Originally 11 March 2017
Three weeks ago an inconspicuous Order-in Council 39/2017 was quietly passed to repeal two sections of the Alberta Investment Management Corporation Regulation. The deletion of sections 5 and 6 are highly significant as the sections assured a measure of independence for the corporation’s management and board from the government. The government’s decision is positive and courageous for the reasons explored below.
What is AIMCo?
AIMCo’s (Alberta Investment Management Corporation) success is very important to Albertans for several reasons. First as the investment or asset manager for the Alberta government, the corporation manages about $90 billion in financial assets for public sector pension plans, the Heritage Fund, short-term funds of the Government of Alberta, and various provincial agencies. The success of AIMCo has a direct impact on the provincial budget since investment income (mainly Heritage Fund income) may account for between two and six per cent of total revenue. Pension fund trustees of various public pension funds such as the $37.2 billion Local Authorities Pension Plan (September 30, 2016) set broad investment policies, it is AIMCo that is responsible for administering and executing these policies. AIMCo and its associated pension plan trustees are responsible for overseeing investments for over 300,000 current and retired employees in the health, police, and Alberta public service.
Investment Returns before and after corporatization
So when the provincial Cabinet decides to expand the qualifications for directors, this suggests that there is a question as to the quality of the board’s oversight. Last April, the Institute for Public Economics at the University of Alberta published my analysis of AIMCo’s performance since it was established in 2008 (AIMCo paper). The analysis compared the performance of AIMCo with its predecessor organization, the Investment Management Division of Alberta Finance. The tentative conclusion was subject to a number of caveats. The study found that AIMCo’s performance was no better than its predecessor organizations when relevant benchmarks set by the public sector funds were considered. AIMCo’s performance relative to other “competitors” such as the Caisse de depot, Ontario Teachers, the CPP Investment Boards, the Ontario Municipal Employees Retirement System (OMERS), and the B.C. Investment Management Corporation was generally middle of the road. A key concern raised was the creeping upward of expenditures which reduced net returns to the pensioners.
The sections repealed under the Order read as follows:
Qualifications
5 Individuals appointed to the board must have proven and
demonstrable experience and expertise in investment management,
finance, accounting or law or experience as an executive or a
director in a senior publicly traded issuer.
Nominating committee
6(1) The Minister shall establish a nominating committee to advise
the Minister regarding the appointment of any individual to the
board.
(2) The nominating committee must be comprised of at least 3
individuals, each of whom must have proven and demonstrable
experience and expertise in investment management, finance,
accounting or law or experience as an executive or a director in a
senior publicly traded issuer.
(3) The chair is, if the office is not vacant, a member of the
nominating committee.
(4) The nominating committee shall provide the Minister with a
short list of qualified candidates comprised of at least double the
number of positions to be filled, excluding any positions to be
filled by reappointment.
(5) In determining the short list referred to in subsection (4), the
nominating committee must take into account section 2(4).
(6) The Minister shall recommend to the Lieutenant Governor in
Council only candidates for appointment to the board who have
been provided by the nominating committee.
(7) This section does not apply with respect to the reappointment
of a director.
(8) This section applies in respect of persons to be appointed to the
board after January 1, 2008.
Section 2(4) of the Regulation reads:
2 (4) In making an appointment, the Lieutenant Governor in Council
shall have regard to the desirability of having a board that is
comprised of individuals who, in the aggregate, have the full range
of skills, knowledge and experience necessary to be able to
effectively lead the Corporation in achieving its objects.
What the Regulation did was to narrow the selection of the board to “blue-chip” directors- in other words members of the Canadian corporate establishment. From the perspective of the government of the day (Finance Minister Lyle Oberg), this nomination process would provide “safe hands” for the oversight of this critical institution. The safe hands appointed were individuals near the end of their corporate careers in Alberta, Canada and abroad. At the time of the appointments, I was impressed by the roster of blue chip directors which included the former Chairman of TD Bank, Charlie Baillie who was appointed chair of the board and Andrea Rosen also a former Vice-Chair of TD Bank.
Partisanship and Directorships
However, the Alberta directors, who met the narrow qualification test were and are major contributors to the former government party’s coffers. My unpublished research into the backgrounds of the Alberta directors indicates that virtually all the appointees were contributors to the Progressive Conservative Party Association of Alberta (PCAA) and, most notably, leadership campaigns. The most celebrated case was Daryl Katz whose last minute funding of the PCAA in the 23 April 2012 election made headlines in Alberta. Katz left the board in 2015. The Table below probably does not reflect the full extent of contributions from the Katz group and the Katz Group’s senior executives. (The sources of this information were accessed about one year ago at Alberta Elections website. The information on leadership campaign contributions were made released by the various leadership candidates.) It should also be noted that two Alberta directors, Cathy Williams and Richard Bird did not personally donate to the PCAA. Their employers, Shell Canada and Enbridge, respectively did however contribute relatively small amounts to the PCAA.
