MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 5, 1998 (3)
INVESTMENT & RELATED
James Gang In Town
Low oil Prices And Shaky Stock Markets Haven't Deterred Raymond James
Calgary Sun
The stock market doldrums and the fall in oil prices haven't daunted one of the most respected and fully integrated investment dealers in the U.S. from opening an office in Calgary.
And the man who is heading the Raymond James and Associates Inc. operation here is well known to Calgarians and other Canadians through his stint as vice-president of corporate finance with Midland Walwyn Capital Inc.
Glenn Huber, senior vice-president of investment banking for Raymond James, went to Bishop Carroll high school in Calgary, and Princeton University in the U.S. -- and he can tell some famous anecdotes about F. Scott Fitzgerald's days at Princeton.
Raymond James has more than 3,000 retail sales representatives, 125 institutional salespersons and traders, 50 investment bankers and 40 research analysts located in some 1,000 offices in the the U.S., Canada and Europe.
When I asked Glenn why Raymond James decided to locate here, he said one reason was the Canadian energy sector has been historically financed by between 15 and 20 Toronto Bay St. institutions, but Raymond James can open the "gateway" for Alberta's oil and gas sector to between 300 and 500 institutional lenders in capital markets south of the border.
Huber is surely an expert in his field.
Aside from his time with Midland Walwyn Capital, he started his investment banking career with Merrill Lynch Pierre ad Ferris & Smith in New York, then went to Wood Gundy Inc. and RBC Dominion Securities Inc., where he specialized in equity and debt financing, corporate mergers and acquisitions, and general financial consulting primarily to the Canadian oil and gas industry.
The Weakening Of The Old Boys' Network
Board Shuffle / Firms are appointing candidates with expertise for their boards, and as the field of superstars dwindles under increased workloads, the boardrooms of past may change.
The Globe and Mail
Alberta Energy Co. Ltd. was focusing on expanding its international operations a few months ago when it decided to add to its board of directors.
As a result, the Calgary-based oil and gas company deliberately set out to find a new director with wide ranging experience abroad.
In the end, after not only tapping into its own circle of contacts but also consulting two executive search firms, it selected Houston oilman Donald Stacy, who formally took up his new appointment at the company's annual meeting in April.
Mr. Stacy knows the Canadian patch well, having headed Chicago-based Amoco Corp.'s Canadian unit from 1986 to 1993. But more important, he had spent the following four years heading Amoco's Eurasian operations -- Russia and Azerbaijan, specifically -- and handled other senior executive assignments for the company in South as well as North America. He had added to his international contacts with a stint as worldwide president of the Society of Petroleum Engineers.
Mr. Stacy's selection is a small but telling example of changes taking place in the way Canadian companies go about choosing their directors.
The cosy, old boys' network through which many major public companies have traditionally populated their boardrooms with like-minded colleagues is gradually giving way to a more analytical approach in which they are trying to fill specific gaps in their expertise.
"You are thinking more and more about trying to bring relevant experience on to the board," Donald Macdonald, who sits on the nominating committee of Alberta Energy's board and is a director of eight other companies, said in an interview.
"I'm not saying the first tee acquaintanceship is irrelevant now," Mr. Macdonald, a high-profile former federal cabinet minister, added, "but it's far less important than it used to be."
The changes, which are by no means confined to Canada, are being driven by a variety of forces.
Company failures in the last recession helped spark a greater focus on corporate governance, while directors' legal liabilities have grown and powerful institutional investors are demanding more accountability. This has come against a background of accelerating technological change and growing globalization and competition in the business world.
Combined, all these elements have greatly increased the workload boards must carry. Estimates of how long it now takes a conscientious director to prepare for and attend a single company's board and committee meetings range anywhere from about 15 to 30 days a year -- and sometimes more -- depending on the complexity of the company's affairs.
This time pressure alone could spell an end to the phenomenon in which a small pool of serving and retired CEOs, corporate lawyers and former politicians has held large numbers of board seats. It could make the current generation of aging high-profile corporate directors in Canada the last of its kind.
As it is, few of the best-known players come remotely close to meeting recommendations made two years ago by the U.S. National Association of Corporate Directors that no serving CEO should be on the boards of more than two other public companies, and that no director should serve on more than six boards in all.
