Quebec's Caisse de dépôt et placement: tool of nationalism

Stephen B ~ O O ~ A. Brian T a n g v

Abstract: As Canada*s sixth-ranking financial institution, holding a major equity share in several of the country’s largest corporations, Quebec’s Caisse de dkppbt et placement has been the object of criticism and suspicion from the business community and even the federal government. But despite the important questions raised by the investment activities of the Caisse, this agency has not been subject to the careful analysis which is warranted by its size and role as an instrument of economic development. Questions regarding the precise nature of the relationship between the Quebec government and decision-makers in the Caisse, and between the Caisse and the corporations in which it holds a major equity stake, remain unanswered.

This article examines the role of the Caisse as an instrument of economic policy. In the first section the origins and growth of the Caisse are placed in the theoretical context of economic nationalism. The second part of this article examines the investment activities of the Caisse since the PQ came to power. We argue that there is little evidence to support claims that the investment policy of this agency is influenced in a direct and systematic way by the political objectives of the PQ government.

Quebec’s Caisse de dep6t et placement: tool of nationalism?

Sommaire : La Caisse de dBpBt et placement du Qukbec, Btant classke au sixieme rang parmi les institutions financi&res et ayant acquis la majorit6 des actions ordinaires de plusieurs des plus grandes entreprises du pays, a ktk le sujet de critiques et suspicions de la part de la communautk des affaires et m&me du gouvernement ft5dt5ral. Malgrt5 les importantes questions qui se posent en raison de ses activitks d’investissements, la Caisse n’a pas ktk assujettie B la scrupuleuse analyse que justifieraient sa grandeur et son rpble en tant qu’instrument de dkveloppement Bconomique. Les questions, traitant de la nature precise des relations entre le gouvemement qukbBcois et Ies dirigeants de la Caisse, et celles de la Caisse et des corporations dans lesquelles elle dktient une part majoritaire, restent sans rkponses. The authors are with the Department of Politics, Brock University, and the Department of Political Science, Carleton University, respectively. The authors would like to thank Professor Andrew Johnson of Bishop’s University for his comments on an earlier version of this paper, delivered at the annual meeting of the CPSA in Cuelph, June 1984. The suggestions of two anonymous referees for this journal are gratefully acknowledged.

CANADIAN PUBLIC ADMINISTRATION / ADMINISTRATION PUBLIQUE DU CANADA VOLUME 28, NO. 1 (SPRING/PRINTEMPS 1985 ), PP. 99-119.

STEPHEN BROOKS AND A. BRIAN TANGUAY

Cet article examine le rdle de la Caisse en tant qu’instrument de politique kconomique. Dans la premiere section, les origines et la croissance de la Caisse sont plackes dans un contexte thhorique de nationalisme hconomique. Dans la deuxibme partie de cet article, les activitks d’investissements de la Caisse depuis la prise de pouvoir par les PCquistes sont examinhes. Nous demontrons qu’il y a peu d’kvidence pour soutenir la proposition selon laquelle la politique d’investissements de cette agence serait influencke d‘une manikre directe et syst6- matique par le projet politique du gouvernement pkquiste.

With over $18 billion in assets and substantial equity holdings in a number of Canada’s major corporations, Quebec’s Caisse de d6p6t et placement ranks as one of the country’s most important financial institutions. Though the Caisse’s management prefers to see the fund as a “friendly giant” whose investments in the private sector are motivated by nothing more than a prudent desire to increase the yield on its depositors’ incomes and simultaneously bolster economic growth in the province of Quebec, its behaviour since the late 1970s has prompted concerns in some sectors that the Caisse is becoming politicized, Critics of the Caisse, both in the business community and in the federal government, cite its decision in 1979 to lend money to the Quebec government and Hydro-Qu6bec at below- market rates as evidence of an overly cosy relationship between the Parti QuBbkcois government and the Caisse’s management, Even more worri- some than this incident, in the eyes of these critics, was the Caisse’s 1981 takeover of Domtar, orchestrated with assistance from another Quebec government agency, the Socikt6 g6nkrale de financement ( SGF) . This and the Caisse’s insistence that it be granted representation on the boards of directors of those corporations in which it has a major equity stake are often adduced as proof that the Caisse has abandoned its fiduciary role and is now acting as the chosen instrument of the PQ’S economic policy. Indeed, some of the more intemperate opponents of the Caisse’s investment strategy claim that the fund is a tool of “socialism”; that it is the instrument for the covert nationalization of major sectors of Quebec’s and Canada’s economies (“une 6tatisation tranquille,” so to speak) .l

