed to adopt and impose on themselves a “Purpose” of care for, and nurturing of, their stakeholders. Henceforth, corporate decisions will factor in the interests of various parties, including the civic society and Mother Earth.

Professor Colin Mayer, one of the promoters of the ‘corporate purpose”, puts it this way: “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems”. Hum, all leaders of large corporations will subscribe to this broad and vague agenda.

Business circumstances, at least for the oligopolistic leviathans, are changing; the greatest threat to these corporations’ survival often comes from the social and political environment, not mainly or solely from the economic and competitive environment. Large companies with slack resources can cope with the piling up of new demands and expectations in matters of environment, social responsibility, diversity and so on. But three points need to be emphasized here:

1. In this quest for a stakeholder oriented corporation and the multiplication of new ESG mandates, what’s the role of the entrepreneurial spirit, the drive to create and build a business in a world of sharp competition and evolving technologies? The vibrancy of an economy rests on entrepreneurial activity. Let’s be careful, lest we collectively stifle the entrepreneurial drive.

2. As the demands and legal requirements imposed on business corporations largely single out stock-market listed corporations, the current drought of new businesses listing on a stock exchange may worsen as entrepreneurs weigh the costs and benefits of “going public” and private sources of funding mushroom.

3. In Canada, two rulings by the Supreme Court clarified the meaning of acting in “the interest of the corporation” as stipulated in the Canadian Business Corporation Act. Boards of directors in their decisions must give equal consideration to stakeholders and shareholders; boards should not favor any particular group in its decision-making. Basically, we have in Canada a stakeholder model of governance. The U.S. jurisprudence is not that clear on this issue; several legal scholars still argue that maximizing shareholder wealth should be the prime objective of boards of directors. For instance, Professor Bainbridge writes “The law of corporate purpose remains that directors have an obligation to put shareholder interests ahead of those of other stakeholders and maximize profits for those shareholders”.

That is the context for the BRT’s “Purpose” initiative: an unclear American legal framework combined with investor and societal/political pressures on management to adopt a sort of stakeholder model.

But In Canada, this whole agitation about “Corporate Purpose” is moot as stakeholder governance is the law! Canadian boards of directors should be governed accordingly although there is yet little empirical evidence as to how that legal fact has impacted governance in Canada.

When all is said and done, managing for the long term, factoring in the multiple interests of the broader society, desirable goals indeed, will only happen when the games of some financial types are checked and executive compensation is re-arranged to support these objectives. Otherwise, all this agitation is perfunctory, pro-forma, “sound and fury signifying nothing”.

&#160;

Opinions expressed in this article are strictly those of the authors.
]]></content>
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		<title>Audet family was right to reject Rogers&#8217; attempted takeover of Cogeco</title>
		<link>https://igopp.org/en/audet-family-was-right-to-reject-rogers-attempted-takeover-of-cogeco/</link>
		<comments>https://igopp.org/en/audet-family-was-right-to-reject-rogers-attempted-takeover-of-cogeco/#respond</comments>
		<pubDate>Fri, 11 Sep 2020 14:35:55 +0000</pubDate>
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		<guid isPermaLink="false">https://igopp.org/audet-family-was-right-to-reject-rogers-attempted-takeover-of-cogeco/</guid>
		<description><![CDATA[In a surprising move, Rogers and Altice USA made an offer to buy Cogeco and Cogeco Communications and split their assets between them. If Cogeco were a typical Canadian corporation with a one-share, one-vote capital structure, the would-be buyers could disregard any reticence or opposition by the board of directors and transmit their offer directly [&#8230;]]]></description>
		<content><![CDATA[In a surprising move, Rogers and Altice USA made an offer to buy Cogeco and Cogeco Communications and split their assets between them. If Cogeco were a typical Canadian corporation with a one-share, one-vote capital structure, the would-be buyers could disregard any reticence or opposition by the board of directors and transmit their offer directly to shareholders. Given that Rogers already holds a stake of 41 per cent in the subordinate shares of Cogeco and 33 per cent for Cogeco Communications, the outcome is fairly predictable. If shareholders representing two-thirds or more of the shares vote for their offer, the deal is done (leaving aside any possible wobbling by the CRTC or the Competition Bureau).

But because of multiple voting shares, the Audet family, which has effective control of these entities, can and did bluntly reject the attempted takeover. And for good reason. Under the family’s leadership, Cogeco shareholders enjoyed a compound return of 9.8 per cent over the last five years and 11.8 per cent over the last ten. Shareholders of Cogeco Communications were rewarded with a compound return of 10.8 per cent over five years and 13.2 per cent over ten years.

Rogers/Altice offered a “generous” premium of some 30 per cent over the average share price of August 2020. But, compared to the share price of Cogeco entities at the beginning of 2020, the bid price represented a measly 2.3 per cent premium for Cogeco and just 18.6 per cent for Cogeco Communications.

