Sound governance is not some abstract ideal or utopian pipe dream. Nor does it occur by accident or through sudden outbreaks of altruism. It happens when leaders lead with integrity, when directors actually direct and when stakeholders demand the highest level of ethics and accountability. ~ J. Richard Finlay in testimony before the Standing Committee on Banking, Commerce and the Economy, Senate of Canada.
General Motors and Nortel look at bankruptcy. The BCE deal dies. The Bernard Madoff fortune-making machine was a fraud. The demise of once commanding forces takes its toll and causes us to have many questions about the permanency of success and the always-looming specter of disaster.
This week revealed things no mortal was ever supposed to see. (more…)
Last month we raised concerns that BCE’s management —rather than its board— appeared to be leading the auction process that the company had embarked upon. Some days after our posting, the board issued its first statement about the process and made it clear that it was in charge. We see from yesterday’s Globe and Mail that Judge Leo Strine of the Delaware Chancery Court has similar views on the role of the board in the kind of events now unfolding at BCE:
Judge Strine says boards today have to take control of negotiations immediately because managers run the risk of being biased in favor of powerful private equity buyers that typically offer rich contracts for the bosses to remain if their bids succeed. Another worry is the reluctance of private equity buyers to compete with each other in takeover auctions, thereby limiting the potential for bidding wars.
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Judge Strine’s observations about boardroom conduct should make directors at BCE Inc. blanch. The communications company’s board waited until last week to form a special committee of directors to oversee takeover talks, months after private equity buyers had come calling and more than a week after New York buyout giant Kohlberg Kravis Roberts & Co. collared three of Canada’s largest pension funds for a syndicate that is studying a potential takeover.
Judge Strine is not advancing new law. For at least two decades, the Delaware court has followed the position that boards, and especially independent directors, must ensure fairness, value and objectivity when a company finds itself, or places itself, in play. It evolved out of the early days when corporate raiders threatened to upset management’s grip on power, prompting management to find more friendly suitors —occasionally at the expense of the best deal for shareholders.
An interesting side note— our comments on the tardy entry of BCE’s board were also made to newspaper reporters before they were even introduced here. Apparently they weren’t seen as an issue by the reporters who had called me and there was no mention of this concern appearing anywhere prior to its being raised at Finlay ON Governance. It’s another example of where blogs often outpace more turgid mainstream media, and where reporters are often less clued in to the concerns of ordinary stakeholders and investors than they profess to be, and the practices of sound corporate governance than they ought to be.
Last week, we observed that BCE’s board has taken too low a profile in the process to consider going private —so low as to be almost invisible. As we said then:
The fact that management appears to be leading the process, and has selected partners it feels comfortable with, is also troubling.
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It is the board that needs to be carefully and undeniably setting the tone for these discussions. That voice is too faint and its timing has been unimpressive thus far.
Late on Sunday, BCE issued a statement confirming that its board is on the job. Here is part of what was said:
The Board and the Strategic Oversight Committee are committed to conducting a process that all qualified parties can participate in. The Board also indicated that all parties wishing to qualify to participate in the privatization process must be able to establish adequate financial capacity for a transaction of this size and complexity.
Nice to have the directors back online. We were glad to encourage their reappearance and hope they will stay connected.
Another puzzling sign surfaced at BCE this week, when its board announced that it had established a special committee to handle its friendly going private transaction involving Canada Pension Plan and KKR. Unless BCE has gone into the acrobatics business too, it seems to be making a habit of getting things backwards.
First, there was the blanket denial of March 29th regarding any intention to pursue a private equity deal. That was reiterated on April 10th. Many investors relied upon those statements, and, judging by the calls and email received at The Centre for Corporate & Public Governance, some sold their shares as a result. Then, out of the blue, BCE twisted itself into a pretzel and announced that it was happy to do exactly what it said it had no intention of doing just a few days earlier and named CPP and KKR as friendly suitors to the deal.
One would have expected BCE’s board to have established a special committee prior to the company’s announcing its decision to explore a going private transaction —not after. This gives rise to the impression that the decision announced on April 17th was not entirely thought through. Given the scale of the potential transaction and BCE’s prominence in Canada’s capital market, this is less than encouraging.
The fact that management appears to be leading the process, and has selected partners it feels comfortable with, is also troubling. In these kinds of situations, management typically wants to do what is in the best short-term interests of management and not necessarily what is in the long-term interests of shareholders. BCE’s board has a history of being overly deferential to management, as the costly fiasco involving the company’s purchase of Teleglobe, at former CEO Jean Monty’s insistence, illustrates.