Despite the important questions raised by the investment activities of the Caisse, this state agency has not been subjected to the careful analysis that both its size and role as an instrument of economic policy seem to warrant. Too often, articles focusing on the Caisse (in English, at any rate) assume a shrill and tendentious tone, with the authors restricting

1 Such was the burden of the testimony given by Andre Ouellet, then Minister of Consumer and Corporate Affairs, before the Senate Committee hearing on the Corporate Shareholder Limitation Act (Bill S-31), cited in Allan Tupper, Bill S-31 and the Fed- eralism of State Capitalism, Discussion Paper 19 (Kingston: Institute of Intergovern- mental Relations, 1983), p. 16.

100 CANADIAN PUBLIC ADMINISTRATION

QUEBEC’S CAISSE DE DEPOT ET PLACEMENT

themselves to fulminating against the creeping socialism of which the Caisse is allegedly the vehicle.2 There is, admittedly, an extensive litera- ture on the province-building activities of Quebec’s state elite which treats the Caisse as an example of the deliberate use of the state apparatus by the province’s new middle class in order to extend its control over the Quebec economy. However, questions regarding the precise nature of the relationship between the Quebec government and decision-makers in the Caisse, and between the Caisse and its corporate holdings, remain un- addressed.

This paper examines the role of the Caisse as an instrument of economic policy. The first part of the paper attempts to situate the origins and growth of the Caisse in the context of the economic nationalism that informed much of the Lesage government’s policy-making in the early 1960s. We shall argue that the Caisse was always intended to be much more than a state-owned trust company with a passive investment strategy identical to those of similar private-sector financial institutions. The terms of the Caisse’s charter, as well as various statements made by government spokesmen when the enabling legislation was passed, clearly indicate that in addition to fulfilling a fiduciary role the Caisse was intended to help foster economic growth and diversification in the province of Quebec. Govern- ment leaders assumed at the time that there would be little difficulty in reconciling these two roles, but the storm of controversy raised by the Caisse’s recent dealings suggests that they may have been overly sanguine. This first section will also offer a brief assessment of the Caisse’s attempts prior to 1976 to fulfil its dual role as financial trustee and instrument of economic development.

The second section of the paper involves an analysis of the Caisse’s investment activities since the PQ’S accession to power. This will include an examination of the extent and modes of participation by the Caisse in the decision-making of its corporate holdings. Our argument will be threefold. First, we contend that the view of the Caisse as a vehicle for the propaga- tion of the PQ’S particular brand of socialism ought to be dismissed as the product of a febrile imagination. Notwithstanding Ottawa’s protestations to the contrary, there is little reason to believe the Quebec government’s interventions in the economy to be any more socialistic than those of its federal counterpart. Indeed, this was the central contradiction which ulti- mately led to the demise of the Corporate Shareholding Limitation Act (Bill S-31) : Ottawa could not attempt to limit the Caisse’s investments in interprovincial transportation firms without simultaneously calling into

2 Illustrative of this tendency are: David Olive, “Caisse Unpopulaire,” Canadian Business 55:5 (May 1982), pp. 94-101 and Heward Grafftey, “Government and Busi- ness: The Caisse de d6p6t et placement du QuBbec,” Business Quarterly 48:2 (July 1983), pp. 19-22.

101 ADMINISTRATION PUBLIQUE DU CANADA

STEPHEN BROOKS AND A. BRIAN TANCUAY

question its own direct investment activities. Secondly, we argue that certain of the Caisse’s equity investments - in such prominent Quebec-based corporations as Provigo, Domtar and Gaz MCtropolitain - suggest that there is a broad coincidence between the Caisse’s actions as shareholder and the economic policy objectives of the Quebec state. Nevertheless (and this is the third point we are endeavouring to make), the Caisse’s control over the corporate behaviour of its holdings remains, in many instances, tenuous at best. Thus, if the Caisse has indeed been an instrument of nationalism in recent years, it is certainly not (in its present form, at least) the ideal tool for the achievement of the PQ’S economic objectives.