On their face, those facts would justify a rejection of the Rogers/Altice offer and perhaps lead to further negotiations. That would prove a point often made in favor of multiple-voting shares: the controlling shareholders are in a great position to extract the best price from would-be buyers for the benefit of all shareholders.

That is not the denouement here, however, as the Audet family has made it clear their rejection of the “hostile” bid is not tactical but is firm and unconditional. Rogers should not be surprised by such a decision nor continue to pursue this acquisition: its own shareholder structure gives total control to the Rogers family (and now to a “control trust,”).

In an era of exotic funds and of “activist” hedge funds seeking to bully companies into taking actions of only short-term benefit, a dual class of shares becomes very attractive and beneficial for the whole industrial system of a country. It is the ultimate defense mechanism, particularly in Canada, where staggered boards do not exist and poison pills are of very short duration. Even in the U.S., however, from 2017 to 2019 some 16.5 per cent of companies going public did so with a dual class of shares, a share structure that is especially popular among tech companies.

Some will argue, as they always do, that all shareholders should have a voice in a takeover decision, as they would with a one-share, one-vote model, and that multiple voting shares represent a breach of shareholder “democracy.” That’s balderdash. The equivalent of “one person-one vote” democracy in the domain of shareholding would be “one shareholder-one vote,” irrespective of the number of shares held. In political democracies, citizens do not acquire more voting rights because they pay more taxes to the government.

Short-term “tourist” shareholders should no more get to vote than tourists who happen to be in a country on voting day should be able to claim voting rights. Like immigrants, newcomers to the shareholding of a company should have to wait a significant time before acquiring “citizenship” and the right to vote. Clearly, one share-one vote can’t be taken seriously.

We live in an age when all institutional investors call on corporations to pursue ESG (Environment, Social, Governance) objectives and in a country where the legal framework as interpreted by the Supreme Court calls on boards of directors to take into account the interests of all stakeholders, without giving preference to any particular group, not even shareholders. Many dual-class companies become family businesses, which have a longer life, are better integrated in their communities and are more likely to plan and manage with a long-term perspective and careful consideration of all stakeholders. The controlling shareholders of the Cogeco companies are exemplars of these benefits associated with family control. May these family-controlled companies, including Rogers, remain impervious to unwanted takeovers and other financial shenanigans.
]]></content>
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		<title>SEC Rule Amendments and Dual-class returns</title>
		<link>https://igopp.org/en/sec-rule-amendments-and-dual-class-returns-commentary/</link>
		<comments>https://igopp.org/en/sec-rule-amendments-and-dual-class-returns-commentary/#respond</comments>
		<pubDate>Thu, 20 Aug 2020 18:38:47 +0000</pubDate>
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		<guid isPermaLink="false">https://igopp.org/?p=12824/</guid>
		<description><![CDATA[1. ISS is finally leashed: SEC Amends Rules for Proxy Advisors On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to better regulate the activities of proxy advisors, such as ISS and Glass Lewis, and to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, [&#8230;]]]></description>
		<content><![CDATA[1. ISS is finally leashed: SEC Amends Rules for Proxy Advisors

On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to better regulate the activities of proxy advisors, such as ISS and Glass Lewis, and to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.
In essence, proxy advisors have always benefited from an exemption from the information, legal risks and filing requirements of proxy solicitation. The SEC has now stipulated that this exemption will apply in the future only if proxy advisors abide by the following conditions:

 	They must provide specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice;
 	They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure that corporations that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated by the proxy advisors to their clients;
 	They ensure their clients will receive, in a timely manner, any statement, explanation and contestation issued by the corporations that are the object of the voting recommendation.

The SEC is thus responding to oft-stated concerns of many issuers about these heretofore lightly regulated but influential market participants.

Proxy advisory firms are not required to comply with the amended regulations until December 1, 2021.

Of course, ISS has already announced its intention to challenge in court this SEC ruling.

IGOPP is particularly pleased with the SEC’s amended regulations as it called for such actions in a 2013 Policy Paper [1], The Troubling Case of Proxy Advisors: Some policy recommendations.

The complete press release of the SEC, and the links to retrieve pertinent materials, can be accessed here [2].

2. New study on relative performance of US dual-class companies

In a novel approach to the subject, researchers have “constructed” an index of dual class shares for the period 2009-2019. The intention here is to assess the performance of a hypothetical fund that would be made up of all dual class shares in proportion to their stock market capitalization. The performance of the fund may then be compared to other index funds, such as, in this case, the CRSP US Total Market Index. The results for dual class voting structures speak for themselves, as shown in the Table below.



Clearly, the volatility-adjusted return ratio of the Dual Index (a close variant of the Sharpe ratio where the higher the ratio the better) is clearly superior to the ratio of the Market Index.

The Index includes all dual-class companies with ordinary common shares listed on NYSE, NASDAQ, or AMEX and total market capitalization in excess of $100 million. A reconstitution process of the Dual Index is carried out semiannually, at the end of June and December. In case of a delisting or collapse of the dual-class structure, the researchers reinvested the proceeds in the portfolio until the next Dual Index reconstitution.

