Caisse on the Right Path?

I haven't discussed the Caisse in a while but Thursday is Ste-Jean Baptiste, a holiday here in Quebec, so I thought I would go over a couple stories that appeared lately.

First, the trash media coverage. The CBC reports, Caisse PR chief's $355K pay too rich for PQ:

The head of the public relations department at Quebec's largest pension fund is paid $355,000 a year, plus benefits, and the opposition Parti Québécois thinks that is just too much.

But the Caisse de dépôt et placement du Québec defends paying that amount, saying Denis Couture could make more money elsewhere and they need his experience to help rebuild the fund's reputation after it lost $40 billion in 2008.

PQ spokesman Jean-Martin Aussant said Caisse management needs to look at why its communications department has three employees.

"I think they should really look seriously into that division and ask themselves if they really need that many people and such high salaries as well," Aussant said. But he fell just short of calling for Couture's resignation.

"I think they have too many people in the public relations and media and communications department at la Caisse," he said.

"They don't need good communications. They need good management and good choices in terms of investments. And I think — in this context of very strict public finances, when we're getting tax rates that are being higher — I think this decision is a clear lack of judgment," he said.

Aussant said he would like to see more supervision of the Caisse de dépôt by the government. But Liberal Premier Jean Charest said it is an independent institution.

He said the pension fund has an administrative board, whose job is to decide if Couture's salary is a good idea.

Between you, me, and the lamppost, I don't think anyone running a public relations department in Quebec should be paid as much as an orthopedic or cardiovascular surgeon in this province (or more than my neurologists!).

Having said this, the Parti Québécois is once again politicizing the Caisse. Jean-Martin Aussant worked with me at another major pension fund in Montreal. He knows better than advocating more government supervision of the Caisse. (As if more government supervision would have prevented the Caisse's $40 billion train wreck. It wouldn't have because they were all convinced that they were managing risk, including liquidity risk appropriately).

If you really want to know what led to that disaster, you have to ask yourself why wasn't there clear segregation of duties between investment professionals and risk professionals. When the head of risk becomes the CEO, putting his boys in charge of investments, it's a disaster waiting to happen.

The same goes when there is no clear segregation of duties between finance and investment departments. I once saw a senior investment officer at a pension fund I worked for (not the Caisse) become interim CFO. It wasn't for long, roughly six months, but even a day is too long. Can you imagine a senior investment officer also running the team which is suppose to be independently checking the way investment professionals value their investments? Another governance blunder, but I don't blame him, rather the Board for accepting such a silly arrangement.

Getting back to the Caisse, a lot has changed since the disaster of 2008. Karen Mazurkewich of the National Post reports, Caisse on the right path:

For the past 15 months, Michael Sabia, chief executive of Caisse de depot et placement du Quebec, has had his hands full cleaning up the mess left by his predecessor Henri-Paul Rousseau. Not only was there a tarnished image to fix, but Mr. Sabia's been busy cleaning up its balance sheet following the nearly $40-billion loss the Caisse suffered in 2008.

But if a series of recent debt offerings -- most recently in Europe--are any indication, it appears that things are looking up for the institution that manages most of Quebec's public sector pensions.

Although the bond issuance almost disappeared after the sovereign crisis, CDP Financial, a subsidiary of the Caisse, has successfully launched a program to refinance roughly $8-billion of its debt. In addition to making a US$5-billion offering in November, and a $2-billion one in January, the institution will complete a 750-million euro ($946-million) offering at an "attractive" coupon rate of 3.5% later this week.

"It's recognition by the market of some of the things [the Caisse] is doing in terms of simplifying the types of securities we use ... lowering our leverage levels, [and] the dramatic improvement in liquidity," Mr. Sabia said.

That and the fact that "there's widespread recognition that Quebec and Canada weathered the economic storm better than most developed countries," he added.

The Caisse's debt offerings were launched as a new means to reduce risk, particularly within the Caisse's real estate portfolio. In the past, the Caisse used money borrowed between 60 to 120 days to finance assets that had investment time-lines of seven years or more, Mr. Sabia said.

"We weren't matching our sources of financing with our use of financing," he said.

Mr. Sabia doesn't want a repeat of what happened during the worst days of the financial crisis when the markets were closed, and "we exposed ourselves to a huge refinancing risk," he added.

By issuing debt offerings in the three markets where the Caisse has substantial real estate holdings, the institution is hoping to avoid risk related to currency conversions. Now the cash generated by real estate holdings will be used to pay off debt in the local markets.

The debt offerings are only one pillar of the many changes Mr. Sabia is overseeing. In fact, Mr. Sabia has made a management sweep. In addition to hiring a new chief economist and new chief of investment, the institution is on the verge of hiring a new chief financial officer and head of risk.

"You need fresh eyes, fresh perspectives and ideas, and so far that's gone well," he said.

Despite the morale problem he faced when joining the Caisse in March 2009, Mr. Sabia was surprised at the remarkable openness of the employees.

"That's one of the reasons we were able to change so fast," he said.

"Motivating those people, reigniting their pride in what they do ... that's a top, top priority," he said.

Motivation is the top priority, and if I can be frank with Mr. Sabia, more needs to be done to motivate the troops. It won't happen overnight, it isn't going to be easy, especially in these volatile markets, but the focus has to be on motivating employees so they feel engaged and inspired to come into work ready to deliver and contribute positively.

A lot of that motivation is a cultural issue that permeates many levels, but the tone has to be set at the top. Mr. Sabia, his new CIO, Roland Lescure, and other senior managers have to figure out a way to lift the morale at the Caisse. It's a lot better than a couple of years ago, but nowhere near where it should be (Hint: It's not just about bonuses!)

But for all the naysayers and skeptics who thought Michael Sabia wasn't up for the job of running the Caisse, he has proven all of you wrong. And I'm not just saying that to get on his good side. It's not going to help me land a job at the Caisse. I'm saying it because I believe it. Mr. Sabia has a reputation for being a tough boss. He expects a lot from his employees but he also expects a lot from himself. I have personally caught him working very late at night on more than one occasion.

Finally, take the time to read Mr. Sabia's recent speech to the Canadian Club in Montreal. It's an excellent speech which covers many topics, including risk management, how the global economic order is shifting and how the Caisse is positioning itself to capitalize on new opportunities. From the looks of things, the Caisse is on the right path (I would, however, like to see the Caisse start focusing more on idea generation and investments and a little less on risk management).

Let me end by taking this opportunity to wish all Quebecers a Happy St-Jean Baptiste. Bonne Fête Nationale!