One of the organizations that played a key role in the development of the QPP and the Caisse de dCpdt was the Conseil dorientation 6conomique du QuCbec ( COEQ), an advisory body whose function was to elaborate, in consultation with the government, “the plan for the economic organization of the Province, with a view to the most complete utilization of its materia1 and human re~ources.”~ The Conseil, originally created in 1943 by the Liberal government of AdClard Godbout but allowed to lapse during the Duplessis administration, had been revived in 1961. Its board of directors comprised representatives of Quebec’s francophone bourgeoisie, some top- level civil servants and a certain number of academics and union representatives? According to the COEQ:

. . . it is necessary to make of the State a real lever for the Quebec economy. The Government should . . . favour technical innovations . . . which are abso- lutely necessary for the emancipation and the progressive liberation of our economy, dominated by outside techniques and capital.6

Hydro-Quhbec, the SGF and the proposed steel complex in Quebec (what was to become SIDBEC) : these, in the view of the COEQ, were the instruments of this economic emancipation. A provincial pension fund, it argued, might be another such tool, In a report dated June 21,1963 and submitted to the Executive Council, the COEQ recommended the establishment of a uni- versal, contributory pension plan which would allow for the “accumulation of a retirement fund [that] could serve as a reservoir of capital in conform- ity with the Government’s economic expansion policy.”8

In issuing its report on the proposed Quebec Pension Plan and the Caisse de dkpdt, the Dupont Committee followed the recommendations of the COEQ and drew on the experience of some western European nations, notably France, with its Caisse des dCpbts et consignations, Belgium

3 Qukbec, Bureau de la statistique du Qukbec, Annuaire du Qudbec 1963, p. 518. 4 See Roland Parenteau, “L’expkrience de la planification au Quebec (196&1969),” L’ActuaZitk konomique 45:4 ( janvier-mars 1970), p. 680, and Dorval Brunelle, La dkillusion tranquille ( Montrkal: Hurtubise HMH, 1978), ch. 2. 5 Annuaire du QuQbec 1963, p. 519. 6 Dupont Report, vol. 1, p, 29.

102 CANADIAN PUBLIC ADMINISTRATIOW


(Caisse gknkrale d’6pargne et de retraite), and Sweden (National Provi- dent Fund for Retirement Pensions). The report called for the creation of an investment fund that would act both as a fiduciary and an instrument of economic development:

. . . this plan, insofar as it taps a large portion of personal savings and creates per contra a fund of proportioned investments, transfers to the directors of a deposit and investment fund centers of economic decisions which are at present mostly located outside Quebec.?

In the opinion of the Dupont Committee, the Caisse de d6p8t was necessary because the existing pattern of investment in Quebec was geared to the needs of foreign-owned industries. This exacerbated the structural imbalance in the economy by preventing funds from flowing into the under- developed sectors, those dominated by francophones. As Eric Kierans, Min- ister of Revenue in the Lesage government, explained at the time the Caisse was being created, 75 per cent of savings in Quebec came from the business sector in the form of retained earnings and depreciation allowances. Typi- cally, these savings were re-invested in the industrial sectors that had generated them, and this meant that “re-investment is generally tied to existing patterns and existing industries, and not the new direction that we are looking for and must have in this province.” The remaining 25 per cent of savings, Kierans noted, were accounted for by individuals and were con- centrated in financial institutions that had “little interest in equities or in risk-bearing investments . . . .’’8 Thus the Caisse would provide the government with the means to urge, or even introduce on its own, new patterns of investment.

An examination of the statutory provisions regulating the investment policy of the Caisse gives some indication of the various roles the fund was expected to fulfil, The Caisse’s charter set out four main classes of investments :

1 government bonds and government-guaranteed issues of public authori-

2 corporate securities; 3 equity holdings; and 4 mortgages and real estate.

With the exception of the limitations on the purchase of school board and municipal bonds (the Caisse could not acquire more than 20 per cent of any single issue), investment in government bonds and the issues of public authorities was without restriction. Although investment in bonds issued by governments outside Quebec (whether Canadian or foreign) was an-

7 8

ties;

Ibid., voi. 2, p. 204; cf. pp. 250-54. QuBbec, Dbbats de I’assemblke lkgislatiue, June 10, 1965, p. 3404 (our translation).

