In the wake of the global financial crisis, corporate governance — which includes everything from stock option perks for CEOs to the amount of jargon weighing down annual reports — has become a hotly debated topic.
It’s also a major sore spot for Canadian investment guru Stephen Jarislowsky. The 84-year-old billionaire investor and CEO of Montreal-based Jarislowsky Fraser Ltd., with $45-billion under management, has been an outspoken proponent of shareholder rights.
In a recent interview, the high-profile value investor and author of The Investment Zoo shared his insights into the power of long-term thinking, the evils of stock options and the next lurking financial disaster.
Let’s start with the basics: What is corporate governance?
It’s ethical behaviour — that’s all it is. It’s making sure that you’re not getting paid for the wrong reasons. All this cheating, lying, stealing and feathering your own nest without any reason for it, and that all relates to ethics. Corporate governance is really nothing more than decent behaviour.
This discussion seems to get more attention south of the border. But is it just as important for Canadian companies?
Yes, and I think it is getting more attention now. If you look at the activities of the Canadian Coalition of Good Governance, which I founded seven years ago and includes practically every institutional investor of any size in Canada, it’s done more to bring good governance to Canadian companies than regulators ever have.
Why is that?
The only ones who can really police this are the institutional investors who have the clout to do it. Most shareholders own about 50 shares and don’t have time to devote to activism. Even people in my position who manage shares in probably 500 companies around the world, it’s difficult. We cannot neglect our main function, which is investing.
On top of that the securities commissions come in and ask us to fill in all these forms and then spend a couple of weeks with us and waste our time.
Is the current debate over the creation of a national regulator in Canada part of the problem? Where do you stand on that?
It depends on who is on the commission. If all they’re going to do is protect their own law firm or investment firm then we’ll have a lot of trouble.
What’s the worst corporate governance practice now?
Stock options are very dangerous for shareholders — they should be banned. They lead people to be short-term thinkers which means they’re not going to be in the same boat as shareholders who are in it for the long term. They will go for policies that are far too risky.
We need to see a return of the corporation to its long-term horizons instead of these short-term little gains. If you look at the breakdowns we saw in the banks in recent years, stock options were a main reason. I’m amazed that boards of directors don’t understand these consequences.
The people on those hiring committees would probably say if they don’t offer compensation packages that include options and bonuses, they’ll never land the top talent.
That’s baloney. If people in my outfit are just thinking about short-term gains and don’t give a damn about my company, I don’t want them. And I don’t want mercenaries either – those who only go where they get paid the most.
What would you like to see in terms of executive compensation?
There should be a limit on how much more senior executives of a company can make than the average employee in the firm, or than the average salary in the country. It’s absolutely ridiculous what’s happening now.
Okay, let’s say Joe and Jane Investor decide they’ve had enough, like you, and want to push for change. Would shareholder activism at this level make a difference?
No, none. They don’t have the clout. But the institutions do and they’ve done more in the last seven years through the coalition than the security commissions have done in a decade. I can’t give specifics, but we’ve taken certain directors out of corporations, asked others to resign and we have opposed unfair treatment.
What’s at the top of the agenda now for the coalition?
Better enforcement. The coalition has issued statements about best practices and that’s all very fine but it won’t happen unless someone polices it. Institutional investors have the power to police because together we may have 30, 40 per cent of even majority control of a company.
What are Canadian companies doing well in terms of corporate governance?
A lot of companies are doing a very fine job of disclosure. I just got off the phone with a large corporation here and last week was on the phone with the president of one of our largest banks. I talk to them about what I want to see. There’s been enormous improvement in disclosure in this country.
How did it get so bad in the first place?
We have allowed our accountants to give audit reports that no one can understand and we have allowed our companies to publish prospecti that are 400 pages of nothing but accounting and legal jargon that no one will sit down and read.
Do Canadian companies practice better corporate governance those in the U.S. and Europe?
On the whole our big corporations here are better, and on the whole our smaller companies on the venture exchange are worse.
Canada’s banks got high marks from the International Monetary Fund for escaping much of the carnage that ravaged U.S. and European financial institutions in the wake of the global financial crisis. Have they done enough to leverage that position?
Yes and no, but here’s the thing: In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation.
That’s pretty bearish.
I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high.
I hope I’m wrong but I think Canada is on the edge of a lot of trouble.