Abrupt Change of Guard at CPP Investments

Last night, The Canadian Press reported CPPIB head Machin gets COVID-19 vaccine in Dubai:

The head of Canada's largest pension fund received a COVID-19 vaccination while on a "very personal" trip to Dubai, he told staff in an email Thursday night.

Mark Machin disclosed the information in an internal memo after the Wall Street Journal reported he flew to the United Arab Emirates earlier this month, where he received the first dose of the Pfizer-BioNTech vaccine and is awaiting the second dose.

Machin said in the email viewed by The Canadian Press that he remains in Dubai with his partner "for many reasons, some of which are deeply personal."

"This was a very personal trip and was undertaken after careful consideration and consultation," the memo reads.

CPP Investments did not immediately respond to requests for comment Thursday evening.

The federal government is actively discouraging Canadians from travelling abroad and recently implemented strict quarantine measures for those returning home.

Machin told staff he followed all travel protocols related to his role as head of the pension fund while on the trip.

"This trip was intended to be very private and I am disappointed it has become the focus of public attention and expected criticism," he wrote.

Several politicians and health-care officials have become high profile flashpoints of public anger in recent months for leaving the country despite public health advice to the contrary.

Among them, the former CEO of the London Health Sciences Centre is now embroiled in litigation after his travel to the U.S. prompted the hospital to terminate his contract.

Rod Phillips, Ontario's former finance minister, resigned from his post in late December after taking a personal trip to St. Barts.

CPP Investments, which had $475.7 billion in assets under management as of Dec. 31, invests money on behalf of retired and active employees covered by the Canada Pension Plan.

A spokeswoman for Finance Minister Chrystia Freeland said that while CPPIB is an independent organization, the revelation is "very troubling."

"The federal government has been clear with Canadians that now is not the time to travel abroad," Katherine Cuplinskas said in an emailed statement.

"We were not made aware of this travel and further questions should be directed to the CPPIB on this matter."

Machin, who has been in his current role since 2016, joined CPP Investments in 2012. Prior to joining the pension fund manager, he spent 20 years at investment bank Goldman Sachs.

This report by The Canadian Press was first published Feb. 25, 2021.

This morning, the Board of CPP Investments released a statement stating Mark Machin has resigned and is being replaced by John Graham, effectively immediately:

The Board of Directors of Canada Pension Plan Investment Board (CPP Investments) issued the following statement today:

Since 1999, CPP Investments has existed to help provide a foundation upon which millions of Canadians can build their financial security in retirement. In practice, that requires managing nearly $500 billion in assets at arm’s length from federal and provincial governments, relying on a skilled, experienced and professional team. Leadership is, therefore, fundamental to meeting our objectives on behalf of Canadians and we take that responsibility of leadership very seriously.

Recently, our CEO Mark Machin decided to travel personally to the United Arab Emirates where he arranged to be vaccinated against COVID-19. After discussions last evening with the Board, Mr. Machin tendered his resignation and it has been accepted.

Mr. Machin has provided outstanding leadership to the organization as a senior executive and then CEO. His significant accomplishments will help to strengthen Canadians’ retirement income security for many decades to come. The Board wishes to thank Mr. Machin for his global perspective, leadership and commitment to excellence and we offer him our sincere best wishes for the future. In his resignation, Mark emphasized his honour and pride in leading one of the finest global investment organizations over the last five years and deeply appreciates the tremendous diligence and talent of the entire CPP Investments team. He added that he is very grateful for the dedication and guidance of the Board of Directors over the years as well as the tenacity, partnership and camaraderie of the senior management team.

Effective immediately, the Board is pleased to appoint John Graham as the new CEO of CPP Investments. In making its decision, the Board unanimously agreed John is ideally suited to lead the organization forward. He has been instrumental in helping to shape and execute CPP Investments strategy over the last decade as a longstanding employee and member of the senior management team with a successful track record of building and leading global investment businesses.

As Chair of the Board, Heather Munroe-Blum expressed that John’s commitment to the organization, to his colleagues, and to CPP Investments unique mandate is unequaled. By consistently demonstrating deep knowledge of our operations, embracing a global mindset during his time in Asia, while delivering value as a founder and leader of a key investment department, John earned the Board’s unequivocal confidence.

Wow! I was looking forward to writing my regular Friday market comment -- and there's so much to cover as markets are getting rocked this week -- but then this bomb hit me last night, right after I covered OMERS' disappointing 2020 results (they're fine, they will bounce back).

A friend of mine texted me the news articles last night and added: "He's done, the Board will ask for his immediate resignation, the optics of this look terrible, it looks like he abused his power to jump the line and get vaccinated."

I'm afraid my friend is right, the optics do look terrible and Mark Machin was forced to hand in his resignation.