103 ADMINISTRATION PUBLIQVE DU CANADA

STEPHEN BROOKS AND A. B R U N TANGUAY

ticipated, the Caisse’s principal role was to help stabilize and deepen the market for Quebec issues. In this way, the Caisse would allow for the more efficient management of the public debt. In addition, the Caisse was intended to reduce the political influence of the “financial establishment” - the Bank of Montreal and Ames Securities - as the following comments of Douglas Fullerton, one of the members of a provincial task force that drew up the legislation establishing the Caisse, make clear:

. . . people in official circles and other elites were generally convinced - not without reason, moreover - that when the government had tried to determine its policies it had been subjected to considerable pressure from the financial “establishment.’’ The implicit threat was that sources of funds would dry up if the government acted against this “establishment.”g

By breaking the monopoly position of Ames and the Bank of Montreal, which for years had controlled the placement of Quebec government bonds, the Caisse would presumably give the state greater latitude in formulating its economic policy.

The Caisse’s charter stipulated that its investments in mortgages and real estate could not exceed 10 per cent of the fund’s total assets, and, in the case of corporate bonds, the Caisse was prohibited from investing more than 1 per cent of its total assets in any single corporation (these bonds also had to be secured by privileged claim on property, or they had to have been issued by a company with a proven financial track record). The most important restrictions on the Caisse’s investments applied to its purchases of equity. The charter stipulated that a corporation whose shares were purchased by the Caisse had to have yielded at least a 4 per cent annual return on common shares in each of the five years preceding the purchase. This, according to the government, “clearly establishes the principle that the Caisse, when it purchases shares, is not to participate in the launching of new enterprises. It can, however, provide necessary funds for the development of existing firms which have already demonstrated that they are properly managed and that their profitability is beyond doubt.”1° There was, however, a so-called “basket clause” permitting the Caisse to invest up to 7 per cent of its assets in the shares of corporations that did not meet these criteria. It could therefore play a small but not insignificant role in the launching of new enterprises in the province.

Two additional restrictions applied to the Caisse’s equity investments: the fund could not hold more than 30 per cent of any single corporation’s equity, nor could it invest more than 30 per cent of its total assets in corn-

9 D.H. Fullerton, “La C a k e de dkpBt - un regard en arrihre,” in Claude E. Forget, ed., La Caisse de ddpdt et placement du Qukbec (MontrBal: C.D. Howe Institute, 1984), p. 25 (our translation). 10 QuBbec, Dkbats de l’assemble’e lkgislatiue, June 9, 1965, p. 3329 (Jean Lesage is speaking; our translation).



mon shares.” These additional restraints on the Caisse’s role as shareholder were, according to the Lesage government, clear indications that the fund was not intended to act as a holding company. In Lesage’s words, the Caisse was not to be a sort of “Super-sw,” since the latter was an entrepreneur whose chief function was to promote the industrial transformation of the Quebec economy. The Caisse, by contrast,

is not an entrepreneur, but a reservoir of capital. It is not its function to create enterprises, but it will have the necessary resources and powers to take part in . . . plans for setting up or expanding firms that will be suggested to it. The initia- tive will have to come from the SGF, the private sector, government, or from a combination of the three . , .I*

Unlike the SGF, the Caisse was to avoid financing costly projects that might have political value (for example, in the area of regional development) but were of dubious economic merit.

The 30 per cent ceiling on the Caisse’s equity holdings was high enough, in the government’s view, to allow the fund to act in concert with other state agencies or Quebec-based corporations to prevent foreign takeovers of strategic firms in the province. However, the ceiling was not felt to be so high as to enable the Caisse to acquire control of the corporations in which it invested. Despite this disavowal of any entrepreneurial function for the Caisse, however, the investment ceilings set by the government were clearly high enough to permit the Caisse to play just such a role. As is well known, in cases where a corporation’s stock is widely dispersed, ownership of a 30 per cent block of common shares is more than sufficient to ensure effective control of the firm through domination of its board of directors. Whether the Lesage government was simply unaware of the potential control conferred by a 30 per cent holding of a firm’s shares, as Douglas Fullerton has claimed,13 or whether it anticipated a more active role for the Caisse in some unspecified future, remains unclear. What is clear, however, is that this ambiguity in the Caisse’s charter elicited little controversy or debate until the late 1970s, when the fund’s management began to exercise its right as a major shareholder and seek representation on the boards of directors of companies in which it had substantial holdings.