As of December of 2019, the Dual Index included 178 dual-class companies valued at $3.4 trillion. The Index accounts for 89% of the market capitalization of all dual-class companies listed across major U.S. stock exchanges.

The next figure shows the cumulative growth of a one-dollar investment in the Dual Index (green line) relative to the cumulative growth of a one-dollar investment in the market index (blue line). The performance of the Dual Index is especially strong in the second half of the decade .



The complete study by authors Byung Hyun Ahn, Jill E. Fisch, Panos N. Patatoukas &#38; Steven Davidoff Solomon, released as Research Paper on July 28, 2020, is available here [3].

[1] https://igopp.org/wp-content/uploads/2014/04/pp_troublingcaseproxyadvisors-pp7_short_3_.pdf
[2] https://www.sec.gov/news/press-release/2020-161
[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3645312]]></content>
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		<title>The Age of ESG: new issues for corporate governance ?</title>
		<link>https://igopp.org/en/actionnaires-et-parties-prenantes-quelle-gouvernance-a-venir/</link>
		<comments>https://igopp.org/en/actionnaires-et-parties-prenantes-quelle-gouvernance-a-venir/#respond</comments>
		<pubDate>Sun, 09 Aug 2020 18:01:18 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
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		<guid isPermaLink="false">https://igopp.org/actionnaires-et-parties-prenantes-quelle-gouvernance-a-venir/</guid>
		<description><![CDATA[For 40 years or so, corporations listed on stock markets were expected to pursue diligently, if not exclusively, value creation for their shareholders. A number of factors had pushed corporations away from an earlier “stakeholder model,” prime among them the revolution in executive compensation. Then, in the new century, a perennial criticism of business corporations [&#8230;]]]></description>
		<content><![CDATA[For 40 years or so, corporations listed on stock markets were expected to pursue diligently, if not exclusively, value creation for their shareholders. A number of factors had pushed corporations away from an earlier “stakeholder model,” prime among them the revolution in executive compensation.

Then, in the new century, a perennial criticism of business corporations and “capitalism” suddenly took on new urgency, with the capitalist system being held responsible for the wealth and income inequality it produces and the environmental havoc it has wreaked. This time around, though, the complaints did not issue from some leftist organization but from the very heart of the system, from large institutional shareholders who have recently converted to the church of ecological sanctity and social responsibility. In this new view, corporations should henceforth be accountable for their financial performance, yes, but also for achieving set targets in matters of environment (E), society (S) and governance (G). The ESG triplet, tacitly fostering a “stakeholder” doctrine on corporations, has created new challenges for corporate governance.

A year ago, this revised doctrine received a surprising endorsement when 181 CEOs of large American companies signed on [1] to a new “purpose” for the corporation: a fundamental commitment to all of our stakeholders (customers, employees, suppliers, communities and shareholders). “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.” 

So, institutional funds and others now require specific ESG action plans, target metrics and linkage of executive compensation to these metrics.

But there are unresolved issues with this “stakeholder” model of the corporation:

When the interests of various stakeholders are divergent, how should the interests of the corporation be understood? How should the board proceed in determining a fair trade-off between the interests of various stakeholders and which of them are entitled to such consideration? 

A second concern: How are business corporations to cope with ESG demands when facing tough competitors, domestic and international, who are not subjected to these same pressures? A recent study shows that activist hedge funds treat ESG targets as a signal of management’s less than absolute devotion to shareholder interest. Firms spending more than average on corporate social responsibility activities have double the probability of being targeted by “activist” hedge funds.

At a more fundamental, philosophical, level: Should ESG targets go beyond what government regulations call for? In a democratic society, is it not, rather, the role of governments, elected to protect the common good and represent the general will of the people, to regulate business corporations so as to achieve society’s social and environmental goals? But, perhaps the recent ESG focus and re-discovered “corporate purpose” are but maneuvers to fend off popular pressures on governments to impose stringent regulations.

In any case, the achievement of ESG targets will require changes in management incentives. Executive compensation in its current format is in large part linked to financial performance, with major components highly sensitive to stock price. Linking compensation to some ESG targets will call for re-tooling the way executives are compensated, a difficult task. In 2019, 67.2% of S&#38;P/TSX 60 firms incorporated at least one ESG metric in their incentive plans, but only 39.7% related to environmental factors. Some 90% of the firms include ESG metrics in their annual executive incentive programs but rarely in their long-term incentive programs. Willis Towers Watson also noted in a recent study that only four per cent of S&#38;P 500 firms used ESG metrics as part of their long-term incentive awards.

Finally, if a company is to be stakeholder-driven, why only shareholders get to elect board members? That nagging question may come to haunt some of the promoters of the “stakeholder model” as it opens the door to board membership by other stakeholders, such as employees. It may not be what the institutional funds had in mind when pushing their ESG agenda.

