AIMCo's Chair on Rethinking Dictatorial Dual-Class Share Structure

The Globe an Mail published an op-ed from AIMCo's Chair Mark Wiseman on rethinking Rogers’s dual-class share structure:

In 1861, in his treatise Considerations on Representative Government, J.S. Mill argued that benevolent dictatorships could never remain benevolent. Similarly, the saga unfolding at Rogers Communications Inc. represents yet another case of abject corporate governance failure in Canada – a power struggle within a family dynasty that is jeopardizing the future of the company and usurping value from common shareholders.

This is a door that I, and many other institutional investors and legal experts, have been banging on for decades now. For too long, dual-class share structures have allowed families and insiders to maintain control of companies without adequate accountability to those owning the majority economic interest in those companies.

A dual-class structure means simply that specific shareholders possess voting control disproportionate to their equity. Rogers has a dual-class structure, with the family trust holding 97.5 per cent of the company’s votes with less than 29 per cent of its economic ownership. Four members of the family and other insiders take up a disproportionate number of board seats, and directors have no accountability to the majority owners of the company.

It’s perfectly reasonable for families and founders to maintain control and direction over their companies. And there are plenty of ways to do so – raising capital through debt structures or in private markets. But, if you want to tap into public markets, you should have to adhere to a system where one share equals one vote, in the same way that companies adhere to other basic principles, such as furnishing audited financial statements or disclosing executive compensation.

A structure whereby the son of the founder sits as the chair of a trust and basically controls all the voting power in a company, publicly traded since 1979, is more akin to the Soviet politburo than anything resembling a responsible corporate governance structure.

We should not allow our public markets to function this way. New forms of dual-class structures should not be listed on our exchanges, and existing ones should be given a period of time to remediate themselves. Dual-class share companies should also be removed from major indices, including the S&P/TSX 60, where investors wanting market exposure cannot avoid them.

The debacle at Rogers is symptomatic of a much larger issue. Disputes within founder or family-controlled dual-class public companies have repeatedly caused headaches for public shareholders. We should all care about the governance of these companies in Canada. Companies with unequal voting rights make up a much higher proportion of the Canadian composite index than the global average and a very significant number of Canada’s largest employers have them. These companies must be better governed.

Take Bombardier Inc., for example. Its share price plagued for years by corporate governance issues and clashes with institutional shareholders, it has operated since 1981 under a structure where the Beaudoin-Bombardier family controls two-thirds of the voting power while holding just one-third of the equity.

In 2010, Canadian institutional investors challenged manufacturing giant Magna International Inc., as the Stronach family used its dual-class structure to take value from other shareholders, entering a transaction where the family trust received a huge payout in exchange for its dual-class shares. Despite intervention in the courts by investors such as the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board, the transaction proceeded. It was clear then, as it is now, that regulation is required to limit and eliminate these structures.

Companies cite U.S. tech giants, such as Alphabet, as proof of the success that can be achieved through a founder-led dual-class share system. However, in Canada this model has mostly allowed families and insiders, prone to self-dealing and childish squabbling, to exert disproportionate control over sectors integral to our economy.

Facebook, another U.S. tech giant with dual-class shares, has been a train wreck of corporate governance, largely because its structure allows the founder to maintain near-dictatorial control over the company and its investors.

At Rogers, the current family feud for boardroom control, taking place amid the company’s critical acquisition of Shaw Communications Inc., threatens the value of equity held by retail and institutional investors, who actually own more than 70 per cent of Rogers.

No matter the outcome at Rogers, action should be taken against these structures. At the least, regulators ought to impose a “sunset” provision, where companies with dual-class shares must either allow shareholders to regularly reassess and vote on whether the structure remains appropriate or require the structures to be collapsed after a fixed period. The Canadian Coalition for Good Governance has been advocating for this since 2013.

To be clear, this is not a requirement designed to constrain great leaders and visionary founders. If leaders do deserve control because of their brilliance, shareholders will reward them as such. This democratic principle lies at the very core of what a free market is.

For those who don’t want to expose themselves to shareholder democracy, there are plenty of lucrative opportunities in private markets. In public markets, the principles underlying their function should represent the values of fairness, legitimacy, and accountability – the hallmarks of all other aspects of public life.

*Mark Wiseman is a Canadian investment manager and business executive, currently serving as a senior adviser to Lazard Ltd., Boston Consulting Group and Hillhouse Capital, and is the chair of the Alberta Investment Management Corp. He was formerly the chief executive officer of Canada Pension Plan Investment Board and a senior managing director at BlackRock and chairman of its global investment committee.