To what extent did the Caisse succeed in fulfilling its dual mandate (fiduciary/instrument of economic policy) in the first ten years of its existence? Pierre Fournier, in a 1979 study done for the Office de planifi-

11 These various restrictions on the Caisse’s investment activities are set out in QuBbec, Laws, Statutes, etc., An Act Respecting the Caisse de dBpBt et placement du QuBbec, RSQ 1977, ch. C-2, ss. 24-37. 12 QuBbec, Dbbats de l’assemblbe lbgislative, June 9, 1965, p. 3325 (our translation). 13 Fullerton, “La Caisse,” p. 29.

1% ADMINISTRATION PUBLIQUE DU CANADA


cation et dkveloppement du Quebec ( O P D Q ) , ~ ~ considers the Caisse to have surpassed expectations regarding the yield on its investments, easily out- performing the Canada Pension Plan and other similar private pension funds in this area. As for the Caisse’s economic policy functions, Fournier judges the fund to have had its greatest success in reducing the government’s dependence on the financial syndicate and in stabilizing the province’s capital markets during times of political crisis. Fournier notes that the Caisse made massive purchases of Quebec government bonds in 1966, at the time of Daniel Johnson’s “Bgaliti. ou indbpendance” ultimatum, in 1970 during the FLQ crisis, and in 1976 after the PQ’S stunning election vic- tory, when institutional investors were cool towards the province’s securities.l5

According to Fournier, the Caisse before 1976 had been much Iess suc- cessful in achieving its other economic development goals: promoting in- digenous enterprise, assisting in the reorganization of certain industries ( as it did in the creation of Provigo in the mid-l970s), francizing the management of firms based in Quebec and patriating major economic decision- making centres, He criticized the Caisse for adopting a passive investment strategy and for failing to invest the full 30 per cent of its assets in equity, as permitted by its charter. More damning than this, in Fournier’s view, was the fact that the Caisse had been less “nationalistic” in its investment policy than it ought to have been: its purchase of large blocks of shares of non-Quebec corporations had contributed to the “hemorrhage” of Quebec savings.1° Fournier concluded that the Quebec government had allowed the Caisse too much autonomy for it to have been an effective tool of economic policy. And, in fact, the Lesage administration had endeavoured to prevent the politicization of the Caisse by removing it from any overt gov- ernmental influence - the Minister of Finance, for example, was not permitted to issue directives to the Caisse. Whatever coordination did occur between the government’s economic policy objectives and the Caisse’s investment behaviour was supposed to have been achieved through the presence on the Caisse’s board of directors of three associate (non-voting) members appointed by the government: the Deputy Minister of Finance, a Hydro-QuBbec officer, and a member of the Municipal Commission or an officer of the Ministry of Municipal Affairs. In Fournier’s view this was insufficient; he recommended altering the Caisse’s charter in order to spell out clearly its economic development role and to give it greater powers to attain these objectives.l’ The government would, moreover, have to involve itself more directly in the management of the Caisse if this state agency was to perform the tasks required of it, With the election of the PQ in 1976, there

14 e‘ualuation prbliminaire ( QuBbec: Editeur Officiel, 1979), pp. 24-28. 15 Ibid., p. 27. 16 Ibid., pp. 29,40. 17 Ibid., p, 43.

Pierre Fournier, Les socibte‘s d’Etat et les objectifs kconomiques du Qudbec: une



was good reason to believe that these changes in the Caisse’s powers would be implemented.

Tool of nationalism? When the Parti QuBb6cois came to power in 1976 one might have expected eventual legislative reform affecting the Caisse, in view of the recommendations contained in the PQ’S 1972 manifesto, Q u a d nous ser0n.s vraiment chez nous. That document identified the Caisse, along with other parts of the state, the Mouvement Desjardins, and private sector francophone financial institutions, as potential purchasers of the 75 per cent ownership which, by the PQ’S proposal, non-Quebec interests in the province’s financial sector would be required to sell to Quebec buyers. In more general terms, the 1972 manifesto stated:

Founded in 1965, the Caisse already disposes of assets which this year will sur- pass two billion dollars. Given current conditions, the Caisse’s assets will reach $8 billion in twenty years. But for our purposes this is too little, too late. Instead, we must aim to achieve this figure within ten years.18

The Caisse was considered an essential, perhaps the pivotal, tool in the nationalist project advocated by the PQ. But upon forming the government no steps were taken along the politically risky path of reforming the agency’s charter, a precondition to the role envisaged for the Caisse in the 1972 manifesto, and reiterated in the PQ platform of 1975. Indeed, it was not until 1979 that the relationship between the policy preferences of the government and particular investment decisions of the Caisse became a subject of major controversy.

