Governance in the News - Again
Oct 31, 2021
Several months ago, I posted a Savvy Director blog about two governance stories in the news (Governance in the News.)
I said then – and I haven’t changed my mind – whenever you see the words ‘governance’ or ‘board of directors’ in a headline, it’s not going to make for a heartwarming read.
“Governance stories in the news tend to focus on conflict, crisis, and failure – shedding light on goings-on and machinations that were not meant to be in the public eye. However disturbing, these stories make fascinating case studies.”
– The Savvy Director, ‘Governance in the News’
This week we’ll take a look at a current story that has Canadian business reporters and governance experts mesmerized - the saga of Rogers Communications Inc.
First Some Background
If you live in Canada, you likely know the story. But The Savvy Director blog is fortunate to have readers from around the globe, so let’s begin by setting the stage for our international audience.
Rogers Communications is Canada’s largest provider of wireless services, a leading cable company, and a major player in broadcasting, publishing, and sports entertainment.
Ted Rogers founded the company in 1960 with a single Toronto radio station, then expanded into television, eventually creating a cable television network. In 1979, Ted took the company public – it was by then the largest cable operator in Canada. The company continued to grow rapidly through multiple acquisitions. In the 1980’s Rogers entered the wireless business, then print media.
When Ted Rogers died in 2008, he left behind a corporation with annual revenue of more than $11 billion, more wireless and cable subscribers than any other company in Canada, and a broad assortment of media holdings.
The Dual-Class Structure: Rogers has a dual-class share structure, where holders of Class A shares have voting rights, but holders of Class B do not. Contrary to the principle of one share = one vote, the dual-class structure gives Class A shareholders voting control disproportionate to their equity. In Rogers’ case, the family trust holds 97.5 percent of the company’s votes but has less than 29 percent of its economic ownership.
The Trust: In his will, Ted Rogers created the Rogers Control Trust to make sure his family would keep control of the company. According to corporate filings, the trust’s chair “acts as representative of the controlling shareholder,” suggesting that the current trust chair, Edward Rogers (Ted Rogers’ son) has an extraordinary degree of power when it comes to appointing corporate board members.
The Corporate Board: Edward Rogers is not just chair of the trust, he is (or was) also the chair of the corporate board of directors. Several other Rogers family members also serve on the corporate board, as do a number of independent directors. Given that Edward Rogers is not independent, one of the independent directors acts as lead director.
“The wrinkle here is exactly the trust, and the interplay between the trust and the board.” – Richard Leblanc, Professor of governance, law and ethics, York University
What’s Going On?
In September 2021, Edward Rogers led an unsuccessful attempt to oust the CEO and other members of the executive team, and to name the current CFO to the position. While the board of directors - including the other family members - went along with the proposal at first, after some sober second thought they rescinded the motion just a few days later.
Instead, they considered a new resolution that would enhance the terms of the current CEO’s employment, terminate the CFO, and undertake a corporate governance review. A vote was initially deferred, but it passed at an emergency board meeting a few days later.
The board then voted to remove Edward Rogers as chair of the board – but remember that he remains chair of the control trust! So, Edward’s next move was to replace five of the independent directors, including the lead director, with five of his own choosing, via written resolution. He was confident that his newly constituted board would re-instate him as chair, and that’s exactly what they did. (Surprise!).
In taking this step, Edward Rogers created an alternative board – one that would rubber stamp his plans – effectively making a mockery of the term ‘independent director.'
Not to be outdone, the company and the board vice-chair (also a Rogers family member) issued a public statement contesting Edward’s move, arguing that, without convening a shareholders’ meeting, it was illegal. They claim that the original five independent directors are still on the board, and that a new board chair has been elected to replace Edward. The CEO also weighed in, stating that he and most of his executive team intend to resign if Edward’s move to replace the independent directors is allowed to stand.
To make matters worse, all of this is happening at a pivotal time in the company’s affairs, as regulators are reviewing Rogers’ $26-billion takeover of Shaw Communications, another Canadian telco with a similar asset mix. Needless to say, the governance crisis at Rogers is not helping the share price of either company.
The two sides are now heading to court.
“… the saga unfolding at Rogers Communications Inc. represents yet another case of abject corporate governance failure in Canada – a power struggle within a family dynasty that is jeopardizing the future of the company and usurping value from common shareholders.” – Mark Wiseman, former CEO of the Canada Pension Plan, Canadian investment manager and business executive
The Governance Issues
The story has captured the attention of the business media, with some commentators comparing the drama to that of the HBO blockbuster TV series ‘Succession.’ (If you’re not familiar with the show, the plot is summarized as follows: “The Logan family is known for controlling the biggest media and entertainment company in the world. However, their world changes when their father steps down from the company.”)