A brilliant and succinct comment from Mark Wiseman (Ron Mock used to tell me all the time, "he's a really, really wise man").

The dual-share class system is beyond dictatorial, it's anachronistic and puts way too much control in the hands of few without taking into consideration the concerns of the majority of shareholders.

Investing in dual-class shares is basically betting that the controlling family/ individual always have shareholders' best interests in mind, which of course is far from the truth.

Sometimes they do, most of the times they don't. 

I love the way Mark ends his comment:

For those who don’t want to expose themselves to shareholder democracy, there are plenty of lucrative opportunities in private markets. In public markets, the principles underlying their function should represent the values of fairness, legitimacy, and accountability – the hallmarks of all other aspects of public life.

If you don't want to be accountable to shareholders, take your company private.

You can't have your cake and eat it too. 

I do hope Canada's large and powerful pensions start ramping up the pressure on regulators to do away with dual-class shares.

Apart from the fact that I only invest in US shares, I never liked the fact that some families have way too much control over their company's public shares. 

Mark brings up the example of the Beaudoin-Bombardier family (Bombardier), the Stronach family (Magna) but he also alludes to Facebook and the enormous power yielded by its founder, Mark Zuckerberg. 

Again, whose best interests are these families/ individuals fighting for? Theirs or the broad class of shareholders?

As far as the ongoing saga at Rogers, Barbara Shecter of the Financial Post reports on Edward Rogers's next move:

If there was any doubt Edward Rogers was stepping out from the long shadow cast by his father and Rogers Communications Inc. founder Ted Rogers, it evaporated late Thursday when Edward unveiled a bold and “unprecedented” plan to remove five of the telecommunications company’s independent directors and replace them with his own preferred candidates.

The $30 billion company called the move unprecedented and said it has reviewed the resolution with external legal counsel “and has determined the resolution is invalid.”

Accordingly, the board, including its independent directors, remains unchanged, the statement said.

One person close to situation described the attempted board shakeup as the “nuclear option” because of the likelihood neither side will come out unscathed. As another source suggested, management could refuse to work with the reconfigured board

Stepping further out on his own has driven a wedge between Edward and his closest relatives, who have disagreed with his recent machinations including behind-closed-door efforts to overhaul the company’s senior management and get rid of CEO Joe Natale.

In a statement Friday, his mother Loretta and sisters Martha and Melinda said they are “obviously disappointed” in Edward’s decision to try to replace board members and don’t think he has a legal leg to stand on.

“Simply put, his actions demonstrate a disregard for good governance and create a grave amount of risk for the company at an especially sensitive time,” they said, in a likely reference to the company’s pending $26 billion (including debt) takeover of rival telecom Shaw Communications Inc.

They, too, believe he has “miscalculated” his legal position and say he is ignoring the interests of multiple stakeholders including employees, shareholders and customers.

“There is no precedent by which he can simply fire five independent Rogers directors and replace them at a whim,” his mother and sisters said. “The law is clear… (and) while Edward appears unwilling to grasp this basic fact, this doesn’t make it any less true or relevant in this case.”

Edward said late Friday that there is “no legal basis for declaring the resolution (to reconstitute the board) invalid.“

Despite the comments to the contrary by representatives at the company, he said the change of directors of Rogers Communications Inc. took effect Friday morning, immediately upon execution of the shareholder resolution by the Control Trust Chair.

“According to corporate law in British Columbia, a signed resolution of shareholders is deemed to be valid and effective as if it had been passed at a meeting of shareholders, provided it is signed by shareholders holding at least 66.67% of the voting shares,” he said in his latest statement.

In what appeared to be a ratcheting up of the dispute, the statement suggested the company’s CEO was making an “improper attempt to entrench himself and defeat the interests of shareholders” and called that “illegal and ineffective.”

Edward Rogers said “decisive action… was needed to return the company to stability and proceed with a smooth closing of the Shaw transaction.”

But while corporate governance experts agree Edward’s move is very unusual, they’re not sure the 52-year-old scion can’t pull it off, largely because of the mechanisms his father put in place through a family control trust before he died in 2008.  

“As I see it, Edward Rogers has authority, which rests with the trust and the 97 per cent of the company’s votes it controls,” said Richard Leblanc, a professor of governance, law & ethics at York University.

“I’ve never seen a voting trust with this degree of authority, but I think it’s the brilliance of Ted Rogers that he really wanted professional management (but) he didn’t want the ability to crunch a family member — either from the outside or from another family member,” Leblanc said.

In a victory for Edward, at least in this round, that authority was reaffirmed this week when a motion to restrict his powers fell three votes short of the seven of it needed from members of the 10-member advisory committee that oversees the trust, according to sources familiar with the situation.

