Wednesday, May 10, 2017

Canada's Big Pensions Lean on Bombardier?

Alicja Siekierska of the National Post reports, ‘Lapse of governance’: Caisse withholds support for Bombardier chairman Pierre Beaudoin:
Caisse de dépôt et placement du Québec has withheld support for Bombardier Inc. chairman Pierre Beaudoin and voted against the compensation of its executives, which had led to public outrage last month.

The shift in support comes before Bombardier’s annual shareholder meeting on Thursday, where stakeholders will vote on the controversial remuneration for members of its executive team.

In a letter, signed by Kim Thomassin, the Quebec pension fund’s vice president of legal affairs, the fund said that “the Board of Directors of Bombardier must improve if the Company is to deliver its plan and realize its potential.”

“In our view, the Board’s recent decisions regarding executive compensation fall short of the necessary standard of stewardship,” the letter said.

Bombardier was the target of public anger after it was discovered that six executives were in line for a roughly 50 per cent increase in compensation, a few months after the federal government announced it would provide the company with a $372.5 million loan.

Following a steady stream of criticism, including some protests, Bombardier’s chief executive Alain Bellemare asked the board to delay payment of more than half of last year’s total planned compensation to 2020.

While the Bombardier board was commended for delaying payments to the executive members, the Caisse said “our concern is that the initial decisions were made in the first place and what that reflects about the governance of the company.”

“Given this lapse of governance, we have voted against the advisory resolution on compensation.”

The letter also says improving Bombardier’s governance goes beyond the issue of compensation, and that the board should be chaired by an independent director.

“Consistent with our view of the importance of an independent Chair for this Company, we have withheld our support for the re-election of the Executive Chair.”

Quebec’s pension fund invested US $1.5-billion in Bombardier in exchange for a minority stake in the company’s train-making business. Under the deal, the Caisse acquired a 30 per cent equity stake in a holding company that owns the transportation division’s assets.
I covered the Caisse's big stake in Bombardier back in November 2015, stating the following:
What do I think about Bombardier getting billions from the provincial and federal government at a time when Quebec's public school teachers are striking against austerity and demanding much deserved salary increases? It makes me cringe especially since I know the company has been poorly managed over the last few years as its upper management made all sorts of terrible decisions, all of which are reflected in Bombardier's sagging stock price (click on image):


But the company is too important to Quebec's economy to let it fall by the wayside and I'm not talking only about direct jobs. I'm also talking about a lot of small and medium sized enterprises that rely on Bombardier's ongoing operations.

Still, one thing I would like to emphasize is not to look at the Caisse's investment in Bombardier Transportation as an extension of the Quebec government's decision to invest in the struggling CSeries program.

First, Bombardier Transportation has problems but it's a growing business with great potential in developed and emerging markets. Second, the Caisse isn't stupid. It structured the deal to ensure a guaranteed return and if it doesn't get it, it will increase its stake in the growing transportation division. Third, the deal is structured in a way to ringfence it from the troubled CSeries program.

All this to say, when we want to help a giant Quebec corporation, we're better off going through the Caisse than some government agency which doesn't have return and risk in mind when handing out corporate welfare checks to poorly managed companies (to be fair, all of Bombardier's global competitors receive heavy direct or indirect government subsidies).
I didn't mince my words. Despite bouncing back during the last year, over the last ten years, Bombardier's series B shares (BBD-B.TO) have underperformed and been a dog for investors (click on image):


Add to this the controversial and absolutely bonehead move at the end of March to increase top executives compensation by almost 50% as the company laid off thousands and tapped government aid and it's hardly surprising to see the Caisse and other large Canadian pensions are coming out calling for sweeping changes to Bombardier's board.

Alicja Siekierska of the National Post also reports, Ontario Teachers’ Pension Plan withholds support for re-election of Bombardier’s executive chairman:
The Ontario Teachers’ Pension Fund has withheld support for the re-election of Bombardier Inc. executive chairman Pierre Beaudoin, joining a growing list of institutional investors calling for the company to install fully independent board leadership.

“Our assessment of recent events confirms the need for independent board leadership,” the Ontario Teachers’ Pension Fund said in its proxy voting decision, posted online. It also said it does not typically support boards installing an individual in the role of executive chair.

The decision comes the day after Caisse de dépôt et placement du Québec said it would be voting against compensation for executives and withholding support for Beaudoin, citing “a lapse of governance.” The Quebec Federation of Labour’s Solidarity Fund and British Columbia Investment Management Corporation (BCIMC) also said they would be doing the same.

Beaudoin, who became executive chairman of the board in February 2015, and his family maintain control of the company through multiple-voting shares.

Bombardier was the target of public outrage after it was discovered that six executives — including Beaudoin — were in line for a roughly 50 per cent increase in compensation, a few months after the federal government announced it would provide the company with a $372.5 million loan.

Following a steady stream of criticism, including protests, Bombardier’s chief executive Alain Bellemare asked the board to delay payment of more than half of last year’s total planned compensation to 2020.

While more investors express desire for change, questions remain about whether the withdrawal of support for Beaudoin and votes against compensation will lead to substantial changes in the family-controlled company.

There will be a non-binding advisory vote on Bombardier’s approach to executive compensation at the annual shareholder meeting on Thursday, where the board is likely to face some tough questions.

Bombardier said the election of directors and the company’s approach to compensation are on the agenda for Thursday’s meeting.

“We will have an opportunity to discuss these important questions at this time,” spokesperson Simon Letendre said.

Sources told Reuters Beaudoin is expected to stay on this week, despite the opposition.

Anita Anand, the chair of corporate governance at the University of Toronto, said the move by the Caisse to withdraw its support of Beaudoin, as well as vote against compensation, has opened the door for other shareholders to speak out against Bombardier’s governance.