A sharp debate is now raging (in academia at least) about the pros and cons of the stakeholder model. Be that as it may, in the business world, the relentless pressure from investors has converted most corporate management and boards of directors to the ESG religion despite many unresolved issues.

&#160;

Opinions expressed herein are strictly those of the authors.

[1] https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans]]></content>
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		<title>Corporate Governance in the post-pandemic world</title>
		<link>https://igopp.org/en/corporate-governance-in-the-post-pandemic-world/</link>
		<comments>https://igopp.org/en/corporate-governance-in-the-post-pandemic-world/#respond</comments>
		<pubDate>Fri, 01 May 2020 15:42:27 +0000</pubDate>
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		<description><![CDATA[Human beings are wonderful amnesiacs, an observation grounded in the history of traumatic events which have faded gradually into oblivion. That may well be the case with the current pandemic. For instance, how did societies, corporations and their governance system cope with recent dramatic events (so called “Black Swans” or for the more statistically inclined [&#8230;]]]></description>
		<content><![CDATA[Human beings are wonderful amnesiacs, an observation grounded in the history of traumatic events which have faded gradually into oblivion. That may well be the case with the current pandemic.

For instance, how did societies, corporations and their governance system cope with recent dramatic events (so called “Black Swans” or for the more statistically inclined “Six-Sigmas” events, although many would rightfully question whether these were really “Black Swans”)?

Take the financial/economic crisis of 2007-2008. Few sequels remain. Regulations of the financial sector were enhanced somewhat, banks had to increase their capital, executive compensation was “subjected” to an advisory “say-on-pay” vote by shareholders and some of the most outrageous financial speculations were curtailed. But overall, not much has changed despite the panic and dread at the time when many knowledgeable observers and actors feared a total collapse of the world’s
financial and economic system.

But 9/11 is a different story. Although located in New York, the event has brought about lasting, dramatic changes on an  international scale. Air travel was never the same after 9/11. States and government have increased permanently their authority and means to surveil and control societies and the worldwide flow of communications. Some individual freedoms were sacrificed on the altar of security with the consent (?) of the citizenry.

As the current pandemic has a much broader and deeper impact, the 9/11 scenario offers a weak template for what will happen when the pandemic begins to fade away: greater control on citizens’ behavior, close monitoring of all movements through instant communications, government-issued safe-conducts to gain access to any public event. Constitutionally protected individual freedoms will be infringed upon by a State/medical bureaucracy determined to protect us at all costs. All of these coercive measures will be promoted, and accepted, as essential to avoid a recurrence of some form of pandemic.

This painful experience will also foster some changes of a social/political nature: the work arrangements adopted during the crisis will call for a critical re-thinking of the standard pattern of commuting/office work/in-person meetings with colleagues. The resulting reduction of “polluting travel” will be hailed by all environmentalists despite the “irrelevant” cost of anomie, social isolation and estrangement.

The inevitable quest for greater self-sufficiency in many areas (food, pharmaceuticals, etc.) will bring about different industrial policies as well as a renewed skepticism about “globalization” and its supposed benefits. But this latest crisis may also generate a lasting anxiety and a sense of vulnerability in large segments of the population, who will subject all their public activities to the imperatives of total safety.

The role and responsibility of boards of directors

1. Coping with uncertainty

Even if 9/11 or the 2008 financial crisis may not fully qualify as Black Swans, for most corporations these events were unexpected and unplanned for. Corporations were taken by surprise and had to improvise some response. After the 2008 financial crisis particularly, most boards have enhanced their role in risk monitoring and risk mitigation.

But, boards have to cope with uncertainty, not only risk. Uncertainty is different from risk because there is no probability estimate of the occurrence of uncertain event within a given time frame, no way to predict the likely occurrence of a “six-sigma” event. The typical “predict-and-prepare” approach of risk management system and process does not work.

There are always “clairvoyants” who claim, with some justification, that they had foreseen the catastrophe. But how often had they been wrong in the past?

So what is a board to do? To ask management to list all unlikely dramatic events to which a corporation may be vulnerable and prepare contingency plans for each would paralyze any organization. A bank executive claimed recently that his institution had planned for “all” contingencies (nuclear attacks, fires, hurricanes) but had never foreseen a pandemic (Richard Dufour, La Presse, April 25th 2020). What about tsunamis, 9.0 earthquakes, an asteroid hit, etc.?

In an uncertain world where unpredictable and uncontrollable events may have catastrophic consequences, a board of directors must call upon management to hoard strategic and financial resources, build redundancy, and increase the corporation’s flexibility and adaptability to uncertain events. (See Allaire and Firsirotu, Coping with Strategic Uncertainty, Sloan Management Review)

Coping with uncertainty means:

 	maintaining an acute sense of the firm's vulnerability;
 	experiencing the future as largely unknowable; and
 	considering the firm’s survival to be dependent on organizational flexibility, on building buffers and redundancy and on hoarding strategic and financial resources.