The uniqueness of the trust structure “doesn’t mean that it’s not legitimate” or that it can’t be used to successfully reconfigure the public company’s board of directors, Leblanc said.

“I think it has a high probability of success.”

He added that his reading of the arrangements Ted Rogers made before his death has him questioning whether Rogers Communications made a miscalculation of its own in stripping Edward of his role as chair of the board this week.

“The estate arrangements provide that the control trust chair should be a senior officer of RCI (Rogers) such as the chair or deputy chair of the board or a member of senior management,” he said. “So in removing Mr. Rogers from chair of the board, that may not have been permitted.”

Edward has suggested that his reconfigured board would re-assess that decision.

The twists and turns of the ongoing corporate and family drama has drawn comparisons to the TV show Succession, in which three fictional siblings jostle for position to run the family’s sprawling media company, often privately undermining one another and pushing the boundaries of what they are prepared to do to win.

A Globe and Mail report this week that said Natale found out about Edward’s plan to oust him through an ill-timed “butt dial” by former company chief financial officer Tony Staffieri, who was slated to replace him, did little to tamp down comparisons to the drama dreamed up by Hollywood script writers.

If Edward Rogers were a character, he might be written as the shy, slightly awkward son who finally steps into the limelight. He was groomed alongside his sister Melinda and brought into the company fold by their father in his late twenties after cutting his teeth in junior jobs at cable company Comcast in Philadelphia.

His initial steps were tentative. At one of the company’s annual meetings, Edward trailed behind his father by a few steps as he made the rounds. He also joined the odd conference call with Bay Street analysts in the early days, attempting to joke and take on his father’s penchant for throwing out cavalier remarks about the company’s competitors.

But Edward persevered, working in the cable division and rising to the level of executive vice-president. Ultimately, though, both Edward and Melinda were moved out of their executives roles, after Ted’s death, and held positions in the boardroom while executives brought in from outside the family ran the company.

According to published interviews and books, Ted Rogers had longings for his children to take over the business and ensure its survival, as he had resurrected his own father’s dreams and innovations in radio — cut short by his death at the age of 38 — and turned them into a multi-million-dollar company. But, as he got older, Ted recognized that Rogers would be in good hands with professional management after he was gone.

He told author Caroline Van Hasselt, who published a biography on Ted in 2007, the year before he died, that Edward needed to more time to develop.

“He’s like a good wine; he needs some time to mature,” Ted explained.

For his part, Edward told the author that he found the idea of working in the business “more appealing” than running things from the boardroom. And he didn’t get over that idea quickly. According to a 2014 article in Toronto Life, Edward put his name in to succeed his father as CEO after his death, despite widespread knowledge of Ted’s desire to see a professional manager get the job rather than a family member.

Jostling between Edward and the three CEOs (plus interim CEO and longtime executive Alan Horn) that have run the family-controlled company since Ted’s death have rarely leaked out into the public eye. That was largely true for the inevitable family squabbles as well — until now.

One thing that has become clear as the gulf between Edward and his family grows is that some of his biggest supporters and those he is drawing close loomed large on the Canadian media scene alongside his father.

Public support for Edward in the latest battle has come from two of Ted’s oldest supporters and confidantes, important players because they are also on the board and members of the family trust advisory committee.

Phil Lind worked at Rogers for 53 years, and his long relationship with Ted was often held up as an example of the latter’s loyalty because Lind was kept on following a physically debilitating stroke that sidelined him many years ago.

In a statement Thursday supporting Edward’s boardroom changes, Lind invoked his decades-long relationship with Ted and said his primary focus will be to help “ensure a successful completion” of Rogers’ planned transformational acquisition of Calgary-based Shaw, which Ted would certainly have embraced.

Alan Horn, another Rogers old-schooler who worked there for nearly 30 years, many of them as chief financial officer directly under Ted, came out in support of his son as well.

“I look forward to working with Edward, the Rogers family, and the reconstituted board to help the company complete its game-changing transaction with Shaw,” Horn said.

Edward has also turned to luminaries and fixtures from his father’s heyday to sit on the board he is seeking to build.

Ivan Fecan, for example, ran the CTV television empire from the late 1990s to 2011 when it was acquiring properties across the country and nabbing prized specialty cable channels like TSN, and teaming up with the Globe and Mail newspaper when convergence was the buzzword of the industry.

He shared stages with Ted at glitzy industry conferences in the early aughts and likely exchanged quips with him between appearances before the powerful licence-granting Canadian Radio-television and Telecommunications Commission.