So, what can a Savvy Director learn from all this? What lessons lie behind the family conflict and drama? (Well, it’s not all drama. There’s a bit of comedy too, as highlighted in this Globe and Mail national newspaper headline: ‘Rogers CEO Joe Natale learned of Edward Rogers’s plan to oust him through butt-dial from CFO.’
To help me gain some perspective on the issues, I was lucky enough to get some time with a savvy governance legal guru who is an experienced corporate director and a succession planning expert on large multi-generational family business boards. Although he prefers to remain anonymous, I’m grateful to him for sharing his wisdom and insights for this article.
So, let’s take a look at some of the issues we discussed:
The Family: Family-owned enterprises are an integral part of the economy in Canada, generating almost 50 per cent of Canada’s private sector real GDP. Almost all of these companies are small or medium, with only a few growing to the stage where they become publicly-traded.
Retaining control is an issue for family businesses as they grow, and particularly when they become public companies. Trying to retain total control can cause problems down the road.
The Rogers situation shows the folly of trying to maintain imperial control – most family businesses do not mess it up so badly (or at least not so publicly.) The concentration of a high degree of power in the chair of the trust is certainly problematic. When you put that kind of power in someone’s hands, eventually they will look to exercise it. To quote my governance source, “Don’t leave loaded shotguns on the table and be surprised when someone gets shot.”
When a family business goes public, there are three perspectives to be maintained.
- Family dynamics. Damage gets done to family relationships in a situation like this, and it really never gets fully repaired. The family has no choice but to figure it out. They may broker a deal, but they won’t make peace.
- Ownership. What rights do the owners (shareholders) have? Do they just sit back and collect dividends, or do they have a say in governing the company?
- Governance. The quid quo pro for taking the company public is committing to good governance – maintaining a balance between the family and the owners, with a healthy respect for management. The most successful family businesses recognize the need for good governance.
The Share Structure: The dual class structure is fairly common among Canada’s publicly-traded family businesses. While it allows the founding family to retain effective control, this kind of structure can be problematic. It creates an inferior class of shareholders and can lead to a lack of accountability around the board table. You can get entrenched boards because the board is elected by the controlling shareholder.
“It’s perfectly reasonable for families and founders to maintain control and direction over their companies. And there are plenty of ways to do so – raising capital through debt structures or in private markets. But, if you want to tap into public markets, you should have to adhere to a system where one share equals one vote, in the same way that companies adhere to other basic principles, such as furnishing audited financial statements or disclosing executive compensation.” – Mark Wiseman, former CEO of the Canada Pension Plan, Canadian investment manager and business executive
Not everyone agrees. Proponents say that the dual-class structure can protect start-ups or visionary companies from being pressured by institutional or activist shareholders who are only interested in short-term returns, and that it’s a way to protect companies from hostile takeovers. They also say that doing away with the dual-class structure would mean that, rather than give up control, growing companies would decide not to go public at all, resulting in less investment capital for innovation and slower economic growth.
But even fans of the dual-class structure feel that the Rogers’ version is extreme. Available amendments include putting in a sunset clause where the dual-class shares disappear after a period of time when the founder of the company dies or exits the scene, or allowing subordinate shareholders to have at least some voting rights.
"What we usually see more often is that subordinate shareholders will have the right to elect up to a third of the board members. At Rogers, they have 50 votes to zero for the subordinate shareholders, so this is a very unique case. This is not something we would ever advocate for." - François Dauphin, CEO, Institute for Governance of Private and Public Organizations
The Independent Directors: Independent directors are meant to provide an objective view, free of the influence of management but also free of the family’s influence. Not only is the Rogers situation a failure of governance, but it also appears to be a failure of the independent directors to do their job.
And if the so-called independent directors can be swept away at the whim of the trust chair, and replaced by those who are hand picked to conform to his wishes, does the term ‘independent’ really have any meaning whatsoever?
As my governance source said, “The supposedly independent directors are putting on jerseys for one team or the other, instead of helping to provide perspective.”