Since the 1981 takeover of Domtar by the Caisse and the SociktC gCnC- rale de financement, critical attention has focused on the equity investment activities of the Caisse. Prior to the Domtar takeover, the critics of the Caisse pointed to the 1979 decisions to lend money to Hydro-QuBbec and the government of Quebec at rates of interest below those prevailing on the market (but on the same terms offered by the Alberta Heritage Fund) as evidence that the Caisse’s fiduciary responsibility to the citizens of Que- bec, whose compulsory contributions it administers, was compromised by the agency’s sympathetic relationship to the policy preferences of the provincial government. Interpretations of the Caisse’s province-building role quite correctly centred on its relationship to the debt requirements of the Quebec state and, relatedly, the reduced dependence of the Quebec state on private sector institutional lenders. Generally speaking, the direct investment activities of the Caisse were not controversial.

While the Domtar takeover provides a convenient and non-arbitrary line of division, separating previous critical understanding of the Caisse from

18 Quand nous serons urairnent chez nous (Montrkal: Les Editions du Parti quk- bkcois, 1972), p. 77 (our translation).



TABLE 1 The Caisse’s investment in corporation bonds and shares (in millions of dollars, and as a percentage of total investment)

Year Shares Bonds Total investments

1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966

$3,563.6 (20.0%) 2,759.6 (17.3) 2,316.7 (17.0) 1,496.4 (13.0) 1,105.7 (11.6)

920.1 (11.8) 841.4 (13.4) 823.8 (15.8) 721.5 (17.2) 656.1 (18.8) 518.6 (17.9) 371.9 (16.9) 295.2 (16.9) 224.8 (16.5) 156.6 (15.8) 99.2 (14.5) 47.6 (11.3) -

$519.7 (2.9%) 746.6 (4.7) 887.4 (6.5) 964.3 (8.4) 945.3 (9.9) 677.8 (8.7) 593.2 (9.4) 534.5 (10.2) 430.2 (10.2) 361.6 (10.3) 290.6 (10.0) 264.0 (12.0) 204.3 (11.7) 108.0 (7.9) 45.6 (4.6) 37.6 (5.5) 21.4 (5.1)

.3 (0.2)

$17,851 15,906 13,639 11,508 9,555 7,826 6,288 5,224 4,230 3,499 2.901 2;206 1,743 1,365

990 684 418 183

~~ ~ ~

SOURCE: Caisse de d6pBt et placement, Annual Report, 1966-1983.

the more recent views which were expressed in the debate on Bill S-31, investment in the shares of private sector corporations has long constituted a significant proportion of the Caisse’s total investment portfolio. This is demonstrated by the following figures (see Table 1). As a proportion of total Caisse investments, private sector equity did not account for a greater share of the Caisse’s portfolio in the years 1981 to 1983 than was the case between 1973 and 1975. But in absolute terms, the 17.9 per cent of Caisse investments in this category in 1973 amounted to $519 million, whereas the 20 per cent equity investment share in 1983 represented $3,564 million. Even after allowing for inflation, the growth in absolute terms is dramatic.

Review of the Caisse’s shareholdings reveals that 65 per cent of the market value of the agency’s equity portfolio is accounted for by shares held in twenty-five corporations, only two of which, Provigo and Brascade, generate the major part of their income from operations in Quebec (see Table 2 ) .

Despite this evidence of the Caisse’s concern with a competitive return on its invested equity capital, several developments have combined to focus critical attention on the private sector investments of this state agency. These are:

i ) the takeover of Domtar by the Caisse and the SGF with, at a minimum, the prior knowledge and support of the Quebec government;



TABLE 2 Caisse shareholdings valued at $50 million or more

As of December 31,1983 As of December 31,1982 (in 000s ( in $ mill) ( in 000s (in $ mill) of shares ) of shares )

1. Canadian Pacific 2. Alcan 3. Brascade Holdings 4. RoyalBank 5. Seagram 6. Imperial Oil 7. Bank of Nova Scotia 8. Domtar 9. Bell Canada

10. TransCanada Pipelines

11. Northern Telecom 12. Hiram Walker

Resources 13. Provigo 14. Gulf Canada 15. Bank of Montreal 16. Canadian Imperial

Bank of Commerce 17. Toronto-Dominion

Bank 18. Brascade Resources 19. Canadian Pacific

Enterprises 20. John Labatt 21. Genstar 22. Thomson Newspapers 23. Moore Corporation 24. Dofasco 25. Bow Valley

