Stephen Jarislowsky, President, Jarislowsky, Fraser & Co. Ltd.
April 28, 1988
Chairman: Ronald Goodall, President
It is reported in the press that our speaker has the IQ of a genius. Perhaps his future was forecast by Sir James Fitzjames Stephen in his book Liberty, Equality, Fraternity published in 1873 with these words: "The way in which a man of genius rules is by persuading an efficient minority to coerce an indifferent and self-indulgent majority."
Our speaker has represented the minority: he was the leader of the shareholders' action committee of Canadian Tire; the leader of 15 million votes in opposition to an apparent move by Seagram's which could have resulted in reducing common shares to nonvoting status; he was the representative of Hudson's Bay Oil and Gas shareholders insisting on payment in cash rather than shares by purchaser Dome Petroleum.
The "self-indulgent majority" has been seen by our speaker as companies whose top executives and controlling shareholders seek to enrich themselves at the expense of minority shareholders. He is quoted as saying, "I don't mind them making an honest profit. l just don't want them to be pigs:
He argues that a good investee company possesses integrity and honesty in management. I must agree. He sympathizes obviously with W.S. Gilbert in lolanthe.
The shares are a penny And ever so many
Are taken by Rothschild and Baring, And just as a few are allotted to you, You awake with a shudder despairing.
Stephen Jarislowsky was born in Berlin and attended schools in Holland, France, and North Carolina. He is a graduate in mechanical engineering from Cornell University, New York, in Far Eastern studies from the University of Chicago and obtained a master's degree in business from Harvard. Mr. Jarislowsky saw military service in the U.S. army in postwar Japan as a counterintelligence officer.
His business career began with Alcan Aluminum but after three years he left and ran an art-book publishing house based in New York. His next move was to form his own firm, Jarislowsky, Fraser & Company, in Montreal. During these early years, he was an entrepreneur: one of the founders of a metal fabricating firm, a laundry company, a mutual fund, an auctioneering firm, and an investment publication. He knows how to run a business.
He is fluent in English, French, German and Japanese. An ability with language is, of course, necessary to unravel the mysteries of the prospectus and the annual report. Thank heaven we chartered accountants write with such clarity and simplicity.
Mr. Jarislowsky was ranked top money manager in 1986 and described as the most powerful money manager in 1987. He manages $9 billion, one-eighth of all trustee pension plans in Canada. He is a director of a number of organizations including the Swiss Bank Corporation, InterCity Paper, Fraser Brothers, Quebec Pension Board, the Montreal Museum of Fine Arts and the C.D. Howe Institute. He is a collector of cacti and art. He is married to Gail with two sons and two daughters.
Ladies and gentlemen, please welcome Stephen Jarislowsky who will address us today on "Shareholder Democracy:"
My friend Nona Macdonald prevailed on me for a long time now to address your members. Nona and I go back a long way, but my shyness and hesitation were real. The name of The Club alone is intimidating to an immigrant like myself. I had a similar emotion when I first addressed The Canadian Club.
My speech deals essentially with shareholder democracy and the concept of fairness. In the days of the British Empire, these didn't exist to a large extent, as the board rooms were filled by the elite, who rarely felt that the hoi polloi needed more than a pat on the back. The shareholder was essentially a sucker who wanted to gamble, but in the long run supplied cheap money and never had much, if any, say, nor ever got more than some crumbs. Financial reports were very sketchy as they still are in many parts of the world today, and the regulatory authorities, if anything, were acquiescent to the board room elite.
Things have changed, but not enough. The ethics of the business community are slowly improving and the pooh-bahs are rarely found in board rooms any more. The ethics of the new breed of paper shufflers, however, are not particularly good, and I have also noticed that the fits a papa once dad is gone don't lack the quality of greed, even though their inheritance was rarely re-earned by them-just manna from heaven or the right place under the apple tree.
Where do I come from? Essentially, I am an institutional investor! That means I invest the funds of other people, in a rather conservative fashion. Increasingly, these funds are pension fund monies from the private and public sectors. They are fiduciary funds and my clients, the pension fund boards, are trustees for these funds, corporate and individually owned. By that I mean they are either, and still largely defined, benefit plans or, growingly, money purchase funds. The former are pension plans where the benefits are guaranteed (hence defined) by the company; while in the latter, the values at the time of retirement, and even all along the way, accrue in full to the contributors, normally without a minimum guarantee. My job is to act as agent of the trustees and as such to make sure that the funds are safely invested to achieve the best possible returns within the confines of fiduciary stewardship. In effect, I invest them in a prudent way -the prudent man's rule.
