Canadian IR in the mid-1990s is proving to be a two-way street, as Canadian institutions diversify abroad and Canadian companies endeavor to woo foreign funds to their domestic market
Canadian IR may still be at a formative stage but its underlying growth is easily exceeding expectations. Indeed, the Canadian Investor Relations Institute (Ciri) now boasts more members - over 300 - than its UK counterpart, making it second only to Niri.
A core of exceptionally well-versed senior IROs forms the nucleus of the community in Canada, but there are also many newcomers on the scene, trying to climb the learning curve as fast as possible. Ciri surveys show that 70 per cent of the new generation have financial backgrounds, but lack any practical IR experience. 'The IR function is now gaining recognition, but people are just learning about what must be done,' says Joanne Brown, executive director of Ciri. 'Increasingly, corporations are accepting that someone must pay attention to this area.'
The growth of IR has been such that some say it is expanding too quickly. 'Many enter the field calling themselves IR professionals who don't yet understand the business in any depth,' says Dick Wertheim, managing partner at Toronto-based Wertheim & Co and a Ciri co-founder. 'The risk is that some of these novices who have been stumbling about will do things that reflect poorly on the profession. The positive side is that this scenario underlines the need and challenge to cultivate practitioners in larger numbers. The Ciri mandate has gone a long way toward developing expertise.'
Wertheim, who created one of Canada's first IR programmes in the mid-1970s and later did a stint at Burson-Marsteller, recalls that when he arrived from the US in 1974, the IR function was virtually unknown in Canada. 'In those days, quite literally, the CFO might respond to investor queries by saying ridiculous things like: What do you want to know that for? Or: If I tell you, what are you going to do with the information? That attitude is still out there today in some corners but it is much less prevalent.'
Ciri, which was set up in November 1992, began life as a Niri chapter. But it soon became clear that an independent Canadian organisation was necessary if the profession was to flourish north of the border. As the first Canadian director on the Niri board in 1982, Wertheim struggled to convince his colleagues that Canada was not the 51st state. 'Some, but not all, US directors had a provincial attitude,' says Wertheim. 'They believed that what was good for Niri was good for Canada. They did not appreciate that things like Niri's Washington Alert were of little use to Canadian companies that were not interlisted. Few Canadian firms were keen on paying impressive fees to Washington for that kind of product.'
The Canadian capital market does differ significantly from its US counterpart, although almost every US trend reaches Canada within a couple of years. Current examples include corporate governance issues, the increasing growth of institutional money and the gradual raising of the IR profile in general. Canadian institutions now account for some 70 per cent of trading value in Canada, with pension fund assets expanding from $150 bn in 1989 to $262 bn in 1994; and mutual funds growing from $23 bn to $127 bn over the same five-year period.
'Money causes things to happen,' notes Ron Blunn of IR consultancy Blunn & Co. 'That is why IR has flourished in Canada. From mid-1992 to mid-1994, Canada saw a burst of IPOs, while the pool of pension money continued to grow at a dramatic rate.' Noting the 20 per cent cap on foreign investment imposed on Canadian fund managers, Blunn says: 'With 80 per cent of the money stuck in Canada, you have a host of fund managers chasing a limited number of opportunities. All that activity leads to a greater need to communicate properly.'
But formidable obstacles still remain. One is the concentration of capital in Canada, where about 75 per cent of TSE 300 index stocks are tightly controlled. 'Canada has a large number of companies with non-voting stock,' notes Peter McBride, IRO at conglomerate Imasco. 'Few investors like this because, in a takeover situation, for example, you want to be in a position where every share has one vote.' Imasco, with a total capitalisation of C$5.8 bn, is listed in Montreal, Toronto and Vancouver.
Corporations do take shareholder value seriously, however. Blunn, who specialises in annual reports, notes that companies are now putting maximisation of shareholder value before earnings growth. 'Canadian executives are more sensitive to the idea of spinning off elements of a company, creating more of a pure play,' Blunn says. 'So they directly address the issues of shareholder returns as opposed to the financial issues of growth and earnings.'
