Diane Francis on Business Issues

Monday, August 14, 2006

Claude Lamoureux on Canadian Governance

The C$96-billion Ontario Teachers Pension Plan only invests in stocks that trade in the U.S. because investor protection is superior there, says CEO Claude Lamoureux.

"When we buy stocks in the U.S., or trade stocks in the U.S., we're protected by U.S. laws. It's easier to sue there to protect your investment, laws are tougher and they are also more owner friendly," he said in a telephone interview this week.

The Teachers' pension plan, second largest in Canada after the Caisse de Depot et Placements du Quebec, has been drawn into legal skirmishes involving Nortel networks (settled out of court) and Biovail. Both cases were based in the U.S. where laws and courts are more helpful.

"No one ever goes to jail for these crimes in Canada. Look at Bre-X or YBM. It's only U.S. regulators who take rigorous action," he said. "As a result, the best way in Canada to steal money is to wear a nice suit and do it in your office instead of taking a gun and holding up a store."

He believes that the biggest problem is the failure on the part of politicians to understand the failings and need for reform.

For instance, Canada has too many competing jurisdictions with the provinces controlling securities laws and the feds, criminal laws. I asked him about other issues such as the fact that the RCMP's white-collar crime section has been inadequately funded by Ottawa for a decade and that prosecutors in Canada are civil servants, often naïve or very politicized.

"Something's got to be done because the public is being taken for a ride and it just goes on and on," he said. "I'm not blaming the securities regulators in Canada. They even say there are jurisdictional issues. There is also little recognition on the part of legislators as to the importance of this. It's not like healthcare and there's a perception that this is a victimless crime. It isn't. People are being stolen from."

Mr. Lamoureux is hopeful that a task force, which is currently working on these problems, will come up with helpful recommendations that will be adopted by politicians.

"It's the system that has to be looked at, as opposed to the people involved," he said. "In the case of a large institution, we are protected because we can always try to sue. But the individual investor is stuck."

A glaring example of Canada's inadequate investor protection involved the issue of market timing and late trading among certain mutual funds and others, he said.

"Look at what happened in Canada about late trading," he said. "A few corporations paid fines, but they stole money from members of the funds. It became difficult to know who personally did it, the names were buried. And the fines were small."

Late trading and market timing was started in the U.S., but justice was more appropriate.
"There were huge fines and in the U.S., people are still being prosecuted over it. They will go to jail. Here, nobody was prosecuted," he said.

The biggest embarrassment was Bre-X, a C$9-billion gold swindle.
"Here's a case where everybody knows there was a problem and nothing has happened," he said. "Another was YBM which was an outright fraud. The securities commission went after a few board members, but none of the owners and managers were extradited to stand trial."

"There was a lack of oversight by the board, but at the end of the day management is responsible. How many got prosecuted? Or are wanted on warrants?" he said.

These companies show that criminals can operate in Canada with impunity, he said.
Another worrisome development is that even though the dreadful Vancouver Stock Exchange was shut down, many of the same questionable promoters are now selling shares to the public through pink sheets or over-the-counter vehicles.

"There are more scandals in the small cap stock sector because there are no big institutions as investors and analysts don't cover them. They fly under the radar," he said. "The people behind some of those scams just changed places, but they are still operating within Canada."

Mr. Lamoureux is also a fan of Washington's Sarbanes Oxley laws which have become controversial in the U.S. because of the additional costs public companies incur to comply.

"Section 404, requiring audit controls went a bit overboard and should be modified, but in general it's good protection," he said. "The fact that 15% of companies had to issue re-statements demonstrates there was a need to have better controls."

Tuesday, August 08, 2006

Bill Gates & Warren Buffett on Estate Taxes

The Republicans, fearing a bloodbath in this fall's mid-terms, have honed a cynical compromise. Most seem ready to agree to boost minimum wages by US$2.10 an hour to US$7.25 within a decade in order to camouflage their attempt to scrap estate taxes for a few thousand super wealthy.

But the camouflage isn't working, thanks to America's two richest individuals Warren Buffett and Bill Gates. Both are totally opposed to scrapping estate taxes which, by the way, Canada scrapped in 1972 and replaced with a 25% capital gains tax upon death or departure.

The two most successful men in the United States oppose scrapping estate taxes based on the indisputable logic that such taxes are absolutely essential in order to foster free enterprise.

This is because such taxes mitigate the creation of an elite which can control the economy and politics, thus removing opportunities for new, smarter players. Look at Latin America or Saudi Arabia if you think unfettered inherited wealth builds sound economies and good societies.

Warren Buffett described the rationale behind estate taxes best: "Repealing estate taxes is equivalent to choosing the 2020 Olympic Team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."

He made that statement the day he announced that his wealth was mostly going to the Bill and Melinda Gates Foundation (and four smaller foundations to be run by his three children). The Gates Foundation finances social development and healthcare projects that governments and the private sector have neglected.

Mr. Buffett and Mr. Gates not only oppose scrapping the tax but favor increasing it. Gates' father, a Seattle attorney, leads the political movement in favor of higher taxes.

Despite the compelling logic, the Republicans seem to be listening to the lobbyists on behalf of the richest families who have spent US$500 million since 1994 lobbying to repeal the taxes, according to U.S. think tanks Public Citizen and United for a Fair Economy.

By the way, these estate taxes are rarely paid to governments. The wealthy have a choice: pay the money to the government or set up a bona fide foundation and give it away.

And that's another benefit derived from the taxes. These foundations fill a void that's often missing. These foundations and families divest their wealth to build hospitals, universities or to make contributions to social development projects, foreign aid schemes, public-interest research or the arts.

