Many alternatives concerning the way forward for troubled Bombardier Inc. happen to be proposed. The Quebec government has committed $1.3 billion in aid and today some type of moral argument has been levelled at Ottawa to throw money into Bombardier’s cap also. This is a very bad idea from a governance perspective, as well as a taxpayer perspective.
Let’s be clear about Bombardier’s governance reality: The Bombardier/Beaudoin families hold almost 60 percent of voting power in the corporation, despite holding a fiscal interest of just one-quarter of this figure. This is a dual-class-share firm that just isn’t flying.
A federal bailout would place perhaps a billion or more taxpayer dollars in the hands of family that’s insulated from governance accountability due to the corporate structure that it has chosen. This insulation and insufficient accountability haven’t been good for the organization. In the last five years, Bombardier’s stock price has declined more than 75 percent. Why must Canadian taxpayers be responsible for Bombardier’s poor corporate governance?
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Dual-class share structures are fundamentally unfair: They leave the subordinate shareholders unprotected and cry out for any response from securities regulators. Advocates of such structures recall testimonials – like Fairfax or Onex – without focusing on the reality that dual-class-share structures undermine corporate governance standards since the subordinate shareholders are burdened with a disproportionate share of the economic risk in the firm in accordance with remarkable ability to influence the affairs of the corporation. In particular, they can’t elect directors or otherwise ensure change through their vote.
As the Magna buyout showed, and the Corus/Shaw deal suggests, dual-class structures can have severe consequences especially when there aren’t any legally mandated procedural safeguards relating to special committees, valuations, fairness opinions and voting conditions. Since the jurisdiction of securities regulators is founded on investor protection and also the public interest, dual-class-share structures should be further regulated, if not prohibited, in capital markets.
From Ottawa’s perspective, if Bombardier were to receive federal funding, there aren’t any accountability mechanisms in position to ensure that the present board would do any better than it has to date. At the minimum, the Bombardier board itself must be replaced and repopulated not with government representatives – as the Quebec government is proposing – but with independent directors (as is the case in non-dual-class firms). This can need a dismantling of the dual-class structure.
Reforms are needed to make sure that Bombardier’s subordinate shareholders can bring about the decision about who is around the board of the corporation. This isn’t the area for taxpayer money.
Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance, Faculty of Law, University of Toronto. Email: anita.anand@utoronto.ca