Atco Ltd. chairman and CEO Ronald Southern, for instance, sits on the boards of 10 prominent public companies outside the Atco empire, including Canadian Pacific Ltd., Imasco Ltd. and Canadian Airlines Corp.
And former Ontario premier William Davis, a corporate lawyer and professional director since he left office in 1985, now sits on 15 major boards, ranging from those of Canadian Imperial Bank of Commerce and Magna International Inc. to that of Seagram Co. Ltd.
Just how far the wave of change has gone in Canada's boardrooms is a matter of debate.
Some executive search consultants who are building substantial new business recruiting directors say the revolution is already well under way.
"It has changed completely and totally dramatically," said consultant Christopher Laubitz of Caldwell Partners Amrop International in Toronto. "It's not the way it used to be -- 'Just bring me the most predominant name brand in the marketplace.' Today, it's business wisdom first."
Patrick O'Callaghan, who heads Vancouver-based recruiter Patrick O'Callaghan & Associates, said that over the past five to 10 years the responsibility for choosing directors has shifted out of the purview of the CEO and firmly into that of board nominating or governance committees.
"What has been dramatic about that is that increasingly, those committees have taken their responsibilities very seriously," he said. "They'll go through a much more rigorous process of establishing criteria and casting a net, often with the utilization of firms like mine, really surveying the field."
Tom Long, a Toronto-based partner in recruiters Egon Zehnder International Inc., said his firm has done several director searches in the past 18 months for prominent blue-chip corporations quite capable of attracting anyone they wanted from the Toronto Club's membership list.
"But they've engaged us specifically because they know all those people and they want our advice on who are the less obvious but most promising CEOs or CEOs-in-waiting that aren't on anyone's lists but could add a lot of value," he said.
As well, he added, companies are increasingly instituting performance reviews for their directors in an effort to weed out the deadwood and find replacements willing and able to take an active role.
"There were a lot of people who were kind of empty suits," Mr. Long said. "They would come to the meetings with their binder, not having cracked it before they got there, contribute nothing to the meeting
and leave."
But some corporate governance specialists and observers think the headhunters are overselling the progress that has been made.
"Well, let's just say they're really marketing the revolution," said Tom Gunn, chief investment officer of the Ontario Municipal Employees Retirement Board (OMERS), one of Canada's biggest pension fund investors, which these days is paying more attention to the quality of the boards of the companies in which it invests.
Governance expert Donald Thain, a business professor at the University of Western Ontario, is also skeptical.
"It's becoming more legitimate in a guarded sort of way to be a director who takes a position and does the job," said Prof. Thain, who co-authored a book published last year that was highly critical of Canadian boards.
"But the old ethic and the old culture of don't rock the boat, don't get yourself into any trouble with the rest of the board [is] still the way you get on to a lot of boards."
Indeed, Prof. Thain is not remotely impressed when he surveys the scene.
"There's this bell-shaped curve," he said. "You take 100 directors and you've got 10 that are absolutely incompetent, 10 that I would call master professionals, 40 per cent to 50 per cent average, and some not quite so bad that they're incompetent and others pretty good but not master professionals."
Identifying Canada's most sought-after directors depends on how you define the turf.
For instance, at the age of only 43, Paul Desmarais Jr., chairman and co-CEO of Montreal-based holding company Power Corp. of Canada, sits on a total of 21 boards in Canada, the United States and Europe, according to the 1998 edition of The Financial Post Directory of Directors . But the CEOs, his full-time job is to manage them through their boards.
But if you limit the universe to directors that companies bring in from outside their own orbit, the names of those best known to the world at large are those of former politicians, most of whom, like Mr. Davis and Mr. Macdonald, are also lawyers by profession.
This group also includes former Alberta premier Peter Lougheed, who now holds 12 directorships, former Alberta Energy Minister John Zaozirny, who holds 16 and erstwhile Ontario premier David Peterson, who serves on 11 boards in all.
One new arrival is Frank McKenna, who stepped down last fall after 10 years as New Brunswick's premier. He has already collected seven board seats, including a couple of corporate heavyweights, Bank of Montreal and Noranda Inc.
Some observers say former politicians can add a lot of value.
"There are enormous benefits, because business is increasingly having to work with government," said Mr. O'Callaghan, the Vancouver recruiter. "If you have people who understand the interactions between corporations and governments . . . that's a perspective that is very useful."
