Challenging the boss

Shareholders and managers reconsider their roles

JOHN DALY February 1 1993

Challenging the boss

Shareholders and managers reconsider their roles

JOHN DALY February 1 1993

Challenging the boss


Shareholders and managers reconsider their roles


Like many of the 900 people who attended the annual shareholders’ meeting of the Canadian Imperial Bank of Commerce (CIBC) at Toronto’s Royal York Hotel last week, 74-year-old Alex Kousiakis and two of his friends, all small investors, stayed after the formal proceedings for free sandwiches and coffee in one of the hotel’s ballrooms. They were clearly unhappy with the bank’s financial results for 1992: profits plunged to $12 million from a record $811 million in 1991. Much of that decline resulted from $1.8 billion in bad loans that the bank wrote off last year, almost half of them to the Reichmann family’s nowbankrupt Olympia & York Developments Ltd. But at the meeting, CIBC chairman and chief executive officer AÍ Flood, who supervised many of the bank’s transactions with the Reichmanns during the 1980s, and a managementsupported slate of directors were re-elected without opposition. And only one shareholder questioned Flood directly about the loans. Afterwards, Kousiakis said that the bank should not have loaned so much to a single client. In the United States, where the chief executives of 13 major corporations have been fired in boardroom revolts in the past 18 months, shareholders and directors of even the largest companies are far less tame.

The most prominent casualty has been Robert Stempel, the chairman and CEO of General Motors Corp. of Detroit, whose board of direc-

tors fired him in November. Others have their backs against the wall, including John Akers, the embattled chairman of International Business Machines Corp. of Armonk, N.Y., which last week announced a $6.7-billion loss for 1992, the largest ever by any corporation. But so far, despite some signs of restlessness, the American-style corporate rebellions have not spread into Canada. And even shareholderrights advocates who argue that Canadians should assert themselves more forcefully concede regretfully that such action is unlikely in the near future. Declared David Leighton, a professor at London’s University of Western Ontario School of Business and a director of several Canadian corporations: “If shareholders don’t start asking questions, then we’re just a bunch of saps in this country.”

To Leighton and many other experts who study corporate governance, the revolts in the United States are a welcome sign that shareholders can regain control over companies where senior executives have had free reign for decades. According to traditional management theory, shareholders should be the ultimate authority in any corporation, electing a board of directors that appoints a president and other operating officers and monitors their performance.

But as many companies have grown over the past half-century, ownership has become dispersed among thousands of shareholders, with

no single individual able to cast a decisive vote. As a result, power has gravitated to the senior executives and, in many cases, those executives pursue goals other than directly ensuring maximum returns for shareholders, including growth for its own sake and paying themselves generous salaries and bonuses.

But in the recent wave of shareholder revolts, even founders of companies have lost their jobs. Two years ago, the board of directors of Compaq Computer Corp. of Houston, Tex. removed founder Joseph R. (Rod) Canion after he refused to cut costs and lower the price of the company’s products. Last year, the board of another computer-maker, Maynard, Mass.-based Digital Equipment Corp., asked founder Kenneth Olsen to retire early because of his failure to respond to the shift to smaller computers.

In Canada, small shareholders have also staged a handful of uprisings. In 1987, minority shareholders of Canadian Tire Ltd. of Toronto blocked an attempt by the children of founder Alfred W. Billes to sell their controlling stake in the company directly to a group of store dealers. Both the Ontario and Quebec securities commissions vetoed the sale after minority shareholders argued that it denied them the chance to cash in on the higher stock prices that would have resulted from a bidding war for the company on the open market. But for the most part, such revolts have been rare. And in the few instances where chief executives were forced out of their jobs, including Garth Drabinsky’s departure from Cineplex Odeon Corp. in 1989 or Peter Cole’s resignation as chief executive officer of troubled Central Capital Corp. in 1990, they were fired by large controlling shareholders who had tolerated erratic performance for several years.

Indeed, shareholder-rights activists claim

that, in many cases, companies that are closely held are the most difficult to reform. Leighton said that about 70 per cent of the 500 largest Canadian companies are “closely held”, while only 30 per cent are “widely held.” In the United States, the percentages are roughly the reverse. And although the dispersal of ownership in widely held corporations like IBM and GM augmented the power of senior executives in the past, Leighton argues that recent regulatory changes give activists a better chance to organize challenges to management.

In tightly controlled Canadian corporations, particularly the operating companies in Peter and Edward Bronfman’s Toronto-based Edper empire, the odds against such challenges are much higher. In the Edper group, a small group

of senior executives maintains effective control of those operating companies through holding companies that own close to, but not more than, 50 per cent of the shares in their subsidiaries.