'It's a subtle difference,' says Blunn. 'US companies are more front and centre about this. They see it as their responsibility to maximise value. Now more Canadian companies talk about returns upfront.' Blunn says they are now including more comparative stock charts in the opening pages of annual reports, whereas they used to tuck these away somewhere at the back.
The tight ownership structures have tended to reduce the importance of corporate governance in Canada, but that is changing, too, with institutions now less likely to vote with their feet than they were in the past. Many institutions have holdings in large companies essentially because they have no choice, given the small size of the market and the foreign investment cap. The Toronto Stock Exchange (TSE) has been instrumental in changing the mindset, but, in practice, quiet diplomacy rules.
Institutional investors are becoming much more demanding of issuers, however, and several have issued governance guidelines, according to John Ross, president of Toronto-based The Proxy Solicitation Company. 'More institutional investors are establishing direct contact with the issuers on a number of different fronts,' Ross adds. 'This trend will continue.'
At the top of the issue list this proxy season came shareholder rights, with about 20 plans coming to a vote. Alcan Aluminium, for example, spent time earlier this year marketing its shareholder rights plan to institutions and gathering feedback. Alcan is capitalised at US$6.6 bn and trades on all the major exchanges in the world, with most of the trading being on the TSE and NYSE. 'We have to take the views of shareholders into consideration in putting forward plans,' says Duncan Curry, Alcan's IR manager. 'Investors understood the benefits of a shareholder rights plan, but wanted as few restrictions as possible on their ability to trade shares. Eventually, we modified the plan slightly to respond to concerns.'
Another topic familiar to US IROs is executive compensation. 'Stock option plans have become more excessive, diluting shareholdings,' says William Riedl, president of Fairvest Securities Corp, an institutional stock brokerage firm whose main research product covers corporate governance. In response, the TSE modified a regulation that said the number of options could not exceed 10 per cent of capitalisation. Now shareholders have to approve a specific number of shares as options.
In a high profile case, telecom equipment maker Northern Telecom adopted an option plan that engendered close scrutiny in Canada, and exemplified the trend towards more confrontational tactics. When Nortel wanted to create options amounting to 15.8 per cent of the total outstanding, alarm bells went off in institutional board rooms. One of Canada's biggest investor groups, Pension Investment Association of Canada (Piac), which represents over 100 pension funds with assets of some C$265 bn, spoke out publicly for the first time against the option plan. Nortel then modified its plan, but only slightly. Bell Canada Enterprises, Nortel's largest shareholder with 52 per cent, had already said it would support the plan.
Not everyone is thrilled by the advance of corporate governance in Canada. 'That's not to say Canadian corporations do not need to be called to account, because they have gotten away with so much on the governance front for so long. But I question how people can come out of school with an MBA and go right into managing money without ever having been in a corporate environment and tell experienced business executives that they know how to manage their business better,' says Wertheim. 'Very often they haven't a clue.'
Another feature of US capital markets that is now crossing the border is its legendary litigiousness. 'Until now, Canadian IROs have been more casual about the legal ramifications of activities than they have in the US,' says Sandra Croy, IRO at Vancouver-based Methanex, the world's largest producer of methanol, capitalised at C$2 bn, which trades on the TSE, ME and Nasdaq.
Croy has a valuable perspective here, having formerly been IRO at Chase Manhattan Bank. 'This is an area that has caught Canadian IROs off-guard. Take reviewing analysts' financial models. The point was made at the Ciri conference in May that if you correct them, and if you go into detail, you can be construed as having blessed them. The next time an analyst comes out with a report way off base, and gets sued, you could be held partly responsible. Canadians are becoming more sensitive to these issues.'