Prof. Thain disagrees. Vigorously.
"They are notorious in terms of thinking that a board position is easy pickings for no work, no responsibility [and] for living off their political contacts and their former reputations," he said.
This brought a sharp retort from Mr. Zaozirny.
"For an individual who purports to be an expert, those rather blanket statements display a marked lack of understanding about what actually happens with boards of directors," he said.
"There's a lot of commitment and work and responsibility and liability involved. It's anything but a free ride."
Whatever their usefulness, politicians appear to be less in demand than former and current CEOs.
The appeal of bringing in active, outside CEOs, the consultants say, is that they may well have faced challenges and opportunities in their own industries similar to those faced by the companies on whose boards they sit.
In fact, CEOs who hold outside directorships use much the same argument to justify the time they spend on other companies' business.
J.E. (Ted) Newall, who stepped down yesterday after seven years as Nova Corp.'s chief executive, but will stay on as its chairman, is a case in point.
"I have brought a lot of valuable learning back to my own company," said Mr. Newall, who has held six high-profile outside board seats for years -- including Royal Bank of Canada, Alcan Aluminium Ltd., BCE Inc. and Canadian Pacific Ltd.
By way of example, he cited a lesson he learned from a former Alcan CEO and applied when he took Nova into new markets abroad. "I remember David Culver saying once that he could learn as much about how to operate in China with a $20-million investment as with a $2-billion investment, so he thought he'd start with $20-million," Mr. Newall recalled. "That's pretty profound wisdom that you bring back."
Nevertheless, Nova's chairman also said that given the increasing time pressures on CEOs, he now thinks they should limit themselves to a maximum of four outside directorships, adding that some companies are imposing formal caps.
Search consultants say it already is growing increasingly difficult to lure highly regarded top executives to more boards.
One cited BCE's Jean Monty, 51, who already holds four outside directorships. "He is still young, he has proven himself in a global market, he has oodles of business wisdom, he's outspoken -- but he's exceedingly active, so you can't get him," the consultant said.
This means there is a high demand for former corporate chieftains.
Imasco Ltd. chairman and former CEO Purdy Crawford, 66, for instance, is a director of nine major companies outside its empire, including Canadian National Railway Co., Inco Ltd., Petro-Canada and two in the United States.
Petrocan chairman Thomas Kierans is another case in point. Mr. Kierans, 57, is the former CEO of brokerage house McLeod Young Weir Ltd., who now heads the C.D. Howe Institute, a Toronto think-tank. He also chairs Moore Corp. and investment dealer First Marathon Inc., and is a director of six other companies, including Bell Canada and Manufacturers Life Insurance Co.
Influential private investors also are well represented on the nation's boards.
For instance, Anthony Griffiths, who gained fame for turning around Mitel Corp. twice in the late 1980s and early 1990s, chairs no fewer than six companies, including Meridian Technologies Ltd., Slater Industries Inc. and Peerless Carpet Corp., and is a director of eight more.
And Toronto lawyer and investor Albert Gnat, a partner of Mr. Griffiths in several of the companies on whose boards they both sit, currently holds a total of 18 directorships, ranging from Rogers Communications Inc. to MDC Communications Corp. and Aquilium Software Corp.
Notably absent from double figures are women, although they have been gaining entry to male dominated boardrooms in greater numbers in the past few years.
A perusal of the 1998 edition of The Financial Post Directory of Directors suggests that of the relative handful of women that hold multiple directorships, Jeannine Guillevin Wood has the most clout. As well as being chairman of Laurentian Bank of Canada, she is on the boards of four other companies, including BCE and Sun life Assurance Co. of Canada.
As for the women who hold the most directorships, Montreal economist, consultant and broadcaster Dian Cohen is tied at seven with former federal cabinet minister Barbara McDougall.
Ms. Cohen's directorships include Canadian Pacific, Sun Life Assurance, Noranda Forest Inc, while Ms. McDougall's include AT&T Canada Long Distance Services Co., which she chairs, Avenor Inc., and E-L Financial Corp. Ltd.
How much do corporate directors get paid to represent shareholders' interests?
