Payingtherich

Bailingoutdual-classcompaniesdoesnotrewardeveryshareholderequally

The outstretched hand of ailing Bombardier Inc. unabashedly pleading for a taxpayer-funded bailoutfromOttawaisdraggingthedebateoverdual-classcorporatestructuresintounchartedterritory. The Montreal-based aerospace and transportation company,controlledbytheBombardierandBeaudoin families, is seeking at least $1 billion from the federalgovernmenttomatchthe$1.3billionalready pledged by the Quebec government. It would be tempting to be swayed by Quebec’s argument that saving Bombardier is akin to saving Ontario’s batteredautoindustrybackin2009.Don’tbefooled.

This is the first time a publicly traded company that is tightly controlled by a private family is looking for a bailout using the public purse. This is not a policy question about whether the federal government should be picking winners and losers; it’s about whether taxpayers should be investing in any family, let alone one with a spotty track record. KeepinmindBombardier’sstockpricehasplunged 75 per cent in the past five years. If that return isn’t goodenoughforitsshareholders,howcoulditpossiblybegoodenoughforCanadiantaxpayers?

The prospect of bailing out a dual-class company is raising eyebrows in governance circles and boardroomsacrosstheland.Thereisalreadyplenty of static around the merits of dual-class share structures. In these types of companies, enormous decision-makingpoweriswieldedbyasignificantshareholder, usually a founder or family, and they derive that power in the voting rights they secure through eithermultiplevotingsharesorvotingandnon-voting common shares. Needless to say, these companies are not renowned for their best corporate governancepractices.

In all, there are more than 80 public companies withdual-classstructures,accountingforabout10% ofthetotallistingsontheTSXandTSXVentureexchanges.EvenintheU.S.,theonce-revileddual-class structureisbecomingmuchmorefashionablesince someofthemostimportantcompaniestohavegone public in the past few years, including Google Inc., FacebookInc.andShopifyInc.,usedthiscontroversialcorporatedesign.

Notwithstanding their less-than-robust corporategovernancestandards,dual-classstructuresexist because their benefits are viewed in some circles to outweigh the risks to capital markets and the public interest.Proponentsarguefounderscanraisemoney onpublicmarketsandmaintaincontrolwhileinvestorsreapthebenefitsofthelong-termfocusoffamilies with skin in the game. The flip side, critics say, is that they undermine a principal corporate governancetenetbylimitingtheabilityofminorityshareholders to influence the affairs of the company. In other words, the risk/reward ratio is heavily skewed infavourofthoseholdingthevotingshares.

Generally, oversight of dual-class companies by Canadian securities regulators has attempted to rein in the controlling shareholder rather than codify the governance rights or improve the structural safeguards of minority shareholders. The reason: prohibiting dual-class structures or restricting them would deter entrepreneurs from taking companies publicorpossiblygivethemreasontotaketheirlistings outside of Canada. At the same time, investors havebecomemoresophisticatedandarebetterable tounderstandtheirpeculiarities.

Still, using the public purse to bail out the balance sheet of a dual-class company has never been contemplated. If politicians are going to wade into thebusinessarenawithcashhandoutsforsuchentities, there should at least be some expectation those companies will be required to live up to the spirit of respecting minority shareholders and taxpayers. It’s time to raise the bar on the governance practices of dual-classcompanies.Meaningfulregulatoryreform thatbolsterstheregulatoryobligationsofthecorporation,anditsboardofdirectorsandseniormanagement is what’s needed, not a list of conditions for a loan that may never be repaid. In other words, let’s changetherulesbeforeanychequesarecut.

DUAL-CLASS COMPANIESARE NOTRENOWNED FORTHEIRBEST CORPORATE GOVERNANCE PRACTICES