Teachers retreat is small shareholders' loss

Prime Minister Stephen Harper's doing it. So are U.S. President Barack Obama and the Financial Times. Everyone's talking about the Canadian banks - bailout-free, solvent and low in toxic mortgage sludge.

But here's one place you won't hear much boasting about the wonders of Canadian bank shares: the Ontario Teachers' Pension Plan. Four years ago, the federal government took the shackles off pension funds by eliminating the rule that had forced them to hold 70 per cent of their money in Canadian assets. Teachers took advantage, in a manner of speaking.

Buying into the mantra of "Why buy Canada when you can own the best in the world?" it lopped more than $10-billion in Canadian stocks from its portfolio. On financial shares, it wielded the heavy axe. The fund's ownership of Royal Bank of Canada, one of the best-performing large banks in the world, fell from nearly nine million shares to 1.3 million in the past two years. Its stake in Toronto-Dominion Bank dropped from 4.5 million shares to just 808,000. So which bank was Teachers riding instead as the world entered the calamity of 2008? Royal Bank of Scotland (Gordon Brown, proprietor).

The RBS blowup cost Teachers more than $400-million last year, contributing to its $19-billion investment loss. But the example is a bit misleading. Teachers didn't really cut its stake in RBC, Canada's largest bank, by 85 per cent (though it did cut it). It sold millions of shares but also bought some back indirectly, using futures and equity swaps to play market indexes in which RBC is a constituent. Why? It's easier. It also allows for a bit of leverage. For a small fee, Teachers can get exposure to $100-million worth of stocks without putting up $100-million in cash, if it wants to. It has also made the fund less relevant.

Shareholders can vote. Shareholders have influence. Owners of equity swaps? Not so much. "If you speak to companies, you'll find they don't listen too much [to Teachers]any more," said a senior Canadian pension manager. Why does that matter? Because there's really no one to replace it in the role of boardroom pit bull.

In the Claude Lamoureux era, Teachers accomplished a lot by being outspoken, even mouthy. Sometimes it went too far, and sometimes it was wrong. But more often it was speaking the harsh truth. The fund's managers were among the most effective proponents of clamping down on excessive stock options at Biovail and other companies. It was early, loud and persistent in opposing the outlandish pay of Frank Stronach at Magna International. It stood against an abuse of shareholders' rights at Molson. Behind the scenes, it helped clean a few boardrooms of directors who weren't up to the job.

"We still want to be a major player in corporate governance," says Wayne Kozun, senior vice-president of public equities at Teachers. That's nice, but good luck. Teachers may still get an audience in some cases, because of reputation. But ask any CEO or chairman whether he's more likely to hear the ideas of an investor shareholder who owns 5 per cent of his company or one who owns 0.5 per cent. The question answers itself. In the case of Magna, it looks like Teachers doesn't own a single share any more.

Can anyone else take up these fights? Most pension funds aren't big enough or visible enough to have the clout. The Caisse de dépôt et placement du Québec is, but it's bedevilled by its own problems. (Even when it's not, it's too busy explaining to Péquistes why it's not fulfilling its God-given mission to bail out some bankrupt factory in east-end Montreal.) The Canada Pension Plan could, and it does do some shareholder activist work, but it's very quiet about it. Most private money managers are scared to say boo because they have conflicts of interest. It's not good business. Complaining about an executive's fat paycheque might cost it the chance of managing the pension money.

"At the end of the day, the public funds are the only ones that can do something that rocks the boat a bit," says our anonymous pension manager. But most people on Bay Street believe new Teachers CEO Jim Leech is less interested in flexing muscle in the boardroom than was Mr. Lamoureux, the failed BCE gambit aside. Mr. Leech is a deal guy. And aside from who's at the top, there's something a bit rich about a large pension fund that wants transparency in the boardroom but whose own operations are made murkier by greater use of derivatives. It's too bad. Time was when Teachers did a lot of good for investors who were too small to be heard. That time may be over.