A study released last year by consultants William M. Mercer Ltd. and the Institute of Corporate Directors found that Canada's biggest companies -- those on the Toronto Stock Exchange 100-stock composite index -- generally paid their directors a total of about $35,000 to $40,000 a year in cash or a mixture of cash and stock.
The key components were: annual retainers, which averaged $15,000 for board seats, $3,000 for membership in a committee and $4,900 for chairing a committee; and attendance fees that averaged $1,000 for a meeting of the full board or a committee and $500 for directors who attended via teleconference.
Mercer concluded that this added up to a big bargain when compared with the United States, where another survey last year pegged the average annual pay for directors of 350 big U.S. companies at $65,700 (U.S.) -- $96,685 Canadian at current exchange rates.
Not surprisingly, directors on this side of the U.S. border tend to agree.
"Canadian boards don't pay people enough to get them to do it for the money -- people do it for the experience more than anything else," said Nova's Mr. Newall.
"I'd make more money if I took that time and spent it managing my own personal investments," added Mr. Newall, 62, who, proxy circulars suggest, earned about $192,000 last year in retainers from his outside boards, on top of the $815,000 in salary and 300,000 stock options he was paid by Nova.
"I've got to tell you that . . . the fees don't cover your time. It just doesn't come close," agreed Helen Sinclair, 47, who, in addition to running her own business, BankWorks Trading Inc. of Toronto, is a director of five vastly larger companies, including Toronto-Dominion Bank and Stelco Inc.
Instead, she said, she has taken on the directorships because she figures they will help her in her own business.
Ms. Sinclair, former chairman of the Canadian Bankers Association, appears to be earning about $68,000 annually in retainers.
Still, for holders of multiple directorships, the numbers can add up to more than modest totals, particularly for those who snare jobs as non-executive chairmen, which generally pay anywhere from about $50,000 to $200,000 or more a year.
Rough calculations suggest that Imasco's Mr. Crawford, for instance, last year pulled in more than $580,000 in annual retainers from his 12 board seats, and that Petrocan's Mr. Kierans rang up about $575,000 worth.
Mr. Kierans figures he spends about 30 to 35 hours a week or 40 to 50 per cent of his working life on his directorships.
For others, however, board work is a full-time occupation.
This is the case for William Dimma, 69, the former CEO of A.E. LePage Ltd., who is regarded as one of the deans of corporate directors in Canada. He said he works a full 70 hours a week to fulfill his duties, which currently include the chairmanships of six private and public companies, including Swiss Reinsurance Co., and Perigee Inc., a Toronto based investment counselling firm that went public earlier this year. He also is a director of eight other companies, including Trilon Financial Corp. and Magellan Aerospace Corp.
"I'm a conscientious director," he said. "I read the material -- I never skip it -- and I like to think I contribute at the meetings."
He also indicated he has no desire to cut back his workload, even though he'll likely have to step down from about half his current boards when he reaches their mandatory retirement age of 70. "I enjoy the business world and as long as health holds and my mind doesn't turn to butter, I'd like to keep doing what I'm doing."
One development that could make the financial picture more enticing for directors is that many companies are now granting them stock options, the same incentive that has made near instant multimillionaires of many CEOs and other senior executives in the bull market of recent years.
The theory is that options will more closely align directors' interests with that of shareholders.
Some observers worry, however, that the practice could invite abuse. Among them is William Riedl, president of Fairvest Securities Corp., a Toronto institutional stock brokerage that tracks governance issues for its pension and mutual fund clients.
"You've got a serious conflict of interest in many boards where the directors are responsible for administering the option plan and have unlimited discretion on how many options they grant to themselves," he said.
Nevertheless, boosting Canadian directors' compensation in some way or another may be the only way to get them to reduce the number of board seats they hold to the levels recommended by the U.S. directors' association.
That's the view of Jonathon Kovacheff, who works for the corporate governance practice of management consultants Johnston Smith International in Toronto.
"You'd have to literally pay them double or triple what they're getting paid now to make it worth their while," he said.
THE WEEK AHEAD
Long Weekend Unlikely To Stem Upward Bias
MSNBC
To quote Bruce Springsteen: "Say goodbye, it's Independence Day." Financial markets are closed Friday in observance of the Fourth of July amid expectations the weekend festivities will continue when trading resumes Monday.