On the information front, Croy has already had to deal with a minor crisis. The TSE goofed recently when it published that the short position on Methanex stock was a hefty 35 mn shares. The company has about 180 mn shares outstanding. In fact, the real short position was 19.7 mn; and many of those are not naked short positions but positions by arbitrageurs who are long on Methanex installment receipts. Croy had to prod the TSE to verify figures. 'We were getting a flood of calls asking what was wrong with Methanex,' comments Croy. 'It felt good to set the record straight.'
Whatever they think of the trends coming north from the US, many Canadian companies are looking south for new shareholders. Around half of the trading in many of Canada's largest blue-chips now takes place on a US market; and several Canadian IPOs, particularly in the high-tech area, have bypassed domestic exchanges in favour of a US listing. With US pension funds expected to increase their exposure to foreign securities from about 3 per cent of their total assets to some 15 per cent by the end of the decade, Canadian IROs are pondering ways to get US exposure and attract some of the large pools of available capital.
For now, Canadian equities make up less than 1 per cent of US portfolios and it is difficult for Canada's IROs to capture the imagination of US investors. Nevertheless, they do pound the streets in their bid to expand shareholder bases away from Canada's domestic market: those who represent companies dominant in their business sector, or perceived to have superior growth potential and liquidity, tend to be the best received.
US investors are mainly concerned with the direction of the Canadian dollar; political risk - in terms of fiscal management and the ongoing Quebec separation affair; and the lack of coverage by US analysts. The TSE, which accounts for almost 82 per cent of the value of equity trading in Canada and which is the continent's second largest market, began a marketing initiative this spring. It involves visiting the head traders of major US institutional investors to tell them about the strengths of the Toronto marketplace.
At the Ciri conference, and following a promotional visit to Boston, Christopher Matthews, director of equity market development and information products at the TSE, told Canadian IROs: 'US institutions are anxious to hear about Canadian market opportunities. We were told to tell our members and our listed companies to come down and see the institutions as often as possible. One-on-one relationships are important in terms of getting business done.'
For their part, Canada's relatively small group of institutional investors are beginning to invest overseas, so companies have to counter-balance this by getting more foreign investors. One company that has tried to do this is Toronto-based CAE Inc, best known for flight simulators. Traded on both the Montreal and Toronto exchanges, CAE has revenues of some C$650 mn, a current market cap of over C$1 bn and more than 5,000 employees.
In 1989, CAE attracted US and overseas interest, partly as a result of its acquisition of Link, a US-based military simulation company. As luck would have it, the Berlin Wall fell soon after the purchase and the bottom fell out of the US military market. Non-Canadian shareholders decided there were better opportunities elsewhere and CAE's non-Canadian ownership fell from about 8 per cent to 4 per cent. The stock price dropped from a high of about C$15 in 1989 to roughly $4.25 in 1991.
'Not a pretty story,' admits Bob Waite, vice president of corporate communications at CAE. 'We decided to find a buyer for Link. Its performance made CAE as a whole appear to be stagnant, and this translated into no real interest in the stock.' Meanwhile, CAE began to try to reacquaint US and UK analysts with the company, painting a picture of its underlying strengths. A major focus was England, where the company had found investors to be more value-oriented rather than momentum-oriented. 'We were reasonably sure we were going to win a large UK order, and had plans to make an acquisition,' comments Waite.
With the help of DF King, CAE began to woo the British. As far as Waite can ascertain, the result of these efforts was that CAE's non-Canadian shareholders went back up to about 8 per cent. And whereas a year ago its top three shareholders controlled almost 40 per cent of the stock, today six shareholders control just over a third. Not a bad turnaround for a company that appeared to be on the ropes.
Part of the challenge with UK investors was the sorry state of the Canadian dollar, which declined by 15 per cent in just a couple of months in early 1995. However, the advice from brokers was that when the currency did eventually turn, things would move quickly and investors would remember the opportunities that had been in front of them most recently.
The moral of the story? 'Don't visit once and give up,' says Waite. 'Keep the information - good and bad - flowing freely.'