Let me first begin my stating it really saddens me to watch him leave CPP Investments this way.

CPP Investments isn't just Canada's national pension, in my humble opinion, it is the best pension fund in the country and the world, and a huge part of its success is owed to the leadership of Mark Machin.

To be blunt, Mark is an outstanding leader in every respect, he's not only very knowledgeable and smart (he's an MD by training), he literally expanded CPP Investments' global footprint and he's also a very nice man, very impressionable when you meet him because he's empathetic and genuinely nice.

I've met Mark a couple of times here in Montreal and have exchanged emails with him and spoken to him on the phone on many occasions, and he's always treated me right, he's a stand up guy.

So, yes, it disappoints me to see such a great leader (in every respect) leaving our country's most important pension fund under these circumstances.

But I'm also disappointed to hear he received the vaccine while on a personal trip in Dubai and somehow this was leaked to the press.

We can conjure up all sorts of stories as to who leaked it but that's not the point, the point is it happened, he owned up to it and the optics do not look good at all.

Canadians have been patiently waiting for a vaccine for months now, the rollout in this country is frustratingly slow, and it just doesn't look right that the leader of Canada's largest pension fund "jumped the queue" to receive his shot before everyone else.

Now, to be fair, we do not know all the details as to why and how this happened, maybe there are legitimate reasons as to why he felt he wanted to be vaccinated as soon as possible, but in such a high profile position, all that doesn't matter, what matters is public perception and whether it harms CPP Investments' reputation and brand.

One retired reporter shared this with me: 

I would argue that this would require a piece as to how CPP pretends to be a leader on ESG while its top executive is completely insensitive to the “Social” aspect. 

Kind of harsh but he's right, you cannot publicly claim you're a leader in ESG and not take your own personal actions into account.

Again, there may be legitimate reasons as to why Mark decided to privately get vaccinated (we do not know his or his partner’s medical condition and he needs to travel a lot), but this was mishandled and it blew up on him and the organization to the point where the Board was forced to act swiftly and decisively. 

There are still many unanswered questions and here are a few of them:

  • A friend shared this CBC article on how LHSC board chair resigned amid fallout from CEO's travel scandal. He told me: "If the Board knew and sanctioned his travel, and I cannot see how they were not aware as most CEOs are required to report all travel (even personal), the Chair and the entire Board will need to step down."
  • Another friend of mine asked me bluntly: "How many other Canadian pension CEOs jumped the queue to be vaccinated? Are we going to ever find out? I doubt it."
  • Did other members of CPP Investments' senior management travel to receive the vaccine abroad? If so, should they be forced to report it?
  • Was the decision to name John Graham as the next CEO done hastily and should the Board have placed someone as an interim CEO as it pondered who should lead this organization?

Let me tackle that last one because it's important to note, CPP Investments is much bigger than one person, no matter who that individual is, and it has incredible bench strength (this goes back to the days Mark Wiseman was leading the Fund, and Mark Machin only improved it).

I have no doubt whatsoever that John Graham will be an outstanding CEO, he was being groomed for the position for some time, it just sucks that his moment to shine has to come under such a dark cloud.

I actually emailed John earlier to congratulate him and give him and Michel Leduc a heads up to this comment to see if they have anything to add publicly. John replied back and we will catch up at a later date but given the circumstances, he needs to focus on his organization and his employees first which is totally understandable.

I think the most important point I want to get out to the public is even though Mark Machin's departure is troubling and concerning, the organization will survive and thrive for generations to come.

John Graham is surrounded by outstanding men and women at all levels of the organization and they're ready to step up to the plate at a moment's notice. The organization's long-term strategy remains solid and second to none.

Now, as far as the Chair of the Board, Heather Munroe-Blum and the rest of the Board, I do not share my friend's concerns nor do I think she or anyone else on the Board should resign.They are all extremely competent and ethical and we shouldn't jump to conclusions as to whether they were aware that Mark Machin was flying to Dubai to get vaccinated (if they did authorize this trip for that reason, it's a big problem for them).

In fact, my friend was sure that Michael Sabia called Mark Machin to tell him to resign and I said that's "total rubbish", CPP Investments governance is such that the Board and only the Board can make such a decision.

Importantly, nobody from the Government -- any government as CPP Investments is mandated by all provincial governments (except Quebec) and the federal government -- stepped in to force Mark Machin to resign, this was entirely a Board decision.

That's what "operating at arm's length from the government" means, Justin Trudeau, Chrystia Freeland and Michael Sabia who is now part of the Government have zero say on CPP Investments' internal affairs, and neither should they (Sabia knows this all too well as he dealt with his share of government pressure while he was at the helm of CDPQ).