| Table 2.2 | AIMCo Directors’ Donations to PCAA | ||
| Names | Donations | Leadership Campaigns | Company Donations |
| George Gosbee (Vice-Chair 2008-2015) | 21,680 | $5000 (Redford- George & Karen) | 9,400 |
| Clive Beddoe (2008-2013) | 2000 (Redford) | 17,720 | |
| David A. Bissett (2008-2010) | 6,995 | $10-4999 (Dinning), $30000 (Prentice) | |
| Darryl Katz (2008-2015) | 30,000 | $5000 to $30,000 (Rexall- Dinning) , $5000-$30000 (Medicine Shoppe- Dinning)$10-$4,999 (WAM – Dinning) $101-500 (WAM- Hancock)) $10001-$15,000 (Medicine Shoppe Stelmach), $15,000 (Prentice- Katz Group), $10,000 (Redford-Medicine Shoppe) | 227,275 |
| Frank Layton (2008-2010) | 4,438 | ||
| Mac Van Wielingen (chair 2015-) | 18,500 | $5000-$30,000 (Dinning), $5000 (Prentice-ARC Financial); $10000 (Prentice) | 90,180 |
| Ross Grieve (2010-) | 1,500 | $5000 TO $30,000 (Dinning-PCL), $501-$1000 (Stelmach), $10000 (Prentice), $5000 (Redford-PCL) | 185,471 |
| Harold A. Roozen (2010-) | $1,001-$5000 (Stelmach) over $10,001 (Hancock) | 5,750 | |
| John Ferguson (2014-2016) | 3,550 | $501-$1000 (Stelmach) | 8,275 |
| Totals | 86,663 | 544,071 | |
The fact that one individual contributes to the political party in power, especially a party that had been in power for 43 years, should not disqualify them from serving on these boards. Indeed, all these men have had distinguished careers in business. The concern is that modern investment management, in an uncertain world, requires a governance structure that constantly questions, inter alia, the premises of investment strategies and the mathematics underlying the complex financial structures AIMCo invests in.
While the goal of creating a highly functioning board, insulated from political interference, was the received wisdom at the time, the difficulty was that the board lacked intellectual and gender diversity. Some “government” oversight was provided with the appointment of the Deputy Minister of Finance to AIMCo’s board. Section 4(1)(b) of the Alberta Investment Management Corporation Act legislated that the “Deputy Minister of the Minister” would serve on AIMCo’s board. But within two years, and under a new minister, this provision was repealed. The Minister at the time, the Honourable Iris Evans, noted that the deputy’s presence on the board was to facilitate the transition to a new organization. During the debate over Bill 22, there was no mention whatsoever that the deputy’s appointment was temporary. In any event, the publication of the At the Crossroads report, which recommended deputy ministers not sit on provincial agency boards, was cited as a rationale for removing the deputy.
Institute of Corporate Directors and Disruption
It is interesting to note that the Government has apparently rejected the requirement that prospective board members hold a designation from the Institute of Corporate Directors (ICD). The ICD, which set up shop over a decade ago in the wake of corporate governance scandals like Nortel and WorldComm, is a educational organization which has partnered with the Rotman Business School at the University of Toronto (and now many other business schools) to train directors in proper governance methods.The judgment not to give preference to the ICD.D. designation is a good decision since the designation is costly to obtain and its membership is mainly populated with members of existing boards.
In Edmonton over the past couple of months, the local ICD chapter has held events around the concept of “disruption” in corporate governance practice. The notion of disruption is now globally recognized as Ernst & Young, one of the Big Four accounting firms, has been promoting the utility of diversity in addressing the challenges of an intensely competitive corporate world facing legal and regulatory change. The ICD, to its credit, has too been a promoter of greater diversity, including gender diversity, on corporate boards. Support for diversity confirms the requirement of not only international experience but also the capacity to “think outside the (corporate) sandbox.”
The repeal of the restrictive provisions under AIMCo will enable the government to cast its net more widely for capable directors who see the world differently from corporate executives. Indeed, the board would likely benefit from persons with scientific degrees, such as physics or mathematics, given the complexity of risk management policies now undertaken at AIMCo. Other perspectives besides law, accounting and engineering might include medical scientists or individuals who have worked in the government or diplomatic sectors.
Another key recommendation of the AIMCo paper was that consideration be given to the appointment of representatives from the various public pension plans. Section 11 of the AIMCo Act defines the duty of a director in the conventional manner, that is, to: “(a) shall act honestly and in good faith and with a view to the best interests of the Corporation, and (b) shall exercise the care, diligence and skill that a reasonable and prudent person would exercise in comparable circumstances.” This provision is standard in Canadian corporate law but in some financial institutions statutes, the best interests of the corporation are defined to include the interests of depositors. Since the rise in investment management expenses has been a drag on returns to pensioners and employees, it would seem reasonable for the Alberta government to follow the example of British Columbia’s Public Sector Pension Plans Act. That Act mandates the trustees of the four statutory pension plans (College Pension Plan, Public Service Pension Plan, Municipal Pension Plan and the Teachers Pension Plan) to be responsible for appointing one director out of seven- (four out of seven). These persons would represent members with economic interests at stake. Such individuals would likely be more vigilant in ensuring expense levels were scrupulously watched than directors who legislated duty does not take the beneficiaries interests directly into account.
This article should not be interpreted to mean that AIMCo needs to be “shaken up”. Before corporatization, the organization faced challenges in staffing positions and improving its IT systems -both critical to a cost-effective and prudently managed investment portfolio. AIMCo has attracted investment talent from all over the world and its historic returns should not be regarded with undue alarm by the general public. However, a more diverse board, perhaps with several corporate “outsiders,” including persons understanding the cost of running investment portfolios, would make good additions to the board.