I should not gamble with the funds on the one hand. On the other, I should not just buy bonds, but should seek out intelligent growth opportunities with good and honest managements. Clearly, if the majority owners, the boards or management of the company I invest in do not look after my clients as shareholders, but only after themselves-whether legally or illegally-I do not accomplish what I set out to do. If the majority shareholder favours himself at the expense of other shareholders (my clients), these latter lose. If management does the same, these shareholders lose, etc. A Southam-Torstar deal; a Canadian Tire; a Seagram attempt to bring in nonvoting shares; a predatory takeover of a subsidiary (Dominion Glass, Keeprite, etc.) are all at the expense of my clients and diminish my performance.
I look for shareholder democracy, where all shares are voting equally; where directors represent all shareholders alike and act as fiduciaries for all; where managements get well rewarded for work truly well done; where management does not reward itself unconsciously and where control shareholders do not invite others in as shareholders unless they expect to treat them fairly. Finally, I look for laws which assure that excesses and/or dishonesty are easily prosecuted and severely punished. While this platonic ideal is what I look for, l do not necessarily find it. The result is that I have a choice-to allow myself to be cheated and robbed or to fight.
In the past, institutional investors usually acquiesced to being cheated and robbed. You voted with your feet. You sold your shares or you chalked it up to experience. Many investors still retain that attitude. Many, if not most of my competitors, do not like to be identified opposing control shareholders, boards or management. They fear to lose business thereby or fear to be ostracized in their business circles and clubs.
For many years now, ever since the British PetroleumSupertest contest, I have taken an aggressive stance when it looked that my clients once again would be victimized. I do it for good business reasons-if my clients have better performance I get more clients-that in fact is what I'm paid for. I'm paid a percentage of capital so that my clients can get a higher percentage of gain and so can have a good return on what they pay me. The better my performance, the happier my clients and the more they recommend me to others. So my policy is "enlightened selfishness." I'm not Robin Hood, though at times I try to sound like him. I'm an impostor who fights the battles to get more business.
There is another reason too. When we pick a stock, we choose it based on lengthy research into facts about the industry, the company and its management. If we are right in our assessment, the stocks we buy should do well. If they do not, then presumably our analysis was poor. However, the best-laid plans by mice and men are no good if we deal with an unethical board or a grasping control shareholder. We have little control over that till after the event. When we distrust the principals, we avoid the stock, but who would cast stones at the Southam or Canadian Tire companies? They were always the height of respectability! I hate to do this security analysis and be proven right only to be diddled. It sets off a nervous reaction of outrage in me on which I usually act. If a correction cannot be obtained in a friendly manner, we will pursue the matter in law.
The law in Canada though is not of much help. The duties and obligations of directors are not well spelled out and as such Ontario law doesn't insist that, like in the U.S., directors are necessarily fiduciaries acting alike for all shareholders. A court will not normally question the decision of a board as long as the board crossed all is and dotted all i's. The fact that a board is acting strictly for management or the control block who appointed them does not bother a court, unless the board did not act within legal niceties. Outside directors are rarely that if they were appointed by other than the outside shareholders and professional advice from investment firms or such is usually reflective of who paid the fat fee. Advice usually follows what he who asks for it wants to hear, especially when accompanied by the fat cheque. We have learned that the hard way, but we are not despairing. We have made much progress. Still, we believe that the laws must be improved and that the process of using the law must be far more expeditious and far less costly. I'm not here to tell you horror stories.
We have made progress. Canadian Tire was a bench mark in getting the OSC/QSC to act for the minority shareholder. Using soft dollars to pay our legal bills also is an enormous help. Before that we paid 100 cent dollars after tax to fight our own company which used our money on a tax-deductible basis to fight us. The relations of the institutional investors with the OSC and QSC are indeed excellent. We work closely together and have built a solid relationship of mutual assistance where warranted. We want no special favours from the OSC and QSC, only the courage to act in unfair situations. They have demonstrated the same under Paul Guy and
Stanley Beck. We also want them to act to modify the laws in line with what I said above. We feel that, though slowly, here also there is motion in the right direction.