As far other senior officers at CPP Investments getting the vaccine, we have to be careful, some are stationed in countries where the vaccine rollout is proceeding much quicker than here, so if they are fortunate enough to  be vaccinated, good for them, I'm happy to hear it.

As far as as other Canadian pension leaders being vaccinated on the "down low", it's possible but I highly doubt it and even it happened, I doubt we will ever find out, especially after this story broke out.

Let me end my comment by wishing Mark Machin all the best, he truly was an outstanding leader and a genuinely great guy who I will miss (please stay in touch).

I also want to congratulate John Graham and wish him and his senior team much success in the years ahead. 

Most importantly, let me reassure all Canadians that as long as CPP Investments' governance remains intact, we can all rest assured that the Fund will continue to generate pension payments for generations to come.

Lastly, some brief market insights since it's Friday and I typically cover markets on Friday:

  • I think the backup in US long bond yields is overdone in the short-term. Bond yields tend to overshoot on the upside and downside but it's the veracity of the move that caught many off guard this week. The yield on the 10-year US Treasury note should top off here but yes, it might creep up to 1.65% (who knows!).
  • The quick backup in long bond yields raised inflation fears and concerns that the Fed will have to tighten quickly, which is all nonsense. 
  • What the backup in long bond yields has done is help cyclical shares -- Financials (XLF), Industrials (XLI), Energy (XLE) and Materials (XME) -- surge this past month and it hit tech stocks, especially hyper growth tech shares (see my comment on the unArking of the market, much of this was foreseeable).
  • Going forward, I expect the rally in cyclical shares to cool as yield backup stalls and the US dollar comes back, I expect we will see the tech giants (XLK) will lead the market, but I'm watching them and the Nasdaq very closely (needs to hold above 13,000 level) and I'm not discounting a March madness surprise, so buy some volatility (VXX) and gold (GDX) just in case as a hedge.

I wish all of you a great weekend, if you have anything to add on this or any of my comments, feel free to reach out to me at LKolivakis@gmail.com.

Below, an interview I posted earlier this week. Mark Wiseman, former head of CPP Investments and chair of AIMCo, talks about "an emerging retirement income crisis" thanks to record low interest rates and decreased economic activity as a result of the pandemic. He talks about what can be done to ensure the strength and success of the Canadian pension model in this environment and how we can grow the economy.

Please also read Mark's comment on this topic and why we need to preserve the Canadian governance model. Stay safe everyone, trust your pension officials are all working hard for your best interests.

Update: Paula Sambo and Kevin Orland of Bloomberg did a follow-up comment on this story, looking at John Graham's profile and more: 

Mark Machin’s big mistake got him drummed out of Canada’s national pension manager in a matter of hours. It’s a turn of events that puts the fund in the hands of a former industrial scientist who has made few waves in the world of finance.

John Graham was promoted to chief executive officer of the Canada Pension Plan Investment Board on Friday, putting him in charge of a $373 billion global portfolio that includes everything from Britain’s Southampton port to Germany’s Axel Springer media empire to the Petco retail chain.

The fund needed a new CEO quickly after Machin was found to have flown to the United Arab Emirates, where he received a Covid-19 vaccine. He had committed a double political sin -- taking a trip in defiance of Prime Minister Justin Trudeau’s warnings to avoid international travel, and getting a shot most other Canadians can’t get because of the country’s limited vaccine supplies.

After the Wall Street Journal revealed Machin’s travel on Thursday evening, he resigned.

The board surprised some CPPIB managers by turning to Graham, who was not seen as the natural successor to Machin, according to people familiar with the situation. The organization was thrown into a situation it might not have been prepared for: Machin had been CEO for less than five years and wasn’t expected to leave soon.

But Graham is described by associates as a safe pick -- smart and sophisticated, with the cautious mindset of a Canadian public servant. He will likely follow the existing strategy of expanding international offices and investing more in private assets, these people said.

”When you look at his CV, you see credit, private markets -- that is a significant part of the future as to where that retirement-savings investment process needs to go, in order to be successful and generate net real rates of return that are high enough,” said Keith Ambachtsheer, a pension adviser who has provided strategic advice on governance, finance and investment issues to Canadian pension funds, including CPPIB.

Graham, 49, spent almost a decade as a research scientist at Xerox Holdings Corp. after completing a doctorate in physical chemistry. He started at CPPIB in 2008 in the portfolio design group before switching to private investments and credit.

In 2018, Machin promoted Graham to senior managing director in charge of a credit investments team spread across Toronto, New York, London and Hong Kong. The group’s recent focus has been growing in Asia and emerging markets, particularly in China, India and Brazil.

“These are markets that are going to grow, they are going to be increasingly relevant in the global economy and it makes sense to spend time to build out capability and the infrastructure to invest,” Graham said in a 2019 interview with Bloomberg.