It's a win-win situation for the public.
And estate taxes are one of the main reasons why Americans are roughly four times' more charitable than Canadians on a per capita basis.

Currently, the taxes in the United States are punitive and can total 90% in some regions. There is a federal estate tax of 55% on estates worth US$2 million or more and, in addition, most state governments impose a death duty.

By contrast, Canada is unique among developed nations in that it has no estate taxes.
Worse than that, Canada also allows its wealthiest citizens to pay a 25% departure tax on wealth created in Canada and then move to tax-free or lower tax offshore havens forever so they never have to pay taxes again.

This is what Canadian families headed by tycoons such as Frank Stronach, Michael deGroote and the billionaire Irvings of New Brunswick, among others, have done with their wealth.

While this is not illegal, morality is another matter. People who have made fortunes should pay back the country that gave them the opportunity to become wealthy. So should their offspring and their offsprings' offspring.

By contrast, the U.S. taxes its wealthiest citizens when they die but also wherever they live even if they have renounced their citizenship.

Mr. Buffett, who lives in a house he bought for $31,500 even though he is the world's smartest stock market investor, also articulated estate taxes as an important cornerstone of social justice.

"It's in keeping with the idea of equality of opportunity in this country, not giving incredible head starts to certain people who were very selective about the womb from which they emerged," he said.

He chose the Bill and Melinda Gates Foundation to give his US$31 billion to because he said the couple has demonstrated that it knows how to do its due diligence so that its "giving" is leveraged and provides sufficient scale to make a difference.

The Gates' Foundation has a very small staff and prefers partnerships or networks as a giving strategy. But it is selective in how to hands out funds.

For instance, the Foundation has provided badly needed technology to 11,000 public libraries in the U.S. It has given US$100 million to 8% of New York City's public high schools providing they met certain curriculum criteria. And it just announced US$237 million in grants to several research groups to come up with a vaccine against AIDs providing they all agreed to cooperate and to share their results globally for others to work on.

Monday, August 07, 2006

Teck Cominco, Wal-Mart and Cows

My bet is that Teck Cominco Inc. will end up buying Inco Ltd. and create another Canadian powerhouse in the mining world. To that end, the Vancouver base metal giant upped the ante this Monday.
But the market is saying that the bidding war is probably not over.
Within minutes of Teck's announcement of a higher, more cash-rich bid, the hedge funds bet on a bidding war between Teck and rival Phelps Dodge Corp. of Phoenix, and possibly others.
So I consulted my guru, Terry Ortsland, who was the only one to suggest in this column weeks ago that Phelps Dodge would bid for Inco.
"The knee jerk reaction by the hedge funds this week is that the bids will continue to go up and so far they've been proven right," said Terry, a mining consultant.
Naturally, Teck's CEO Don Lindsay tried his best to dampen the expectation of a bidding war. He said Teck would not chase Inco's stock price upward, but his quoted remarks still leave the door open.
When asked by Reuters if this was Teck's final offer, he said: "I can say it's a very full offer; a very fair offer and that we will only do what makes sense for Teck Cominco's shareholders."
In other words, possibly yes and possibly no.
"I think Teck is a serious, very mathematical company and the numbers right now are pretty stretched," said Terry. "On the other hand, Inco has got a scarcity value - it's the only one in the world with all these attributes: It has huge projects, growth, market share and technology."
Inco also has a good presence in China and Asia which is worth a premium, plus it is also a technology play.
"Nickel is the only commodity that has technology associated with it. It is pretty complicated to produce nickel compared to copper or other metals," he said. "So it deserves a premium in terms of technology. So this company's worth a number which nobody seems to pin down."
Besides being gobbled up by a mining company, Terry believes that institutions and consumers may want to snap up Inco, possibly as partners with Teck or others.
"You've got the stainless steel companies, trading companies and state-owned enterprises," he said. "You've also got financial institutions with trillions of dollars who are looking for investment vehicles at the end of the day."
The August 16 Teck deadline is a challenge for Phelps because it needs lots of approvals whereas Teck's on a fast track, he added.
"And there's no doubt that Teck's offer is superior."

Retail Battles
Wal-Mart Stores Inc. continues to be attacked from many sides. This week, it announced that it will write off US$1 billion after selling its chain of 85 stores in Germany to a retail rival. German unions attacked its hours and its products made by underpaid Chinese workers.
At home, Wal-Mart faces trouble too.
The state of Maryland passed a law requiring any retailer with 10,000 or more employees to earmark 8% of employee salaries towards their health care or write a cheque to the government for the difference. The argument was that Wal-Mart's failure to provide health-care benefits cost Maryland's taxpayers millions because workers are forced many to use the state-supported health care plan Medicaid. Wal-Mart won that case recently, but Maryland's appealing.
Then a few weeks ago, Chicago's city council passed a "living wage" ordinance requiring any "big box" stores (read Wal-Mart and Target Inc.) to pay workers at least US$10 an hour plus US$3 an hour in benefits.


Mad About the Cows
Two interesting developments were announced by agriculture officials in Washington about one week apart. But both are linked.
First, Washington announced that it would cut back its national program to test for mad-cow disease. Then this week it announced that it won't open up the border to more Canadian live cattle since seven cases of mad-cow were discovered north of the border.
Here's the point: the cases were discovered because Canada is being more aggressive and thorough in terms of its testing of cattle. At the same time, the Americans are retreating from testing which makes their cattle look healthier than they probably are.
Put another way, if Canada tested as often as the Americans have there probably wouldn't have been any cases discovered. (By the way, none of these cases got into the food chain.)
So the question north of the border becomes, why not cut back testing to American levels?

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