Pay­ingth­erich

National Post (Latest Edition) - Financial Post Magazine - - THE STREET - There­saTedescois­thechief busi­ness­cor­re­spon­dent­for the Na­tional Post. Email: ttedesco@na­tion­al­post.com

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

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