The Shareholders and Other Stakeholders: The governing statute, the Canada Business Corporations Act, requires that board directors act with a view to the best interests of the corporation. In doing so, they may also consider the interests of shareholders and other stakeholders, namely employees, creditors, consumers, governments, retirees and pensioners, the environment, and the long-term interests of the corporation.
To quote my local governance expert, “The situation shows total disregard for the 70% owners of the company” and “Nothing in this story addresses the fact there are thousands of people whose livelihoods depend on the company.”
The Management Team: If you are the CEO or a member of the executive team at Rogers, or at Shaw for that matter, it must be increasingly difficult to keep your eye on the ball. Who exactly is the CEO supposed to take direction from? The old board or the new one?
And getting back on track after this fiasco could take a lot of time. It’s a total distraction from the work at hand, not the least of which is a $26B acquisition currently pending regulatory approval.
Questions for The Savvy Director
Let’s give some thought to the following questions. (There are really no right answers. Our intention is simply to spark some considerations that might someday be helpful in your own board work.)
- If Edward Rogers approached you and asked you to become one of his new independent directors, how would you respond? (Hint: Asking first about the size of your retainer fee is not what we have in mind!)
- How might an In Camera session (independent directors only) be used when this kind of a problem surfaces? When should it have happened?
- To whom do the independent directors owe their fiduciary duty? What about the non-independent ones? Don’t they have the identical fiduciary duty?
- What advice would you have for the Rogers CEO?
- Is the dual-class structure fundamentally incompatible with fairness in the capital markets? (Keep in mind that they aren’t just used in family businesses. US tech giants like Facebook (or should I say 'Meta'?) and Alphabet are employing this structure.)
- If you can be replaced at the whim of the trust chair, can you realistically function as an independent director?
- What needs to be in place to ensure the trust exercises its control in a manner that is not oppressive and does not disadvantage other key stakeholders?
- How can the board of directors move forward positively after this?
- The legal take on this matter boils down to one question: “Can the trust change the board without a shareholders meeting?” The answer to that question may, in fact, be Yes. But even if it’s legal, is it proper? Does Edward Rogers have the moral authority to do what he’s done?
As this blog is being written, the Supreme Court of the Province of British Columbia has agreed to hear the case to determine who comprises the governing board of Rogers Communications Inc.
- The quid pro quo for taking a large family business to the public markets is a commitment to proper governance including a healthy respect for the bright line between the board and management.
- The legal question is whether a family control trust can change the board without a shareholders meeting. Independent directors should execute their fiduciary duty to all shareholders by raising this issue or consider resigning if not permitted to do so.
- When independent directors see a ‘whiff’ of problems, surface it. Go into a closed session of the board to understand where things are at.
- The key to making a good decision is to establish parameters ahead of time. Explore the options, look at the alternatives of the ones that make the most sense depending on what the decision objectives are.
- Really be honest about the decisions to be made. There is no ideal answer. Make sure you have the right questions. Can you look back and say you made the right decisions at the time?
- Successful family businesses of a certain size - the ones that do the best against all metrics - recognize the need for good governance. This is the balance between management and ownership (family).
- Even if some family members are board directors, there is a need for a clear line between the board and management.
- There are no winners in governance battles that have entered the public arena. The proper forum for these discussions is not in the media - television, newspaper, or Twitter.
- There is no regard for public shareholders from either side in the Rogers dispute.
- The very fact the Rogers dispute is occurring publicly speaks volumes about the suitability of some of these players leading the company.
- Mechanisms created to try to maintain family control of a public company do have an ugly underbelly if not exercised responsibly.
- It’s a good reminder for both individual companies and the public regulators to ensure that all stakeholders are properly protected.
- Some good may come of the Rogers dispute without destruction and loss - but certainly not for the Rogers family. The damage that’s done to the family relationships never gets fully repaired. They are trading power, money and influence for family relationships. Mostly power.
- There will be peace made publicly, but never privately. This will be a cold, calculated deal that will be brokered.
- At Rogers, this is a failure of governance and appears to be a failure of the independent directors to do their job - to provide that objectivity and facility to allow those things to be addressed.
- Independent directors should resign if they cannot do their job. The term ‘independent director’ has to mean something.
We’ve done our best to synthesize the key board governance issues in the dispute at Rogers Communications Inc. If you are interested in the juicy details, they’re available in the resources linked below. (Please note that you may need to be a Globe and Mail subscriber to access some of the articles listed.)
Leave a comment below to get in on the conversation.
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.
Share Your Insight: What is your view on dual class structures for publicly traded companies?