Industries

7,109 7,054

573 6,385 4,011 3,719 3,091 4,385 3,385 3,591

2,292 4,002

5,447 5,181 3,101 2,557

4,652

2,758 2,902

2,892 2,240 1,703 1,223 1,039 2,125

357 349 342 219 181 138 136 133 113 112

112 112

98 90 82 78

76

75 70

69 69 65 65 61 55

7,109 6,297

573 5,636 1,210 2,950 3,900 4,385 4,291 1 * 098

752 3,686

5,787 4,730 2,908 2,142

1,746

- 2,910

1,151 661

1,037 977 717 872

255 217 179 164 109 84

143 88

104 29

64 74

69 69 77 66

69

- 52

41 13 29 50 25 14

~~ ~~ ~

SOURCE: Caisse de d6ppBt et placement du QuBbec, Rapport de gestion, 1982, 1983.

ii) the Caisse’s expressed concern that it be represented (i.e., accorded the right of nomination) on the boards of directors of corporations in which, in the judgement of Caisse management, the size of the agency’s holding and the expectation of long-term involvement warrant this form of participation;

iii) the Caisse’s apparent policy of acquiring larger ownership shares in public companies than is typical of similarly massive private sector pension funds; and

iv) public statements by Jean Campeau, chairman of the Caisse, ac-



knowledging the economic development role of the agency in a more forthright way than had his predecessors.

Controversy over the direct investment role of the Caisse culminated in the debate over Bill $31, which would have placed significant limitations on the investment possibilities open to the Caisse.

While the federal government abandoned in November 1983 a revised version of S-31, with no indication that the legislation might be reintroduced in the near future,lQ the debate over the Caisse’s direct investment activities and, of equal concern to the agency’s critics, the relationship of the Caisse to the economic policy objectives of the Quebec government, continues in various forums. A recent publication of the C.D. Howe Insti- tute, entitled La Caisse de de’pdt et placement du Quhbec: Sa mission, son impact et sa perfomulnce,20 provides assessments of the Caisse from severaI viewpoints, and represents the first book-length treatment of the Caisse. The wider awareness of the Caisse’s direct investment activities, which was one consequence of the protracted debate on S-31, has been reinforced through business press coverage of recent developments in the Caisse’s network of investments (particularly, Caisse participation in the recently created Power Financial Corporation, and cooperation with a group of Quebec-based financial institutions in the takeover of Trust GBnBral) .

In a recent debate on state enterprise in Quebec, Andre Raynauld, past president of the Economic Council of Canada and currently with the Centre for Economic Research and Development at the University of Montreal,21 expressed the unconditional view that the state is by its nature ( according to this view, pluralist and influenced by non-market demands) unsuited to commercial decision-making. Raynauld has applied this understanding to the Caisse:

Because the Caisse is a state enterprise, it is unable to limit its investment role to that of a mere fiduciary for fear that it be accused of being socially useless. Hence, its new demands t o exercise the economic power which a private fiduciary is precluded from exercising, and which one may doubt the wisdom of assigning to a state enterprise.22

The inherent contradiction between the requirements of market competi- tion and the public policy obligations imposed by its state enterprise status

19 In November of 1983 the federal government introduced an amended version of $31, and indicated that the legislation would be tabled in the Commons during the next session of Parliament. With the defeat of the Liberal party in the September 1984 election, the likelihood of Bill S-31 being reintroduced is very slender. The Conserva- tive prime minister, Brian Mulroney, has publicly expressed his opposition to the legislation. 20 Forget, ed., La Caisse de dhpdt et placement. 21 The debate took place during the Radio Quebec program, “L’ActualitB Bcono- mique,” April 12, 1984. Raynauld was debating with Pierre Fournier. 22 A. Raynauld, “L‘impact Bconomique et financier de la Caisse de d6p6t et placement du QuBbec,” in Forget, ed., La Caisse de dkpdt et placement, p. 70.



explains, according to Raynauld, the greater concentration of the Caisse’s equity portfolio (larger ownership shares in fewer corporations) in com- parison to private sector pension funds and, relatedly, the Caisse’s concern with having representation on the boards of corporations in which it holds a large ownership share, a concern which is quite exceptional in the case of private pension funds.