No doubt such measures will have a short-term impact on earnings per share, on return on assets, on optimal capital structure. But that is the cost of some preparedness to cope with uncertain events.

2. Designing the organization for a new set of circumstances

There will be a decisive relaxation, even rejection, of the neo-liberal framework which has defined the functioning of societies and large corporations for decades: the expectation of continuous growth in earnings per share; the cost-driven global search for the locations of cheapest labor where to farm out operations; the massive creation of income and wealth inequality; the indecent enrichment from financial speculation and legerdemain, from activities with little or no social value; the tradeoffs between debt, deficits and social expenditures with the former having a distinct priority over the latter.

Boards of directors should heed the early warnings of impending disturbances of a political and social nature. They may be harbingers of the next flock of black swans. If boards do not effectively handle expectations, they should expect governments, now flush with power, to take actions about work arrangements, executive
compensation, sharing of wealth, punitive taxation for outsourcing, and so forth.

Contrary to what one might have expected given the serious financial issues that will be faced by many business corporations, the recent infatuation of large institutional shareholders with ESG (Environment, Society, Governance) drivers and its corollary, the stakeholder model of the corporation, will not abate. Too much wind in those sails and the pandemic will push further for compliance by publicly traded corporations.

It behooves management and boards of directors to act pre-emptively in five areas:

 	Monitor and enhance the corporation’s self-sufficiency in critical supplies within the home country;
 	Review and re-assess all past decisions to outsource and off-shore operations to low-cost countries;
 	Design work arrangements to adapt to the circumstances post pandemic as well as to the people’s legitimate quest for balance, couple burden sharing;
 	Cut the Gordian Knot of executive compensation; examine the form and level of compensation so as to reduce the gap and set an acceptable ratio of top management compensation to the salary of the median employee;
 	As most large institutional funds have become advocates of ESG, make clear to shareholders what this emphasis and the above adjustments will mean for the management and performance of the company in the future.

The powerful forces of continuity, habits, and normalcy may bring us back to the status quo ante. We may wake up from this nightmare unscathed. Perhaps! But a board of directors should not take this happy ending for granted.

&#160;

The authors are solely responsible for the opinions expressed in this article.
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		<title>The Angels of Market Efficiency</title>
		<link>https://igopp.org/en/the-angels-of-market-efficiency/</link>
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		<pubDate>Fri, 10 Jan 2020 15:02:22 +0000</pubDate>
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		<description><![CDATA[Mr. Ben Axler, Chief Investment Officer and founder of Spruce Point Capital responds (Financial Post, December 17th, 2019) to my article on short sellers of his kind (Financial Post, December 13th, 2019). He trots out the worn-out argument that short sellers only reveal the sordid truths hidden in the bosom of corporations. In short, “professional” [&#8230;]]]></description>
		<content><![CDATA[Mr. Ben Axler, Chief Investment Officer and founder of Spruce Point Capital responds [1] (Financial Post, December 17th, 2019) to my article [2] on short sellers of his kind (Financial Post, December 13th, 2019). He trots out the worn-out argument that short sellers only reveal the sordid truths hidden in the bosom of corporations.

In short, “professional” short sellers are sort of the guardian angels of market efficiency acting as a countervailing force to the fawning, relentlessly positive and often corrupted recommendations of sell-side analysts! Indeed, sell-side analysts tend to see glasses as half-full; for short sellers, glasses are always empty and… dirty.

The consequences of short-sellers’ actions may be dramatic. The near collapse of the financial system in 2008 owed a good deal to the savage, incendiary role of short selling (particularly of the “naked” sort). The book “On the Brink”, written by Hank Paulson, U.S. Treasury Secretary at the time of the financial crisis, makes clear the noxious role played by short sellers during that frightening period. That’s what angels of market efficiency do!

Mr. Asler invites me to share with him what I find wrong in their report on Canadian Tire. Much, too much for a short article but an overarching theme would be the relative ignorance of the Canadian retail market that pervades their report. Spruce Point Capital assumes the competitive and buying behavior of Canadians are identical to Americans. That assumption has proven costly in a number of instances (Think Target, Kmart, Sam’s Club, Best Buy, Sears). Similarly, Canadian retailers which crossed over to the US market were often taught a painful lesson about the differences between the two markets.

So, Spruce Point Capital’s report on Canadian Tire (CT) is insensitive to the particular nature of the Canadian retail and financial markets. It keeps comparing CT unfavourably to Amazon and Walmart as the be-all, end-all of retailing. That myopic American perspective may explain the case of Dollarama.

Barely a year ago in October 2018, Spruce Point Capital launched a virulent campaign against Dollarama producing a long negative report to buttress its claim that the stock price of Dollarama should or would drop from $46 to $28; the stock price actually leveled off briefly at $31 in December 2018 from which level it soared back to above $45.

I made two basic points in my earlier piece, which bear repeating.