“These large institutional investors in Canada have a leadership role to play in demanding and expecting good governance from Canadian corporations,” Anand said.

“It will open the door to other shareholders who also disagree with the governance practices at Bombardier to say that something has to change.”

But whether the mounting public pressure leads to any change be remains to be seen.

Anand said she is not confident that there will be substantial changes by Thursday’s shareholder meeting, but that institutional investors including the Caisse and the Ontario Teachers’ Pension Plan have sent Bombardier a “strong message.”

“There are issues that need to be addressed,” she said.

The BCIMC has said it is voting against all non-independent directors at Bombardier, with the exception of Bellemare, “as the board’s overall independence is low.”

The BCIMC also voted against the executive compensation and withholding votes for returning members of the compensation committee “for ratifying what we believe to be problematic compensation issues.”
By the way, CPPIB joined the chorus of voices objecting to Bombardier's executive chair. According to the Toronto Sun, Canada's largest pension fund is withholding its vote for Pierre Beaudoin and two other director nominees recommended by the board of the Montreal-based firm. It’s also voting against Bombardier’s executive compensation proposal, according to a tally posted on the CPPIB website as part of its routine disclosure of its voting intentions.

Below, I provide you with information on Bombardier's top institutional shareholders for its class B shares (click on image):


As you can see, the Caisse is the top holder along with Norway's pension, CPPIB, and bcIMC.

Now, when bcIMC states there are "problematic compensation issues” at Bombardier, it's a polite way of saying the Board is engaging in dubious and borderline corrupt practices to line their pockets as the company continues to struggle and shareholders continue to experience a sagging stock price.

I agree with this statement: "While more investors express desire for change, questions remain about whether the withdrawal of support for Beaudoin and votes against compensation will lead to substantial changes in the family-controlled company."

Here you have the Caisse, CPPIB, bcIMC, Ontario Teachers' and others rightly calling for a truly independent and qualified board of directors but as long as Beaudoin and his family control voting shares, all the governance in the world won't loosen their grip on this company.

[Note: For those of you who don't know, Pierre Beaudoin, the current Chairman of the Board and former CEO of Bombardier, is a scion of Bombardier's founding family, which controls the company through its dual-class share structure.]

In my opinion, nothing will ever change at Bombardier (in a meaningful way) until the family cedes control of its majority voting shares to institutional investors. Ironically, if it did cede control, you might actually see a meaningful turnaround at Bombardier, one that will bolster it for many years and allow it to compete much more effectively with its global competitors.

In short, while I applaud the Caisse and other large Canadian pensions for trying to shake up Bombardier's board of directors and introduce a better and more aligned compensation scheme for its senior executives, I remain highly skeptical that anything will change at this giant company in terms of governance and in terms of performance. Bombardier is a dog and will remain a dog as long as the family controls voting shares. Period, end of discussion.

And this is too bad because Quebec and the rest of Canada need a strong, vibrant and growing Bombardier which creates many direct and indirect jobs. All those idiots hoping for the company to go under are clueless and don't understand how aerospace is one of the most heavily subsidized industries across the globe (all of Bombardier's competitors enjoy direct and indirect government subsidies).

Also, I have no problem paying Bombardier's top executives top dollar once they execute on their action plan and deliver a solid performance over many years. The compensation should be primarily tied to long-term performance, just like the compensation at the Caisse and other large Canadian pensions.

Below, Bombardier’s CEO has asked the company’s board of directors to delay most of the planned pay hikes for top executives amid public backlash over the hikes. BNN’s Paige Ellis explains how Alain Bellemare’s compensation compares to the CEOs of Boeing and Airbus, and how politicians are reacting. Click here to watch this clip if it doesn't load below.

I agree with the guy who said you need a competitive compensation package to 'attract and retain talent' at Bombardier but when BNN's Paige Ellis showed Alain Bellemare's compensation relative to his peers at Boeing and Airbus, she should have also shown the stock price of their shares relative to Bombardier over the last ten years.

For example, look at how well Boeing's shares (BA) have performed over the last ten years and compare this performance to the performance of Bombardier's shares over the same period which I showed above (click on image):


Now, we can argue whether Bombardier and Boeing are in a fight to see who can rip off more taxpayers (this industry runs on subsidies), but there's no denying Boeing is a much better-managed company which has delivered stellar results over the last decade, rewarding its shareholders.

And if you think I'm way too harsh in my criticism, you should read what a friend of mine sent me after reading this comment:
Listen, the issue is that this generation of the family does not have the capacities to run a company of this size. Also, their corporate culture and HR policies are just terrible. The organization has been sick for a very long time.

Air Canada falls into the same category. High cost, low productivity player in its market. The only reason that AC remains profitable is that they operate in an oligopoly whereas Bombardier doesn't.

Both companies hire cowboys, both local and international. You get what you pay for!
Anyway, for more on this story, read this article from Bloomberg's Frederic Tomesco, Bombardier Showdown Looms as Investors Abandon a Family Scion. He covers it well.

Update (May 11th, 2017): Bombardier Inc Executive Chairman Pierre Beaudoin is giving up management responsibilities after an outcry over compensation, but will continue to lead the board, the company said on Thursday as it reported a smaller-than-expected quarterly loss.

Beaudoin was re-elected to the board hours after the company announced he will step down as executive chairman following public outcry from major institutional shareholders over his leadership and executive compensation. He was re-elected to the board with 92.32 per cent of the vote on Thursday, the lowest percentage among the 15 directors, with 7.68 per cent abstaining (see vote tally here). Some think in refusing to leave, Beaudoin missed a chance to do the honorable thing.

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