What does Stephen Jarislowsky know about corporate governance?

Buying BCE

By: Stephen Jarislowsky

Financial Post
July 26, 2008


The Board of Directors of BCE met to consider an offer from the Ontario Teachers Pension fund, and others, to make a leveraged buyout. The board was fully aware that if it sold BCE, the buyer would issue new bonds and borrow from banks, in addition to the already outstanding bonds and preferred shares issued at the time. The board also knew that these bonds and preferred shares would not rank ahead of the new debt. Old bonds issued in this situation totaled some $5-billion, plus the preferred shares. These bonds were all rated 'A' or better, which means "investment grade." The board also knew that bonds under 'BBB' (one grade lower than 'A-') would be 'junk' bonds and that most pension funds prohibited owning such bonds (many funds do not allow 'BBB' bonds, or if so, only in small amounts). The company had originally sold the bonds to investors on an 'A' or over rating.

When the board meeting ended, the board had accepted the offer from Teachers and, though its action in one meeting created a loss for the bondholders of $1-billion, i. e. it had destroyed unilaterally, without change in the company's pre-meeting risk, the value of these bonds by $1-billion, with the sole objective being to get a higher price per share. The board members had a conflict of interest as all were BCE shareholders. As fiduciaries for the company (and that was their status under Canadian law) they had betrayed the interest of the bondholders by $1-billion. Was this legal? Was it ethical? Was it good governance as fiduciaries?

The trial judge said yes it was legal, citing U. S. Delaware Law. All five judges of the Appeal Court said no. The Supreme Court, allowing the case to take precedence (why?) over all others on its docket, after a very cursory hearing, allowing only a minimum of testimony, and after only a few days of thinking and deliberation, unanimously said it was legal. It would give its reason later (?)! The haste is surprising, and so is the willingness to give preference to this case. Obviously when five Appeal Court judges are unanimous, one may wonder why seven Supreme Court judges came to the exact opposite conclusion in no time flat? The case is murky at best. Moreover, in another case, the Supreme Court had ruled that directors have an obligation to other stakeholders, not only the shareholders. A contradiction?

Few judges are experts in corporate matters of this type or in modern governance. Clearly that would seem to apply here. Why else would there be a total contradiction of the Appeal Court by the Supreme Court?

Jarislowsky Fraser Limited does not hold BCE shares or BCE bonds for its clients, nor does the writer own any. Some years ago, we decided not to invest in this company after the board did not honour a Letter of Comfort to Teleglobe bondholders. Neither the firm nor I have a conflict of interest in my writing this letter.

However, being a co-founder of the Canadian Coalition for Good Governance, the founder of the Institut sur la Gouvernance du Quebec, and after 53 years in business defending shareholders, I believe I have a fair grasp of both ethics and governance. To be allowed to legally alienate $1-billion of market value in a short board meeting does not meet my criteria.

If indeed the Supreme Court acted correctly, I am shocked that a unanimous Appeal Court ruling was so summarily overruled in insufficient time. Does it mean that Canadian laws need to change to protect against this type of alienation? Does it mean that the law is not clear? Does it raise other suspicions and questions?

I would like to go on record saying that I am very uncomfortable. Both Canadian Law and our process are flawed at best.

Stephen Jarislowsky, Chairman & Director, Jarislowsky Fraser, Montreal.