1. Canada is a benign place to practice financial/casino capitalism as our regulators never adopted either of the two following measures put in place in the USA. As a consequence of the financial crisis, the SEC has clamped down on “naked” short selling, the practice of selling shares but delaying the delivery of the shares for as long as possible in the hope of buying back the shares at a much lower price without incurring the cost of borrowing shares from other holders. Also, in 2010, the SEC introduced a measure whereby if the price of a security falls by more than 10 per cent, transactions in the stock are stopped for the remainder of the day and all of the following day.

2. Large institutional investors with a significant position in a company have, or should have, the analytical wherewithal to assess public claims made by short sellers against this company. If they find those claims to be illfounded or even false, they should state so publicly instead of, as is the case now, letting the company fend off the attack by itself. And these large institutional funds should not lend their shares to short sellers of the Spruce Point Capital ilk.

Should Canada let American short sellers roam free and wreak havoc in our financial markets? To ask the question is to answer it.

&#160;

The author is solely responsible for the opinions expressed in this article.

[1] https://business.financialpost.com/opinion/counterpoint-short-sellers-like-us-create-real-value-for-public-markets-by-telling-canadian-investors-the-truth
[2] https://igopp.org/limiting-the-damage-of-short-sellers/]]></content>
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		<title>Limiting the damage of short-sellers</title>
		<link>https://igopp.org/en/limiting-the-damage-of-short-sellers/</link>
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		<pubDate>Fri, 13 Dec 2019 15:56:40 +0000</pubDate>
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		<description><![CDATA[When any individual investor or fund comes to the conclusion after careful analysis that a company is over-valued, it may very well sell short the shares of that company. Fair enough. If the analysis proves right, facts on the ground will confirm it eventually and the stock price will drop. But that’s not the game plan [&#8230;]]]></description>
		<content><![CDATA[When any individual investor or fund comes to the conclusion after careful analysis that a company is over-valued, it may very well sell short the shares of that company. Fair enough. If the analysis proves right, facts on the ground will confirm it eventually and the stock price will drop.

But that’s not the game plan of “professional” short-sellers. These funds produce a wholly negative report about a targeted company, which they broadcast widely to media, analysts, and investors in the hope of producing a stampede of shareholders exiting the  company’s stock. The result usually is a sharp drop in price as a kind of self-fulling prophecy. The short seller then buys the stock back at this much lower price and sails into the sunset with a bundle of cash.

Several countries (Japan, France, Germany, Italy) are considering ways and means to curtail the ability of activist funds to inflict damage to their industrial structure. Japan’s huge Government Pension Fund has suspended all loans of shares to short-sellers; if all Canadian institutional funds were to adopt such a policy, it would drive way up the price of borrowing shares to short-sell and make it more difficult to carry such operations profitably.

France is proposing to lower the threshold for reporting holdings of shares in a company from 5% to 3%. (Canada is a laggard and an outlier in this respect with a threshold of 10%; USA=5%; UK=3%). Furthermore, in the UK, short sellers must make their position public when it reaches 0.5% of outstanding shares and must include all derivatives in the computation of that ratio.

In the U.S., the SEC has clamped down on “naked” short selling, the practice of selling shares but delaying the delivery of the shares for as long as possible in the hope of buying back the shares at a much lower price without incurring the cost of borrowing shares from other holders. The SEC has instituted a “Hard T+3 Close-Out Requirement” imposing a three-day limit on stock delivery after a sale. No such restriction has been put in place in Canada.

Also, short selling could not be carried out if the last transaction had not been executed at a price higher than the previous transaction (the “uptick” rule). This rule was dropped in the U.S. in 2007 and in Canada in 2012. However, in 2010, the SEC introduced a modified tick test that is triggered for the remainder of the day and all of the following day if the price of a security falls by more than 10 per cent. This modified tick test was never adopted in Canada. (Activist short-sellers are increasingly targeting Canadian companies — is Canada ready? Financial Post, Barbara Shecter, October 6th 2017

Canada is thus a benign place to practice financial/casino capitalism. The features of this sort of capitalism are in full display at Spruce Point Capital, the American hedge fund and serial aggressor of Canadian companies. This fund practices the dark art of short selling. Barely a year ago in October 2018, Spruce Point Capital launched a virulent campaign against Dollarama. It produced a report to buttress its claim that the stock price of Dollarama should or would drop from $46 to $28; the stock price actually leveled off at $31 in December 2018 from which level it soared back to above $45.

It is fair to assume that Spruce Point Capital bought back shares it had short-sold at $46, making a hefty profit of some $15 per share in a period of some 2-3 months! But what about those shareholders who believed Spruce Point’s “demonstration” and sold their shares on the way down only to find that they had been helping  unwittingly) a financial scheme, losing a large amount of money in the process. Should they not have a claim, a basis for a class action, against Spruce Point Capital? Why are activist hedge funds permitted to publicly and with impunity disparage any company, to spread innuendoes (“possibly misleading accounting”, “potential shenanigans”), and to carry “ad hominem” attacks on officers or
board members?

