Have money—want power

Cash-rich investors demand a larger role


Have money—want power

Cash-rich investors demand a larger role


Have money—want power


Cash-rich investors demand a larger role

The recession has stalled growth in many areas, but at the Ontario Municipal Employees Retirement System the money just keeps rolling in. Every day of the week, weekends and holidays included, OMERS invests $3.5 million on behalf of the 240,000 Ontario fire and police officials and other municipal workers who are members of the pension plan. In 1992 alone, the organization will take in an impressive $1.3 billion, which it will use to buy stocks, bonds and real estate— mostly in Canada. “We are growing faster than the listings on the country’s stock exchanges,” said James Maunder, the organization’s vicepresident of investment management and administration. He adds: “We have assets of $14.7 billion today, but by 1995 we expect that to almost double to $25 billion.” And while the fund’s investment managers worry about where to stash that much cash, Maunder is considering an even more serious problem: how OMERS— and other big institutional investors—should behave as owners of an ever-growing share of Canadian business.

The issue is increasingly pressing in the face of the troubles besetting the family dynasties that until now have dominated corporate Canada.

Some of those dynasties— the Reichmanns are the most current example—are being forced to sell off assets to pay down debts incurred in the frenzied 1980s; others are struggling to survive recent or imminent transfers of power to younger generations. In either case, many are looking to cashrich institutional investors, and particularly to Canada’s largest pension funds, to buy their assets. As a result, organizations like OMERS are poised to become, collectively, the new owners of corporate Canada. The change is historic. Until now, most institutional investors have played so passive a role in corporate affairs that many have not even exercised their right to vote at company meetings. In the future, however, the few hundred professional money managers who invest the tens of billions of dollars held in savings on behalf of individual Canadians are going to determine the course of some of the country’s largest and most important companies.

At the root of the change is money: cash-rich pension funds have so much of it, in fact, that they can hardly avoid the responsibilities of ownership. The assets of the institutional in-

vestors, which include insurance companies, mutual funds and firms that manage money on behalf of wealthy individuals, as well as pension funds, are growing rapidly. Pension fund assets increased by an average annual rate of 17 per cent during the last decade.

The new interest in their role as owners echoes a similar revolution in the United States. The consequences for the American economy, however, are likely to be less dramatic than in Canada. That is because corporate ownership in that country is already far less concentrated among individuals and families than in Canada.

Still, some big U.S. institutions are aggres-

(Assets as of Dec. 31, 1991, in billions)

1. Caisse de dépôt et

placement du Québec............................................$41

2. Ontario Teachers.................................... 24.7

3. OMERS................................................................14.7

4. Jarislowsky, Fraser & Co....................................12.75

5. Ontario Public Service...........................................8.96

6. Beutel Goodman & Co..........................................7.79

7. AMI Partners.........................................................7.24

8. CN Railways...........................................................7.2

9. Alberta Public Sector...............................................6.7

10. Bell Canada............... 6.45

sively demanding much more influence over how the companies they own are run. In one case in March, the California Public Employees Retirement System helped spark an astonishing revolt by the usually docile board of directors of the biggest company in the world, General Motors Corp. Once dismissed by Texan billionaire and former GM director Ross Perot as so many “pet rocks,” the automaker’s non-management directors succeeded in forcing management to accept major change— including the demotion of the company’s chairman and the installation of a new president. Said John Por, a corporate adviser in Toronto: “I find it amusing that the problem is far more acute in Canada, but they talk about it much more in the United States.”

The debate is catching on in Canada, too. And even though few pension fund managers agree about how active their role as owners should be, there is wide opposition to some corporate practices. For one thing, they dislike multiple-voting shares, which give extra votes

to special insider groups of shareholders. Equally detested are so-called poison pills— corporate structures that entrench existing management by effectively prohibiting takeovers.

More importantly, Canadian fund managers are increasingly focusing their attention on boards of directors. Company boards of directors are supposed to represent the interests of shareholders, but in practice they are often handpicked by management to provide loyal support. Says Robert Bertram, senior vicepresident of investments at the Ontario Teachers Pension Plan Board: “We realize that there are going to be times when we will have to take a more active interest in the management of some of the companies we own.” One way to do that is to demand that corporate boards take a more active role in keeping management on its toes.

Some Canadian fund managers are wary of aggressive confrontations between management and shareholders. “The big problem with the American style of corporate governance is very simple: money managers are trained to manage money,” said Peter de Auer, director of the Ontario Hydro pension fund. “They are not trained to manage a company.” If fund managers have already demonstrated their own limitations by buying shares in companies that perform badly, he added, they have little reason to believe that they will do any better at providing management advice. De Auer said that mon-

ey managers who are not sat-

isfied with a company’s u results always have an option: j= they can sell the shares.

S But others take a different g approach. Some fund managg ers say that they have be1/1 come too big to register dissatisfaction with an investment by selling their shares. Declared Michel Nadeau, senior vicepresident of equity and planning at the country’s largest institutional investor, the Caisse de dépôt et placement du Québec in Montreal: “If the management of a company cannot fulfil its mandate or meet its objectives, the board should be in a position to bring about changes that will maintain the competitiveness of a company.”

To that end, the Pension Investment Association of Canada, which is made up of about 100 pension fund managers, is debating ways to make corporate boards act as more effective checks on management. The most controversial proposal would rate boards on the basis of their performance. For its part, Allenvest Group Ltd., a Toronto stock brokerage house that caters to institutional investors by researching shareholder rights issues, has undertaken an assessment of the independence of the directors of major Canadian companies. “One of the problems with boards in Canada is that

there aren’t a lot of truly independent directors,” says Allenvest president William Riedl. “Often, directors are friends or cronies of management or dependent on management in some other way. They are not independent and they do not have the intestinal fortitude to dismiss management.”

More independent directors offer only one of several possible ways to improve corporate performance. The size of a board is also critical. “The average bank board has 35 people,” says Maunder, who heads the Pension Investment Association’s corporate governance committee. “We think it is impossible to have an effective board of that size. Given the dynamics of meetings, the ideal board is maybe eight to 10 people.” Maunder argues as well that companies in which one person acts as both chairman and president should divide the two posts.

The changes that institutional investors are urging do not end there. Several pension fund managers say that boards should give the

responsibility of auditing and determining salaries to outside directors. Other analysts say that boards should insist on hiring outside consultants to advise them on such issues. Nadeau of the Caisse, meanwhile, noted that it has even been recommended in the United States that boards should negotiate limitedtime contracts with their senior managers that could be renewed on expiry if both sides were satisfied. At the very least, says Maunder, major shareholders should get closely acquainted with board members. “After all, they are supposed to represent our interests,” he added, “yet we seldom talk to them face-toface.”

Exacting better performance from Canadian corporations carries significance that goes well beyond the world of money managers. In the wake of a damning report last year by Harvard Business School economist Michael Porter, a growing number of executives are acknowledging that bad management may be more to

blame than unproductive workers for Canada’s relatively weak competitiveness. The Caisse’s Nadeau, meanwhile, says that institutional investors can contribute to corporate competitiveness by demanding better management accountability. Declared Nadeau: “To keep Canada alive, to make certain that we have really competitive companies that can face international competition, institutional investors must ensure that we have very clear corporate governance rules.”

In a country where habits of deference to dominant individual shareholders die hard, Nadeau’s objective may seem remote. But as the family dynasties that have propelled corporate Canada through much of its history look with growing urgency for new sources of capital, the financial clout that he and other institutional investors wield may ultimately provide an irresistible argument.