Another figure on Edward’s list to join the board is Jan Innes, who managed communications and government relations at Rogers Communications for two decades. When Ted was in charge, she was the gatekeeper for anyone who wanted to get close to him.

The other directors Edward intends to put on the board are Michael Cooper, Jack Cockwell and John Kerr. He is planning to get rid of Canadian corporate stalwarts such as former Hudson’s Bay Co. president Bonnie Brooks and telecom veteran and lead Rogers director John MacDonald — who was appointed chair after Edward was pushed out this week.

As the positioning of some players becomes clear, where the loyalties of others lie in the inner circle remains less clear.

John Tory — by day mayor of Canada’s largest city — is on the advisory committee to the Rogers Control Trust. His father, a lawyer at the blue-chip Bay Street law firm that bears their name, was a lifelong friend of Ted Rogers, and during his lifetime he advised some of Canada’s major media families including the Thomsons.

The younger Tory worked for Rogers Communications for years, rising the ranks to run the company’s media and cable divisions before leaving for a life in politics.

In what surprised even some close to the family and corporate drama at Rogers, Tory took several hours out of his schedule earlier this week to chair a meeting of the Rogers family, the trust advisory committee members, and independent directors.

He told reporters he did so out of obligation to his former mentor, Ted Rogers.

Edward, in one of his rare public statements on the events of the past month, suggested he, too, has his father in mind.

“In accordance with the wishes of the last Ted Rogers … I am announcing changes to the board of directors that will help guide RCI (Rogers) through the closing and integration of the Shaw transaction and into an exciting new phase of growth,” he said Thursday.

One could imagine some he has surrounded himself with invoking the phrase Ted closed every speech with: “The best is yet to come.” His mother and sisters might disagree.

What needless drama! I haven't seen the show Succession but all this reminds me of old episodes of Dallas where J.R. Ewing goes after everyone, including his family members to make a buck.

It's a bit pathetic when you think about it and I'm not so sure Ted Rogers would approve of all this drama.

In any case, it just bolsters Mark Wiseman's case against dual-class share structure.

Lastly, before I forget, kudos to AIMCo's CEO Evan Siddall  and his former team at CMHC for being honored with a Catalyst award, well done and well deserved:

Below, it has been an extraordinary week at the highest level of power at Rogers Communications, one of Canada's largest telecommunications empires. A battle for control has been underway, pitting Edward Rogers against other family members as he attempted to change the company's CEO and put his hand-picked replacement in his place. 

While that manoeuvre was thwarted, the power struggle has resulted in Twitter storms from Martha Rogers, Edward's sister, and John Tory, the mayor of Toronto, being called in to attempt to mediate. 

Now the company seems to find itself with two board of directors, with each claiming legitimacy. On top of all that, exclusive Star reporting confirmed that Edward tried to meddle with the Raptors' leadership this past summer, in a manner that may show some patterns to his corporate activism. With 24,000 employees and the ongoing $26 billion acquisition of former rival, Shaw Communications, there is at lot stake for one of Canada's largest media empires.

Update: A former pension fund manager sent me a different view after reading this comment:

I personally would rather own shares in or work for a company with votes controlled by a family, rather than one where most votes are in fact cast by nameless people at eg. Blackrock. I think when you investigate who actually votes most shares in large cap companies, many would be surprised where practical control actually resides. Certain asset managers and small numbers of people at headhunter firms create their own exclusive virtuous circles. Once a family is out, the power gap gets filled by a diffuse group of people, often bringing an agency rather than principal type of culture to the Board room. Both family and more diffuse governance structures can work, and some work better for companies that are large and stable versus companies with high growth or in industries in flux.

Therefore, the public market has room for different share structures, let the markets decide how important the governance structures are, and what type suits the business purpose in each instance.

I thank this person for sharing their informed views but I still agree with Mark Wiseman, let's do away with the dual-class share structure once and for all.

Another view came from Joe Nunes of Actuarial Solutions who shared this with me:

The problem is not dual class shares. The problem is the ego of SOME founders and an inability for ‘independent directors’ to hold the line on founder excesses. The opposite problem does exist in single class shares where there can be an agency problem and management starts looking more at their own interests than the interests of shareholders.

To me, skin in the game is good. I would mandate that executives of large publicly traded companies have to own shares in the company as their major form of compensation and allow them to sell those shares evenly over the 10 years following their departure. That would be their ‘pension plan’ and that would ensure they would be incentivized to build a durable business able to survive after their departure.

Joe also sent me a YouTube clip on dual class share structure featuring insights from corporate governance expert David Beatty which you can view below. I thank him for sharing this and his insights with my readers.