It is the board that needs to be carefully and undeniably setting the tone for these discussions. That voice is too faint and its timing has been unimpressive thus far.
The Centre for Corporate & Public Governance was the first to raise concerns regarding BCE’s press statements in connection with its private equity talks. It has since received several dozen emails and calls from individual investors expressing fears that they were provided, at best, an incomplete picture by BCE when it denied on March 29th that any private equity talks were taking place or that any were intended to take place. The Centre has called for an explanation by BCE and, failing that, an investigation by market regulators. The Montreal Gazette carries the story in a piece today. It also carries a rather troubling response from a manager in Market Regulation Services, the body that is supposed to ensure market integrity. Here is an excerpt from the Gazette story:
A corporate accountability watchdog wants regulators to investigate whether BCE misled shareholders when it denied it was in talks with private equity firms on March 29.
Richard Finlay of the Centre for Corporate and Public Governance said many shareholders relied on BCE’s affirmation that it had no plans to take the company private. “It just doesn’t happen that fast. … It takes a lot of time to pull things together, to gather advisors and law firms.”
He is also suspicious of a spike in trading of BCE shares last Monday, the day before BCE did confirm talks with the pension funds.
“You have to ask if some people were acting on privileged information,” he said.
But an official at Market Regulation Services saw no need for an investigation. “Who knows how quickly things move along,” said Chris Lewer, manager of market surveillance. “The more high profile the case, the more things have tendency to evolve. All we can go by is the press release BCE issued.”
I was not aware that regulators were in the business of blindly accepting without question what publicly traded companies say. If that’s true, they can all shut the doors and we might save a lot of money —except for all the investors that will be fleeced. Certainly the misbehavers in the marketplace —and it is rumored there are more than a few— will be pleased to hear about the new policy of securities regulators, who appear to have been struck with a sudden case of acute panglossianism.
Anyone looking at the two releases, and the huge spike in the trading of BCE stock just the day before the announcement, would have serious questions to ask BCE management. If the right answers are not forthcoming, an investigation should be conducted. That’s the way the system is supposed to work. Dozens of investors have already expressed that opinion and I expect there are hundreds out there who feel the same way.
Fortunately, BCE stock is also traded on the NYSE board. There are a number of U.S. investors who also relied upon BCE’s statements and have some concerns about the contradiction that later followed. So once again, Canadian investors will have to look to U.S. regulators to dig a little deeper than their northern counterparts
The market’s Canadian watchdog prefers to sleep.
What a coincidence. BCE is now engaged in the very talks it previously denied were occurring to take the company private, with a group that includes KKR, the very company rumored before to be involved in the discussions —the discussions BCE said were not taking place. It might be regarded as a statistical amusement to some, but to investors it may well have amounted to a substantial loss. The Centre for Corporate & Public Governance has called on regulators to review discrepancies in the company’s statements.
BCE’s stock has been soaring since “speculation” about a possible LBO deal surfaced in March. In response, the company issued a statement on March 29th denying that talks were occurring in respect of privatization and claiming it had no plans to pursue such discussions. The stock continued to appreciate, nevertheless. On Monday, before BCE’s statement of today, there was a huge spike in volume and price at the start of the trading day both on the TSX and NYSE boards, which suggests a number of people decided over the weekend to buy BCE. Were the big transactions yesterday and BCE’s announcement today linked? That’s what regulators are supposed to guard against.
The kind of landmark move BCE disclosed today proceeds only after extensive meetings, analysis, preparation and discussions. It does not occur overnight. Board approval must be obtained from a number of players, as well as BCE. My point is that it stretches credulity for BCE to have asserted “there are no ongoing discussions being held with any private equity investor with respect to any privatization of the Company or any similar transaction” and that “the company has no current intention to pursue such discussions” —while less than three weeks later announcing that such negotiations are underway.
The question that needs to be addressed is: Were certain investors able to profit from information that such talks were occurring, while others did not because they were relying upon the information the company provided? The question takes on even greater significance in that just one week ago the New York Times cited a top BCE official as saying “Our statement of March 29th stands. We are not in any current talks with any other parties.”
There are vast sums in a company like BCE to be made or lost by its shareholders. Investor confidence is based on the principle —indeed the law— that all investors are entitled to material information that could affect the company at the same time.
Regulators need to act quickly to ensure that, in what might be the largest deal of its kind in Canada, involving one of its most valuable market assets, no shenanigans will be tolerated.