Guest Post: Is Michael Sabia Having Second Thoughts?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

The new Caisse boss, Michael Sabia, got grilled on Monday at Quebec public finance committee:

The new boss of the Caisse de dépôt et placement du Québec says his goal is to learn from the mistakes made at Canada’s biggest pension fund manager and do better.

Michael Sabia made the comments to reporters before appearing before the provincial legislature’s public finance committee.

“My objective in this context is to learn whatever is necessary from our 2008 experience, turn the page, reinforce the Caisse and better protect the assets of Quebecers,” Sabia said in Quebec City.

The former CEO of BCE Inc. took over the Caisse in March after the value of the pension fund giant’s assets plummeted 25 per cent in 2008 to about $120 billion from $155 billion, hurt by its holdings in asset-backed commercial paper.

Sabia, the first anglophone president of the Caisse, said Monday he understands Quebecers were disappointed with the results.

François Legault, finance critic for the opposition Parti Québécois, asked Sabia why the Caisse lost $10 billion more than the market in 2008, with $3.7 billion of that in the real-estate sector.

Although he offered some general opinions, Sabia deferred to Fernand Perreault, the head of the Caisse’s real estate arm, to answer questions at the hearing on the Caisse’s real-estate losses.

The commission is mandated to study the finance ministry’s budgetary credits for 2009-2010. It will also examine the Caisse’s strategies, which will be announced over the coming months.

At one point in the hearing, Mr. Sabia evoked his grandfather and defended his Quebec roots:

Michael Sabia evoked his late grandfather, an Italian immigrant who arrived penniless in Montreal almost a century ago, to underscore his Quebec roots and attachment to French Canada in his first public grilling by provincial politicians as head of the troubled Caisse de dépot et placement du Québec.

Mr. Sabia, who was recently tapped by Premier Jean Charest to run the $120-billion provincial pension fund manager, appeared before a National Assembly committee yesterday, asserting he “never sought this job” and passed up offers on several continents in order to “render service to Quebec.”

The appointment of Mr. Sabia, an Ontario-born anglophone and former head of Bell Canada parent BCE Inc., raised eyebrows in Quebec where the Caisse is widely expected to act as the champion of the province’s French-speaking business class.

Though Mr. Sabia has lived in Quebec for 16 years, his tenure at Montreal-based BCE was marked by a perceived shift in the company’s upper management and operations to Toronto.

Resentment over Mr. Sabia’s appointment rose to the surface yesterday when, appearing before the National Assembly’s finance committee, the new Caisse chief was forced to defend his Quebec bona fides during a heated exchange with Parti Québécois MNA Jean-Martin Aussant.

The sovereigntist politician asserted that “someone who tries to sell a Quebec jewel to Toronto is maybe not rendering service to Quebec.”

Mr. Aussant was referring to Mr. Sabia’s decision as chief executive officer of BCE Inc. to engineer a $35-billion leveraged buyout of the telecom giant by Ontario Teachers Pension Plan. The deal, which collapsed last year, was largely viewed in Quebec as one that would lead to the eventual relocation of the company’s head office to Toronto from Montreal.

The comment, which came near the end of nearly four hours of testimony, was too much for Mr. Sabia. While the Caisse CEO had until then adopted a measured tone, often spiced with humour, he shot back angrily at Mr. Aussant.

“Almost 100 years ago, my grandfather arrived here in Montreal with nothing, nothing, nothing in his hands. Why did he stay here? Because he was convinced that Quebec is an open society,” Mr. Sabia said. “I grew up with this perception. I am not going to accept your position. I have an understanding of Quebec and I chose to work here – over a lot of other opportunities in Asia and in the United States – to render service to Quebec.”

The Caisse, which is Canada’s biggest institutional investor and manages the assets of 25 provincial funds including the Quebec Pension Plan, has been reeling from the worst performance in its 44-year history and upheaval in its executive ranks. It lost 25 per cent of its value, or $40-billion, in 2008.

Mr. Sabia has emphasized the need to strengthen the Caisse’s risk management practices to avoid the disasters of recent years, notably the institution’s overinvestment in now toxic non-bank asset-backed commercial paper. The Caisse has so far written off more than 40 per cent of its $12.6-billion in ABCP.

Mr. Sabia likened the Caisse’s situation to that of Canadian National Railway Co., which was a bloated Crown corporation when he arrived there as second in command in 1993, and BCE, which was on the skids from its disastrous investment in Teleglobe Canada when Mr. Sabia was brought in as CEO in 2002. Before the MNAs, Mr. Sabia underscored his role in putting both companies on the right track and said he would do the same at the Caisse.

Though BCE’s corporate activities appeared to have shifted increasingly to Toronto in recent years, Mr. Sabia noted that he oversaw the construction of a $250-million new head office “campus” to demonstrate the company’s commitment to Montreal.

The new Caisse head did his best to avoid being hauled into a debate over the mission of the institution, which in the past has often been used as instrument of economic nationalism. It has mentored some of the province’s most successful entrepreneurs .

“I’m Catholic but not Jesuit,” Mr. Sabia told Parti Québécois finance critic François Legault, adding that he saw no contradiction between the Caisse’s dual missions of seeking the best returns on its investments while contributing to Quebec’s economic development.

Mr. Legault criticized the Caisse’s current absence from the boardrooms of the province’s largest corporations. He noted that the Caisse held relatively few shares of Bombardier Inc. and SNC-Lavalin Inc., and no shares of National Bank of Canada – a situation that would leave the Caisse powerless to keep those companies in Quebec hands if they become the objects of takeovers. The Caisse remained on the sideline during the 2007 takeover of aluminum icon Alcan Inc., and its consortium withdrew early from the bidding for BCE.