The same process, the same modus operandi, is on display at the most recent Canadian target of Spruce Point Capital: Canadian Tire is “An Antiquated And Structurally Non- Competitive Brick And Mortar Retailer With No Clear Focus And No Competitive Advantage” claims Spruce Point in a report of 108 unreadable pages made public on the morning of December 5th (“Kicking the tire down the road”).

Although there may be kernels of truth in their analysis, the report throws everything but the kitchen sink at the reader and in the process throws mud at an Executive Vice-President and the Chairwoman of Canadian Tire.

What one will never find in these hack jobs is any concern for the environment and the society at large or for stakeholders other than shareholders. Yet, almost all institutional investors have now adopted strategies that put a high priority on Environment and Society, on long-term investment horizon and due consideration for all stakeholders of a company. Given this solemn commitment, why would these institutional investors support and abet the shenanigans of activist hedge funds whose sole focus is on short-term profit?

Large institutional investors with a significant position in a company have, or should have, the analytical wherewithal to assess public claims made by short sellers against this company. If they find those claims to be ill-founded or even false, they should state so publicly instead of, as is the case now, letting the company fend off the attack by itself. And these large institutional funds should not lend their shares to short sellers of the Spruce Point Capital ilk.

Canadian securities authorities and institutional fund managers should adopt some ways and means to limit the nefarious activities of activist funds, particularly the short-selling kind: more transparency, better regulations, enhanced constraints, self-discipline by institutional investors.

The author is solely responsible for the opinions expressed in this article.
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		<title>RONA: a tragedy in three acts</title>
		<link>https://igopp.org/en/rona-a-tragedy-in-three-acts/</link>
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		<pubDate>Fri, 22 Nov 2019 16:29:04 +0000</pubDate>
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		<description><![CDATA[Act I: In July 2012, the American corporation, Lowe’s, makes some noise about acquiring RONA, the Quebec-based chain of hardware stores. Coming on the eve of an election campaign in Quebec, the prospect of a foreign acquisition of a “strategic” Quebec company generates strong reactions and a sort of political consensus: “The Quebec government must [&#8230;]]]></description>
		<content><![CDATA[Act I: In July 2012, the American corporation, Lowe’s, makes some noise about acquiring RONA, the Quebec-based chain of hardware stores. Coming on the eve of an election campaign in Quebec, the prospect of a foreign acquisition of a “strategic” Quebec company generates strong reactions and a sort of political consensus: “The Quebec government must give itself the means to block such ‘hostile’ actions.” Shaken by this political agitation and likely social fallout, Lowe’s pulls back without making an offer. The Quebec government then examines various options to protect local control of corporations against foreign takeovers. The best seems to be that government-controlled or government-friendly financial institutions collectively but independently acquire a blocking position in the shareholders’ equity of “strategic” companies. That actually is implemented in the case of RONA.

Act II: Three and a half years later, Lowe’s comes back with a “generous” bid for all RONA shares. It will turn out to be a bad deal for Lowe’s, as was Rio-Tinto’s acquisition of Alcan. The price was too high and the integration issues more formidable than anticipated. However, at the price offered the deal received the enthusiastic support of the executive officers, members of the board and shareholders, including government-friendly institutions. All were substantially enriched by this transaction. Lowe’s became the owner of the Quebec corporation but had to make some vague commitments about how many jobs would be preserved and where RONA’s headquarters would be located.

Act III: A third troubling act is now unfolding—though it lacks suspense as the outcome is already a foregone conclusion. Lowe’s is under pressure in the markets for lackluster performance and its Canadian operations (i.e., RONA) have become a drag on earnings.

In spite of the solemn, albeit vague, commitments to permanent jobs and other things that it delivered at the end of the second act, Lowe’s is listed on the New York Stock Exchange and thus must deliver on the only commitment that really counts: doing everything to maintain and drive up the price of its stock. At stake in that very real day-to-day drama are the jobs of its senior executives and the quantum of their compensation. Any hesitation or delay in taking all necessary measures to meet the shareholders’ expectations will be severely and swiftly punished.

That is the inexorable law of financial markets, and it also applies to Canadian companies when they are acquiring companies abroad.

One may regret the turn of events at RONA, but it does no good and benefits no one to raise the specter of boycotts and other forms of reprisals against RONA/Lowe’s, as some voices are currently doing. So what should be done?

In the Canadian legal and regulatory context, the only obstacle to hostile takeovers comes from the form of a corporation’s ownership and control. Mechanisms such as dual-class multiple-voting shares, controlling shareholders, and legal impediments to foreign control (such as exist for banks, insurance companies, air transporters, telecommunications companies)—all these shield companies, not only from any kind of short-term pressures from shareholders, but also from unwanted takeovers.

