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The Healthcare of Ontario Pension Plan says that it manages "all aspects of the HOOPP pension plan for health-care workers."
But there is one health-care worker in particular whose name stands out in HOOPP's most recent investment. That would be Kevin Smith, the chief executive officer of St. Joseph's Health System in Hamilton and – until this week – a HOOPP board member, who is also chairman of Home Capital Group, where he has helped preside over an unfolding wreck that required the $2-billion lifeline HOOPP extended this week.
It would be unfair to suggest Mr. Smith's ties are the only reason HOOPP stepped in with a high-interest credit line to provide emergency cash to Home Capital, an alternative mortgage lender that has been suffering a run on deposits since Ontario's securities regulator slapped the company with allegations of misleading disclosure. There's another major connection between the two institutions – HOOPP's CEO, Jim Keohane, joined Home Capital's board about one year ago, and sat on the lender's risk and capital committee.
Read more: The rise and fall of Home Capital
For subscribers: Future of Home Capital uncertain as bankers explore options
Late Thursday, Home Capital said Mr. Keohane had resigned from its board "given the potential conflicts that might arise from the new relationship," and Mr. Smith had resigned from the HOOPP board, also because of the potential for future conflicts.
It's safe to assume that if the two men and their organizations recognize the conflict issue, Messrs. Keohane and Smith also recused themselves from the two boards' discussions of the investment in the days leading up to its announcement.
"I was not part of any of the decision-making in terms of Home Capital entering into this deal," Mr. Keohane said Friday in an interview on Business News Network.
"Any time you're involved with two different organizations, conflicts can arise. The important thing is how you manage those conflicts and, in this case, I think the correct things were done to remove the conflict of interest that could have existed."
And so, it might be said, the Is are dotted and the Ts are crossed. Everything is by the book. Yet there are couple of points to be made in the wake of a transaction that remains odd.
The first is that the resignations and recusals don't entirely remove the questions about potential conflicts and why HOOPP did this. Though Mr. Keohane may have stayed out of the decision, the board of HOOPP has done its CEO a favour by bailing out a company where he sat on a board risk committee that has, it can be fairly said, failed to accurately assess risk. And the pension plan's members have saved Mr. Smith, one of their now-former colleagues, the considerable embarrassment of having Home Capital collapse in the absence of bailout funding.
In short, the future conflicts may be avoided, but the past and present ones were not. HOOPP's board signed off on an investment decision that is inextricably linked to the professional reputations of its chief executive and one of its (now-former) board members.
If Mr. Keohane recused himself from the investment decision, it must have been made in part by an employee or employees who report to him and rely on his goodwill for their compensation and continued employment.
And Mr. Smith, in his role as chairman of Home Capital, may find himself on the other side of the table from a major investor with different aims than Home Capital. Thanks to his board service at HOOPP, that major investor's board consists of his professional colleagues.
All of this brings us to the second point: What should we presume about Home Capital's financial health if HOOPP, rather than others, was the firm that closed the deal?
Surely, there are economic reasons for HOOPP to have made this loan to Home Capital. Since it has more than $70-billion in assets, $2-billion is, if not a rounding error, not a portfolio-breaker either. The terms – a $100-million fee, 10-per-cent interest, and 2.5-per-cent interest on the undrawn portion of the credit line – provide a nice return for HOOPP.
And since it's a loan, backed by a mortgage portfolio, it's not as risky as, heaven forbid, buying an equity stake in Home Capital. The pension plan, at a funding ratio of 122 per cent, can lose the entirety of the loan and still easily pay benefits to its members.
Still, it is worth noting that this is not the typical deal for HOOPP, which does do a small amount of corporate credit and private equity investing, but still devotes the bulk of its money to stocks, bonds and real estate. When Home Capital said Wednesday it was on the brink of a deal with a "major institutional investor," the health-care pension fund was not among the most frequently named names. Perhaps a hedge fund or an investor with more experience in distressed lending?
Perhaps Mr. Keohane, in his role on the Home Capital board's risk and capital committee, is better suited than any other Canadian pension CEO to assess the dangers and rewards of this investment. The Home Capital board, however, has so far shown an inability to grasp the problems with keeping so many past executives and board members left over from the 2014-15 disclosure issue hanging around. The problems of perception and conflicts seem to have spread to HOOPP, suggesting they are as contagious as the health challenges the pension plan's members combat daily.
Special to The Globe and Mail
David Milstead