CN Rail boss Paul Tellier suggested last week that one of his first priorities as the new chief executive officer of Bombardier Inc. will be to address concerns about the company's corporate governance. Hallelujah. Bombardier needs the kind of culture shift Mr. Tellier is so credited with bringing about at CN.
Bombardier has been stubbornly unwilling to make structural changes, even those that almost every other major company in Canada has accepted, such as taking management off its audit committee. But now that Bombardier is in a deep slump, it is the time to do everything reasonable to reassure shareholders.
Bombardier has good material to work with. It has a majority of high-quality, independent directors with strong business backgrounds -- directors like Mr. Tellier (who joined the board in 1997), Power Corp. co-CEO André Desmarais, retired Ingersoll-Rand CEO James Perrella, and former BCE CEO Jean Monty.
But just because the board has bench strength doesn't mean governance becomes irrelevant.
Structures still matter, and the odds of making good decisions are improved by having good systems. Even more critically, many governance practices are really checks and balances to protect shareholders. With Bombardier's finances at a weak point, investors care more than ever about these protections.
Take, for example, the fact that Bombardier executive Jean-Louis Fontaine remains on the company's audit committee.
This has become a rare occurrence today, because many companies understand that audit committees review management's financial statements on behalf of shareholders. They are expected to be independent watchdogs of management. The audit committee also hires the company's auditors, and helps set the scope of the audit that is performed. These functions must occur without any perception that management controls the process.
Many companies that have faced serious scandals have had management on their audit committee, and investors have learned that sensitive information was hidden from the board, and even from auditors. Obviously there's no guarantee that Bombardier will remain scandal-free if it has an independent audit committee, but at least there is one additional protection.
Bombardier has also continued to have insiders on its compensation committee, which is a practice many companies now avoid, and which is now banned under New York Stock Exchange listing rules.
The reasoning is obvious. Shareholders want to believe there is objective logic behind the pay and bonuses awarded to top executives. The perception of objectivity is tainted, however, when insiders sit on the committee.
Indeed, one of Bombardier's compensation committee members has received some of the largest stock option grants given to an individual in Canada. Most of chairman Laurent Beaudoin's options are surely under water today, but he had almost $109-million of in-the-money options at the end of last year, and he cashed options worth $94-million in late 1999. Whatever the merit of his compensation, the process is tainted by bad optics.
There are plenty of other governance issues Mr. Tellier can try to tackle -- although he is taking charge of a company with a majority shareholder who can choose to scuttle any reform. For although the Bombardier family owns only 20 per cent of the company's equity, it controls 63 per cent of the votes through multiple-voting shares.
The company has no nominating committee, and new directors are proposed by Mr. Beaudoin. Mr. Tellier should urge the board to create a nominating committee that can consider a wide range of possible choices for the board. Indeed, the NYSE now requires companies to have nominating committees.
According to Bombardier's last proxy circular, the company does not have an evaluation process for directors, nor a formal process for directors to meet independently of management to discuss concerns. Both these practices are now NYSE requirements. Bombardier also does not disclose some important details to shareholders, such as the attendance records of directors, or whether the company uses its auditors for consulting work.
Any one of these reforms is a tiny matter in itself. But a series of improvements indicates to minority shareholders that the company is serious about doing whatever it can to protect their interests and improve its decision making. Mr. Tellier is well recognized for changing the stodgy culture of CN Rail, where he made governance a priority. Shareholders will wait to see a similar change at Bombardier.
Janet McFarland