We have also made yards elsewhere. The director of the Canadian Corporations Act, Fred Sparling, is suing Southam/ Torstar, asking the court a) to undo the transactions and b) to assess damages for the minority shareholder. This is a first, we welcome it.
We have also gotten together among institutional investors and now fight these actions jointly, no longer alone, and this is effective. In Canadian Tire the assets of the institutional investors working together totalled some $40 billion of clients' money. We have stopped many companies from introducing adverse acts ahead of the shareholder meeting, yet other companies have put into effect bylaws which far better protect minority shareholders than heretofore. We salute CP, Weldwood, Transalta Utilities and UAP for excellent examples in such transactions as non-arm's length deals and subordinated voting shares. We believe there will be ever more companies travelling this road as it creates investor confidence, not only in the specific companies but in our general markets. It reduces the work of the regulatory commissions. It reduces our work. We have proven to be formidable adversaries.
What do we want? Above all we want fairness and shareholder democracy. We do not like nonvoting or subordinated voting shares. We do not want to be the South African blacks of the stock markets!
We believe in pre-emptive rights for new issues or at least in pro rata preference in new issues for existing shareholders. We believe that all material non-arm's length transactions should be decided by the majority of the minority. We believe that directors must legally act as fiduciaries for all shareholders alike and must especially protect the weak-the minority shareholders. We believe that directors should be carefully chosen from people who are informed, ethical and who learn the business of which they are directors. They cannot be merely safe cronies of the majority shareholder or of management. We do not believe that management or the board can unilaterally oppose a takeover to save their own jobs. If a big fat bid is on the table, they cannot deny it to the shareholders. If anything their job should be to see whether there is not a yet fatter one available. They should not arrogate to themselves the decision of at what price to sell-that decision should rest with the shareholders. It is the board's job to assure good management. Normally, if that is the case, results will be good and stocks will sell high. Bargain-hunting raiders do not look for expensive companies; they normally look for cheap ones. These are some of the things we believe in.
As time goes by, institutional money will increase in size. The taxable individual has a hard time to save and to invest profitably today. Short-term money and bonds by and large earn nothing at 5 per cent inflation and 50 per cent tax. The new capital gains rates at 75 per cent next year tax inflation and are higher for long-term investors in real terms than the normal tax rates on short-term money which carries no risk. This may come as a surprise to you. Since V -day in 1972, the value of money has fallen to 30 cents from $1 in purchasing power. Thus a stock had to triple to stay even. Had it tripled say from $30 to $90 you would pay 75 per cent tax on $60 or at 371/2 (75 per cent of 50 per cent) you would lose $221/2 to tax while in reality there was no gain in purchasing power. The private individual's best investment today is his house as he pays no tax on the money he invests and also no capital gains tax when he sells. His other investments of value are his pension plan and his RRSP. But both of these are really not capital but deferred savings. They extinguish normally with him. It is clear that institutional money (RRSPs and pension plans) will grow fast as they are nontaxable while invested. As such, money managers will continue to represent an ever-larger share of the public stockholdings. This will add to our clout.
This also places a heavy responsibility on people such as myself. Who else will be able to represent the public shares effectively if not the big money managers? To date our assuming such responsibilities has brought no scandals, no scams, and little interference in the board room. We personally do not take directorships in public companies in which we invest as it would pose a conflict of interest. On the other hand we have been ill-served by many public boards. We are now starting, only starting, to recommend strong outside directors to boards when asked. l see more of that in the future, but as long as existing directors act for all shareholders alike, I do not believe that we will try to influence them. At Canadian Tire, we now name the A shareholder directors. l have been asked to suggest names for other companies and have a long list of fine citizens in all leading cities of Canada, if you want a new director.
What we want is fairness and shareholder democracy. What we still lack is simple, clear laws assuring us that we will automatically get fairness and shareholder democracy. In the meanwhile, as big boys we are learning to fight our battles as recent successes attest. I promise you that we will persevere and win as our cause is just.
The appreciation of the audience was expressed by Nona Macdonald, Past President of The Club.