Monday, July 28, 2008

The Investment Zoo Chapter 5: Directors: Guardians or Lackeys?

In this chapter, Jarislowsky discusses how to improve the effectiveness of corporate boards and some of the related issues faced by shareholders. It troubles Jarislowsky that most boards are almost all filled with management appointed directors, despite the fact that the shareholders have to vote in the directors. He feels that shareholders need to be more active in controlling their investments, especially the larger shareholders.

Jarislowsky feels that large shareholders and institutions with significant ownership in companies should not be afraid to rock the boat and appoint board members that will keep management in check. He feels this makes sense since board directors are legally obligated to represent the shareholders and its prudent to install a competent director mindful of their responsibilities to shareholders.

A board needs to treat all shareholders in the same fair manner. It needs to look after shareholders interests by ensuring that the executive team is operating well and ethically in order to produce the best possible long term results. A entire board appointed by the management team might not uphold their shareholder duties if the going gets rough. He feels that a lot of the "rot" (as he says) in corporations is a direct consequence of large shareholders not exerting enough influence with management when it is needed. Jarislowsky feels that a lot of common good for all shareholders would come from large shareholders being more influential with management.

To help improve corporate governance in Canadian companies, Jarislowsky and Claude Lamoureux formed the Canadian Coalition for Good Governance. This organization includes many leading Canadian institutional investors managing more than $600 billion in assets. Jarislowsky knows that these institutional investors have enough collective clout to positively influence governance practices within corporations. The main goal of this coalition is to align the interests of boards and management with those of the shareholders.

Some of Jarislowsky's recommendations include that the CEO be a different person than the chairman of the board. He feels that board members should not be preoccupied with share prices as that is the role of the market. Boards need to ensure that all shareholders are treated fairly and that implies that information regarding significant events needs to be communicated to all shareholders. Jarislowsky doesn't like boards that are too large as there is no real time for meaningful participation.

Jarislowsky also feels that securities regulators need to promote shareholder protection by helping to bring about more appropriate laws. He feels that the laws in existence today almost completely fail to protect the Canadian shareholders. Specifically he cites that "majority owners can buy out the minority without paying a fair price". He also recommends that dual-class shares should have a clause that allows multiple voting power shares to convert into common stock during a takeover. In addition, he feels that securities violation penalties need to be much tougher in Canada. He makes it clear that he is still in favor of investing in individual stocks but that small investors need to be aware of the issues facing them.

He feels that the OSC (Ontario Securities Commission) is far too inactive. However Jarislowsky does give them credit for responding to his critical attack on the unfairness of the attempted Canadian Tire Corporation takeover. In that deal, there was a massive difference between the offer price for the multiple-vote common shares and what was offered for the subordinate class A shares. The OSC allowed Jarislowsky and his associates to elect a board director (Jarislowsky's friend) and this was the catalyst for dramatically improved corporate governance at Canadian Tire. He has other examples of teaming up with major shareholders to fight the inequities during takeover events involving shares owned by the prominent Thompson family and the Desmarais family.

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