Private Credit

Graham was also in charge of making a deeper push into private credit, where borrowers bypass traditional capital markets, to fill a need for yield made scarce by low interest rates.

In an interview in December, Machin said exuberance in public markets was a signal to him to extend his fund’s already-huge bet on private assets. He had continued to build the Canadian fund’s private holdings since becoming its first foreign-born leader in June 2016.

About 25% of CPPIB’s portfolio is in private equity and another 17% in real estate and infrastructure, most of which is private, as of Dec. 31, according to fund disclosures.

The strategy is seen as a success, and the fund has returned 9.7% annualized over the past five calendar years after expenses. Almost all of that was on Machin’s watch as CEO.

But it wasn’t enough to save his job in a country where a number of public figures have blown up their careers by leaving for vacations or other discretionary reasons during the pandemic.

Ontario Finance Minister Rod Phillips was forced to resign on Dec. 31 after it was revealed he took a Caribbean vacation at a time when many businesses in the province had been ordered to shut their doors. A cabinet minister in Alberta, Tracy Allard, quit her post after she went to Hawaii.

Nearly a year into the pandemic, “there’s a tremendously fragile public that is out there that is not going to have a lot of tolerance for CEOs who are seen to be flouting the rules,” James Moore, an adviser for law firm Dentons and former Canadian cabinet minister, said in an interview on BNN Bloomberg Television.

That may explain why Finance Minister Chrystia Freeland’s office rebuked Machin for his Dubai trip, despite a government practice of saying as little as possible about CPPIB’s operations. The fund’s top executive reports to a government-appointed board, but the directors are businesspeople including Royal Bank of Canada Chairwoman Kathleen Taylor, not political figures.

CPPIB’s board missed its chance to send the message that it is truly independent by taking his resignation over one lapse of judgment instead of defending him, according to a senior executive of another large pension fund who asked not to be identified because he isn’t authorized to speak about the situation publicly.

Claude Lamoureux, the former head of the Ontario Teachers’ Pension Plan, said Machin should not have had to leave.

“I think if he worked for another board and not CPPIB, I’m sure the decision would’ve been different,” Lamoureux said on BNN Bloomberg. “Yes, it’s mistake but it’s not a mistake to receive the penalty it received.”

Everyone has an opinion on Mark Machin's resignation, it's easy to jump to conclusions but we are not privy to all the details either way.

I do not agree with the Bloomberg article questioning the Board's independence and that it was unprepared to find a successor to Mark Machin, obviously this is total nonsense. 

In fact, Michel Leduc, Senior Managing Director and Global Head of Public Affairs & Communications at CPP Investments, shared this with me:

Worth being clear about something. Without criticizing Bloomberg - it is misinformed to suggest the Board was caught unprepared. It is inappropriate to comment on specifics and I wouldn’t know details as a member of management.

Yet, let me offer that the Board of Directors considers the appointment of the CEO as one of its most important duties. It goes without saying that the process reflects that. The succession plan for Mark Machin started the day after he took the reins nearly five years ago. The rigorous development plans and stretch assignments including internationally and enterprise-wide and shadowing and coaching and measurements and so on and on are very deliberate. Discussions at the Board level at each meeting, many times a year, and over years focus intently on candidates.

The fact that there is deep bench strength today and the Board always has a cornucopia of options even with a leading candidate is one of the outcomes of these processes by design.

If people were surprised by John’s appointment, they simply haven’t been paying attention.

I thank Michel for his feedback. It's clear that John Graham has been an integral part of CPP Investments' success and he and his senior team are more than capable of running that organization over the next decade and longer.

Second update: The Globe and Mail reports that Mark Machin already had one foot out the door of Canada Pension Plan Investment Board when he was forced, under pressure, to resign as chief executive officer last week after receiving a COVID-19 vaccination in the United Arab Emirates.

Before jumping to the front of the vaccine queue, the 54-year-old Mr. Machin had told CPPIB’s board of directors last fall that he planned to leave the country’s largest pension fund in 2021 after five years at the helm, according to sources familiar with his plans.

The succession plan was accelerated once it was reported that Mr. Machin got vaccinated in Dubai. He had permission for some travel, according to sources, and the former CEO toldcolleagues in an e-mail that he “strictly followed” all travel protocols, but the board did not know he had received his shot.

The Globe and Mail is not naming the sources because they are not authorized to speak for CPPIB and Mr. Machin. CPPIB declined to comment and Mr. Machin did not return a request for comment on the fund’s succession plans and his departure.

Whatever, maybe this is true, maybe it isn't, we will never now, nor does it matter now.I wish Mark Machin all the best and something tells me he will come back in another important role (a leader of his stature is being headhunted continuously to lead an organization).