Mr. Sabia countered that it would cost the Caisse between $25-billion and $30-billion to buy “blocking positions” or shareholdings big enough to have a voice in future transactions involving about two dozen of the largest Quebec-based corporations.

“As far as I’m concerned, that’s expensive – from the perspective of risk management and diversification – and it [would deprive the Caisse] of the flexibility to make [more attractive] investments elsewhere,” Mr. Sabia said.

Now, I worked with Jean-Martin Aussant at PSP Investments. I enjoyed our discussions and even though our political views are diametrically opposed, I still listened to his views.

I understand that he is now part of the Parti Québécois (PQ) and he wants to make a name for himself with his party’s rank and file, but this line of questioning was truly pathetic. If I were Michael Sabia, I would be fuming – and rightfully so.

Quebec politics can be very dirty, especially when the Caisse is involved. Let’s go back to when Henri-Paul Rousseau was nominated as President and CEO. Remember that? They practically rolled out the red carpet and crowned him.

But now that they put an Ontario-born anglophone of Italian descent at the helm of the Caisse, some Quebecers are outraged. I even had one guy tell me: “Why couldn’t they put a francophone in charge of the Caisse?”

I replied: “Why? Because Premier Charest was fed up with the way the Caisse was being managed so he probably suggested the board of directors pick an outsider to clean up the place.” And I added: “Besides, what do you have against anglophones and allophones? We pay our taxes too!”.

I understand Mr. Sabia’s frustration. It’s downright insulting when people question your commitment to Quebec. My father sent his three children to French private schools because for him it was absolutely crucial that his children learn how to speak and write French. He told us: “As long as you live in Quebec, you will respect the French language and culture.”

I am thankful for the opportunity I had to go to the Collège Notre-Dame, one of the oldest French Jesuit high schools here in Montreal. Those were great years but back then, the anglophones, allophones and visible minorities struggled to fit in, especially in the early years of high school. It’s much different now, with a lot more ethnic diversification. This is all for the better.

But as far as Quebec public institutions are concerned, we need more representation of minorities, including visible minorities and people with disabilities. In August 2006, the Canadian Jewish Congress, Quebec Region, wrote a report on combating racism and discrimination.

I quote the following:

…, it must also be stated from the outset that if the current exercise is to have any impact on racism and discrimination in this province, Quebec’s leadership must take responsibility for the utter failure of existing programs. The Quebec Public Service is already under a mandatory obligation to ensure that 25% of new Public Service hiring involves members of a cultural community, Native persons, Anglophones, or handicapped persons. Instead the current percentage from minority or disadvantaged groups is dismal. It is no wonder therefore, that many minorities come to the conclusion that the under-representation of minority groups in the Quebec public service is evidence of systemic and institutional discrimination by Quebec’s largest employer, the government.

By failing to take the lead is ensuring that its own hiring practices are consistent with stated intentions to provide equal opportunities to all Quebecers the government itself is guilty of practicing discrimination in the labor market. The government cannot continue to preach equality while practicing the opposite in its own house.

Unfortunately not much has changed since this report was published. The under-representation of minorities in Quebec’s public service and Quebec Crown corporations continues. When is the last time you saw statistics from the Caisse, Hydro Quebec, Loto-Quebec or others Quebec institutions to show which percentage of their employees come from minority groups?

And by the way, lack of minority representation isn’t just a problem in Quebec. What percentage of CPPIB and PSPIB employees come from minority groups? These are two federal Crown corporations which must abide by Canada’s employment equity laws. I would be curious to see the breakdown of their employees at all levels, including senior management.

I realize that these issues may not concern you, but for me, it really angers me knowing that allophones, anglophones and other minorities in Quebec are under-represented in the public institutions. I find this disgusting, especially since these groups pay more than their fair share of taxes.

And Michael Sabia deserved better from the Parti-Quebecois, who in their misguided efforts to supposedly defend Quebec’s interests attacked a man who I think deserved a lot more respect. If the Caisse hired Warren Buffett as their new President and CEO would they have questioned his “Quebec roots”?

I am curious to see how the PQ will question Henri-Paul Rousseau when he shows up in Quebec to get questioned. Will they grill him as hard as they grilled Mr. Sabia?

By the way, this whole notion that the Caisse needs to have controlling shares of Quebec-based companies is simply nonsense. We live in a global economy where Quebec companies need to compete to thrive. The Caisse can’t protect Quebec companies from globalization. Politics and investments makes for a bad mix, as evidenced in past blunders at Quebec Inc.

Finally, in my last comment on the Caisse, I was critical on some of the moves Mr. Sabia did in his recent reorganization. It amazes me that some individuals that lost hundreds of millions are still at the Caisse. These people are obviously good politicians to have been able to keep their jobs. They are masters at carving out their personal fiefdoms as they jockey for internal power.

Also, someone subsequently told me that Ms. Kudzman and Mr. Bastien were “handcuffed and impotent” to act against some powerful internal portfolio managers who took on more risk as positions went against them, effectively “doubling down” using the pension fund’s deep pockets.

If that’s true, this merits a full investigation. Who did Ms. Kudzman report to? Were they aware of this internal power struggle? Why did they not intervene?

As I have written before, it might make sense to change the governance structure so the Head of Risk at these large pension funds reports directly to the board of directors. This will ensure that they are taken seriously and that losses do not balloon out of control in any given portfolio.

Last but not least, people need to understand that the flip-side of risk management is liquidity. If you are increasing your exposure to illiquid securities, illiquid strategies or illiquid asset classes, all the risk management in the world will not protect you against a severe market dislocation.