In one of the most troubled of the operating companies, Royal Trustco, small shareholders have had many reasons to complain in recent years. The company’s shares have declined to $2.11 from a high of $19.38 in 1989, largely because of former chief executive officer Michael Cornelissen’s failed foreign real estate investments in the mid-1980s. Despite huge losses from those ventures, Cornelissen stepped down only in November. Many analysts say that the delay reflects the domination of the board by so-called inside directors from Edper rather than outside directors representing other share-

holders. Of Royal Trustco’s 24 directors, three are company executives and six others are executives with other Edper companies. And some of the outside directors clearly were not chosen for their financial expertise, including broadcaster Adrienne Clarkson and former Montreal Canadiens hockey star Jean Beliveau, who played for the team when the Bronfmans owned it in the 1960s.

But with Royal Trustco and much of the rest of the Edper empire now struggling, concern about management domination of closely held companies appears to be growing. In Toronto last week, federal superintendent of financial institutions Michael Mackenzie said that “where the institution is closely held, we see little evidence that its outside directors, acting

in the interests of the company itself, its depositors or policyholders, are able to stand up to the owners.” He added: “This is dangerous.” Even in widely held Canadian companies, however, directors nominated for election by top management rarely encounter any opposition. At last week’s CIBC meeting, the 36 directors proposed by management, including Conrad Black, Douglas Bassett and several other well-connected business executives, were elected unopposed. Indeed, many shareholder-rights advocates say that the boards of most large Canadian corporations are still dominated by a small, clubby Bay Street fraternity. Said William Riedl, president of the Torontobased investment research firm Allenvest Group Ltd.: “The pinnacle of the Canadian

corporate establishment is rather narrow.”

In the United States, by contrast, more and more outside directors are joining disgruntled shareholders against management. The revolt against Robert Stempel at GM during the fall, for one, was spearheaded by John Smale, a GM director and former president of soap manufacturer Proctor & Gamble Co.

Those shareholders and outside directors, in turn, are gaining support from two key sources: civil service pension fund managers and other large institutional investors, and national shareholder-rights activist groups. For their part, the institutions are becoming increasingly impatient with poor corporate results. But because their holdings in many companies are so large, they risk provoking a sharp downturn in share prices, and further losses, if they simply sell off stock in any single company. As a result, they have few options but to press management for change. Dale Hanson, chief executive officer of the $70-billion California Public Employees Retirement System, for one, has publicly criticized IBM chairman Akers. The 60,000member United Shareholders Association, in turn, has tabled resolutions for IBM’s annual meeting in April, calling for it to split the office of chairman and CEO and to ensure a majority of outside directors on any of the board’s important subcommittees.

In Canada, however, there are no nationwide shareholder-rights groups. And apart from Quebec’s Caisse de dépôt et placement du Québec, most public and private fund managers are more discreet in their transactions with individual companies. Said Robert Sillcox, senior vice-president of investment for the $ 15.5billion Ontario Municipal Employees Retirement Board: “There are other ways to achieve your objectives than to lead the charge in the newspapers.”

But last week, at least one Canadian shareholder was less reticent about speaking out. At the Royal Bank of Canada’s annual meeting in Montreal, Joseph Haziza, 70, stepped up to a microphone and bluntly asked bank chairman Allan Taylor: “How could you have made so many bad loans and why did you get involved in the Olympia & York real estate disaster?” Like AÍ Flood at the CIBC meeting in Toronto, Taylor blamed a worldwide real estate downturn for the disaster and promised to try to do better in future. For the moment, at least, most Canadian shareholders appear quite willing to settle for those explanations.



Former chairman and president Cineplex Odeon Corp.

After a bitter, eight-month battle over control of the North American cinema chain, Drabinsky lost his campaign for a management buyout. Because he could not raise the money to complete the transaction, the board of directors removed Drabinsky from his executive position.


International Business Machines Corp.

Shareholder pressure on Akers to resign has intensified as IBM’s financial woes have deepened. Last week, the company reported its first-ever annual operating loss, including a $6.7-billion deficit for the fourth quarter of 1992. A dividend cut is anticipated following this week’s meeting of the board of directors.

Former president

and chief executive officer

Royal Trustco Ltd.

After repeatedly insisting that the trust company’s sagging fortunes were poised to improve, Cornelissen abruptly resigned in December amid reports of increasingly erratic public behavior. During his 10 years at the helm of Royal Trust, Cornelissen led the company’s ill-fated diversification into European and U.S. markets.