Hopes are rising the Dow will soon make a run at its current record of 9,211.84. The blue-chip proxy looks to play catch-up to the S&P 500, which hit four record closes in the six trading days prior to Thursday's modest setback. The Nasdaq, meanwhile, stands 23.61 points below its April 22 standard of 1,917.61 following Thursday's 1.1% decline.
Assuming the recent pattern of stability in Asian financial markets does not reverse, Wall Street's focus is likely to turn to domestic issues. The second-quarter reporting season begins next week with a smattering of releases. Included in the mix are reports from Motorola (MOT), Yahoo! (YHOO), Advanced Micro Devices (AMD), and Dallas Semiconductor (DS). Outside of tech, FDX Corp. (FDX) is the highlight.
The economic calendar for the week ahead is fairly light. Friday brings the Producer Price Index for June and the University of Michigan Consumer Sentiment Index for July. Reports on car sales, retail sales and wholesale inventories are due earlier in the week. With the Fed having left interest rates unchanged this week amid signs an economic slowdown is at hand, the data are not likely to provide any dramatic impetus for trading.
Given the fact that little or no fireworks are expected from earnings and the economic calendar, further gains will have to come from other factors. Namely, optimism that forthcoming earnings will not be as woeful as once feared and a continuation of the momentum demonstrated in the past two weeks. Even some of the market's less optimistic players concede more gains are likely in the days ahead.
"Technically, the market can go higher because it acts well on good volume," said Tony Dwyer, chief market strategist at Landenburg Thalmann & Co. "All the favorable fundamentals remain in place."
Dwyer is troubled, however, that -- by his estimation -- the familiar refrain of solid economic growth and low inflation is already incorporated into the market. "A lot of the good news is already priced in," he said.
The strategist said blue-chip stocks have risen to egregiously high valuation levels and recommends investors switch some funds into smaller caps. That strategy has repeatedly proved to be dangerous, but Dwyer says investors with "patience" will be rewarded.
"You can have more upside because the risk-reward [in blue chip stocks] isn't favorable in my opinion," he said. "I'd rather be in the beaten down small-cap arena because if the Dow comes down, small caps may not rally, but they will go down less."
Dwyer is further bullish on the group because many smaller stocks trade at price-to-earnings ratios that are paltry relative to larger issues, given their higher growth prospects.
Among the names Dwyer recommends is real estate developer Bluegreen Corp. (BXG), which trades at a P/E of 12.7 times its fiscal 1999 earnings, which are projected to grow 56.5%. Also, he likes women's fashion concern Candie's (CAND), which trades at 14.7 times fiscal 1999 earnings that are expected to grow 62%. Conversely, the S&P 500 is trading at some 22.4 times 1999 earnings, which are projected to grow just 7.5%.
A less restrained view of the prospects for major indices comes from Bill Meehan, chief market analyst at Cantor Fitzgerald, although he suspects more profit taking could be in the immediate future, particularly for tech stocks. Thereafter, he believes the tech leadership will recover while financially sensitive sectors like banks and housing will return to levels not seen since April.
"If there's a surprise out there, it will be the market rallies much stronger than even a lot of the bulls believe is possible," Meehan said. "I think there are things coming to a point where we could turn excessively positive and run this market up substantially."
The market watcher said the Dow could approach 10,000 by the end of the third quarter or beginning of the fourth.
But hold the champagne and party streamers.
Meehan further reports the S&P 500 in the last 200 days is moving in lock step with the pattern of the 200 days beginning August 22, 1986, according to a computer program he asked to search the entire history of the market for chart patterns similar to the current environment.
"If the pattern continues, it would indicate you have the potential for a summer rally here that would blow away most of the bulls' targets," he said. "It could get us to levels that are absurdly valued [but] we know how that ended last time."
For those of you without long memories, 200 days from Aug. 22, 1986 was the onset of a big run-up in the S&P 500. Those gains topped out in August 1987, auguring the Dow's 22.6% debacle on Oct. 19, 1987.
Meehan expects major indices to decline as much as 30% from the heights he sees them reaching in the coming months. But there's a silver lining. First, a 30% drop from 10,000 leaves the Dow at 7,000, which "wouldn't wipe out much of the current bull market," he observes. Secondly, Fed Chairman Greenspan has "plenty of room to maneuver when you-know-what hits the fan, because the Fed has kept short-term rates relatively high."
There, feel better?
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