These days, however, takeovers, foreign or domestic, are rarely “hostile” but instead are usually abetted by willing boards of directors, as in the second act of RONA. When that’s true, the only way the Quebec government could block a takeover of a “strategic “ company would be through the creation of some informal consortium of institutional funds, such as Investissement Québec, the Caisse de dépôt, the Fonds de solidarité, the Mouvement Desjardins, which would collectively hold a third of all voting shares in "strategic" companies, whatever those may be. But that would be very controversial and would raise many thorny issues.

Let’s beware: what starts as tragedy often ends up as farce!

The opinions expressed here are his alone.
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		<title>The Business Roundtable on “The Purpose of a Corporation” Back to the future!</title>
		<link>https://igopp.org/en/the-business-roundtable-on-the-purpose-of-a-corporation-back-to-the-future/</link>
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		<pubDate>Fri, 20 Sep 2019 18:01:39 +0000</pubDate>
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		<guid isPermaLink="false">https://igopp.org/?p=11879/</guid>
		<description><![CDATA[In September 2019, CEOs of large U.S. corporations have embraced with suspect enthusiasm the notion that a corporation’s purpose is broader than merely “creating shareholder value”. Why now after 30 years of obedience to the dogma of shareholder primacy and servile (but highly paid) attendance to the whims and wants of investment funds? Simply put, [&#8230;]]]></description>
		<content><![CDATA[In September 2019, CEOs of large U.S. corporations have embraced with suspect enthusiasm the notion that a corporation’s purpose is broader than merely “creating shareholder value”. Why now after 30 years of obedience to the dogma of shareholder primacy and servile (but highly paid) attendance to the whims and wants of investment funds?

Simply put, the answer rests with the recent conversion of these very funds, in particular index funds, to the church of ecological sanctity and social responsibility. This conversion was long acoming but inevitable as the threat to the whole system became more pressing and proximate.

The indictment of the “capitalist” system for the wealth inequality it produced and the environmental havoc it wreaked had to be taken seriously as it crept into the political agenda in the U.S. Fair or not, there is a widespread belief that the root cause of this dystopia lies in the exclusive focus of corporations on maximizing shareholder value. That had to be addressed in the least damaging way to the
whole system.

Thus, at the urging of traditional investment funds, CEOs of large corporations, assembled under the banner of the Business Roundtable, signed a ringing statement about sharing “a fundamental commitment to all of our stakeholders”.

That commitment included:
1. Delivering value to our customers
2. Investing in our employees
3. Dealing fairly and ethically with our suppliers.
4. Supporting the communities in which we work.
5. Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate.

It is remarkable (at least for the U.S.) that the commitment to shareholders now ranks in fifth place, a good indication of how much the key economic players have come to fear the goings-on in American politics. That statement of “corporate purpose” was a great public relations coup as it received wide media coverage and provides cover for large corporations and investment funds against attacks on their behavior and on their very existence.

In some way, that statement of corporate purpose merely retrieves what used to be the norm for large corporations. Take, for instance, IBM’s seven management principles which guided this company’s most successful run from the 1960’s to 1992:

Seven Management Principles at IBM 1960-1992
1. Respect for the individual
2. Service to the customer
3. Excellence must be way of life
4. Managers must lead effectively
5. Obligation to stockholders
6. Fair deal for the supplier
7. IBM should be a good corporate citizen

The similarity with the five “commitments” recently discovered at the Business Roundtable is striking. Of course, in IBM’s heydays, there were no rogue funds, no “activist” hedge funds or private equity funds to pressure corporate management into delivering maximum value creation for shareholders. How will these funds whose very existence depends on their success at fostering shareholder primacy cope with this “heretical nonsense” of equal treatment for all stakeholders?

As this statement of purpose is supported, was even ushered in, by large institutional investors, it may well shield corporations against attacks by hedge funds and other agitators. To be successful, these funds have to rely on the overt or tacit support of large investors. As these investors now endorse a stakeholder view of the corporation, how can they condone and back these financial players whose only goal is to push up the stock price often at the painful expense of other stakeholders?

This re-discovery in the US of a stakeholder model of the corporation should align it with Canada and the UK where a while back the stakeholder concept of the corporation was adopted in their legal framework.

Thus in Canada, two judgments of the Supreme Court are peremptory: the board must not grant any preferential treatment in its decision-making process to the interests of the shareholders or any other stakeholder, but must act exclusively in the interests of the corporation of which they are the directors.

In the UK, Section 172 of the Companies Act of 2006 states: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, among which the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment,…”

So, belatedly, U.S. corporations will, it seems, self-regulate and self-impose a sort of stakeholder model in their decision-making.

Alas, as in Canada and the UK, they will quickly find out that there is little or no guidance on how to manage the difficult trade-offs among the interests of various stakeholders, say between shareholders and workers when considering outsourcing operations to a low-cost country.

But that may be the appeal of this “purpose of the corporation”: it sounds enlightened but does not call for any tangible changes in the way corporations are managed.

The author is solely responsible for the views expressed herein.
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