Wednesday, May 10, 2017

Bombardier’s Controlling Family Faces Investor Revolt: Funds plan to withhold support for executive chairman after Canadian firm gives pay raises to top executives

The Wall Street Journal 
By Jacquie McNish and  Paul Vieira
Updated May 10, 2017 5:29 p.m. ET

TORONTO—The Quebec family that controls Bombardier Inc. is no longer too big to fail.

One of Canada’s biggest and most international companies, which also ranks as one of the country’s largest corporate recipients of government financial backing, is facing a push to remove its executive chairman, Pierre Beaudoin, a member of the founding family that controls the transportation company through multiple-voting shares.

Citing governance issues related to the company’s move last month to award big pay raises to six top executives, including Mr. Beaudoin, Canada’s three biggest pension funds, along with a fourth major fund, plan to withhold their support for his re-election at a shareholder meeting in Montreal Thursday.

The move to unseat Mr. Beaudoin, 54 years old, whose grandfather invented the snowmobile and founded the company in 1937, is an unprecedented challenge to a family that has steered one of Canada’s few manufacturing success stories on the global stage. It also signals that the company, long supported as the anchor of the country’s aerospace hub and cherished as a symbol of Canadian corporate prowess, may have finally exhausted the generosity of its government backers.

The Bombardier pay raises were disclosed only two months after the Canadian government pledged 372.5 million Canadian dollars ($271.5 million) to Bombardier, and triggered a protest outside the company’s headquarters in Montreal and an unusual rebuke from Prime Minister Justin Trudeau in Parliament.

In a private meeting, Canadian Finance Minister Bill Morneau described the pay increases as a “betrayal” of the government’s support, according to one person attending the session.

The raises were so toxic that the Quebec government is now publicly suggesting it supports the investor revolt at the company it has long supported.

“After all that happened with regards to the compensation of Bombardier executives, we understand why concerns have been raised about the governance of Bombardier Inc.,” said Quebec Economy Minister Dominique Anglade in a statement. “We hope that the board will pay attention to the concerns being raised.”

Mr. Beaudoin is unlikely to lose the vote. He and his family, including his father, Laurent, a former chairman and chief executive, control more than 53% of the votes, through their control of 79% of multivoting shares. They own 13.5% of the company’s equity. Mr. Beaudoin didn’t return requests for comment.

A spokesman for the company said Wednesday in an emailed statement that “the vast majority of our shareowners are supportive of the company’s position and the turn-around plan we are executing. Based on frequent conversations with our largest shareholders we anticipate that this strong support will be seen in the results announced on Thursday.”

The Beaudoin family isn’t accustomed to facing curbs on its power.

On at least two occasions, the family has rebuffed potential investment proposals that involved restructuring the dual class of shares, according to people familiar with the matter. A Bombardier spokesman disputes that.

The dual-class structure has been left untouched even as the provincial and then federal governments awarded loans to Bombardier, aimed at helping the company survive a cash crunch brought on largely by delays and cost overruns related to the CSeries commercial aircraft.

Bombardier has received a total of roughly 3 billion Canadian dollars ($2.2 billion) in loans and investments from the Canadian and Quebec governments over the span of nearly five decades, according to data from the Montreal Economic Institute.

Over half of that amount, a total of about C$1.6 billion, was made available in past year and a half.

Of the funds paid out before 2015, the company said last year that $543 million had been repaid.

It is common in the global aerospace industry for companies to receive some level of government support. But in the case of Bombardier, the few known conditions or guarantees attached to the aid stands out compared with big corporate bailouts in the U.S., including the automotive and banking deals of 2008-09, experts have said.

One backer, the Caisse de dépôt et placement du Québec, did secure some conditions: The fund made a $1.5 billion investment in late 2015 in Bombardier’s train division in return for a one-third stake. Under the agreement, if Bombardier’s cash flow at the end of any given quarter were to fall below a certain threshold, the fund would approve the appointment of three directors to a special board committee to oversee cash flow.

The role of independent directors at the company is part of what some investors are now questioning. Canada Pension Plan Investment Board, Canada’s biggest fund, is opposing the re-election of two independent directors, including former Citigroup Inc. CEO Vikram Pandit, for missing almost a quarter of Bombardier’s board meetings. Mr. Pandit didn’t return requests for comment.

Alberta Investment Management Corp., which oversees more than C$90 billion on behalf Alberta’s provincial public sector employees, said Wednesday it is withholding support for Mr. Beaudoin’s re-election, and isn’t supporting the re-election to the board of four of his family members.

According to people familiar with the company’s board, the Beaudoins have seldom faced opposition from directors.

In 2004, a clash over governance issues with then-chairman Laurent Beaudoin contributed to the departure of CEO Paul Tellier, according to people familiar with the matter.

A Bombardier spokesman said in a statement that “Bombardier’s independent directors have always expressed their views candidly and openly.”

Investors began to question the family’s leadership after Mr. Beaudoin’s ambitious move in 2004 to stake the company’s future on the competitive 100-seat plus passenger jet market began to founder two years ago.

Bombardier has spun off its snowmobile division, but its turboprop planes, subway cars and commuter planes transport passengers around the world.  It employs 66,000 workers.

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