Substantially identical views were expressed by Sam Hughes, president of the Canadian Chamber of Commerce, in testimony before the Senate committee which considered Bill S-31. Hughes argued that the direct investment activities of “pools of enforced savings,” particularly the Caisse, posed a real and present danger to corporate autonomy in Canada. While conceding the legitimacy of equity investment by state agencies, Hughes maintained that the state as investor is fundamentally different from private capital, and should be proscribed from controlling public companies. In explaining his opposition to state participation in the control of a private sector corporation, Hughes observed:

Experience shows that such a step (i.e., state investment for purposes of control) does not represent a temporary investment but rather an indefinite and virtually permanent commitment to that company whatever its fortunes.

. . . The door is opened for the intrusion into corporate economic decisions of partisan considerations that can have serious adverse effects on the company and even the economy as a whole.23

There is nothing remarkable in Hughes’ critique of direct investment by the state. The point is that it represents a view widely held in the private sector, even by those segments of the business community which concede the necessary role of pools of state capital in financing economic development. Hughes’ reservations were particularized in his response to Jean Campeau’s argument that the Caisse, like any other investor, “must look for investments that are large enough to allow them to take an active part as one of the main shareholders and to defend their interests as well as those of the c~rporat ion.”~~ Hughes observed:

I find this statement somewhat difficult to understand. Private sector pension funds have the same requirements to invest “with an eye to profit and safety.” TO my knowledge few of them, except in unusual circumstances, would be com- fortable with more than a 10 per cent common stock holding in any one company. Even fewer would insist on being represented on the board of directors . I . . [The job of professional fund managers] is to manage funds, not to manage the business in which they invest. If private sector pension fund managers, who are acting in a similar fiduciary capacity with trusteed funds, can manage success-

23 Canada, Senate Standing Committee on Legal and Constitutional Affairs, Pro- ceedings, December 2,1982, p. 33:48. 24 Press conference, Montreal, November 17, 1982.



TABLE 3 Chief Executive Officers’ perceptions of the Caisse/ government relationship

“The Caisse is not suficiently independent of the Quebec government.”

Clients Francophones Anglophones Total

Agree 78% 81 82 82 Disagree 11 13 2 6 N’ 27 48 67 115

“A dominant shareholding by the Caisse de ddpdt consti- tutes, or may constitute, a step toward gradual nationalization.”

Clients Francophones Anglophones Total

Agree 78 77 85 82 Disagree 19 21 12 15

*The sampling population is 115. Column percentages may not total 100 because non-responses have been omitted, Both cross- tabulations are adapted from Marcel CBte et Lkon Courville, “La perceptions de la Caisse de depBt et placement du Quebec par les chefs d’entreprises,” Table 9; in Claude E. Forget, ed., La Caisse de dkppbt et pfacement du Qukbec (Montreal: C.D. Howe Institute, 1984), pp. 74-78.

fully without feeling impelled to use the funds as a tool for acquisition and control, then why can the Caisse not do SO?*^

Perceptions that the Caisse’s unacknowledged objective is influence, and that the agency is not sufficiently independent of the Quebec government, are widely held among both francophone and anglophone business elites in Quebec. This is demonstrated in the results of a survey recently con- ducted by Marcel CBtt5 and L6on Courville (see Table 3 ) .

There is both a consensus that the Caisse is not sufficiently independent of the Quebec government, and a high level of agreement among francophones, anglophones and clients of the Caisse that a large ownership share held by that agency may represent a step toward gradual nationalization. In other words, within the private sector milieu in which the Caisse operates there is a broadly shared view that the Caisse is, in some measure, a tool of economic nationalism, This view is not restricted to the business community in Quebec, for the simple reason that economic nationalism is perceived to have consequences which extend beyond the borders of that province. The Liberal prime minister, Pierre Trudeau, expressed the concerns 25 Senate, Standing Committee, Proceedings, December 2, 1982, p. 33:50.



of the Toronto business establishment when he suggested that an increased ownership share by the Caisse in Alcan might prove a lever whereby the Quebec government could influence the investment decisions of that nationally important corporation.

In the next section of this paper the direct investment activities of the Caisse are approached from two angles. The first considers the larger configuration of interests which developed around Bill s-31. The conflict between the Caisse and the management of CP over whether the former ought to be accorded representation on the board of directors of Canada’s largest corporation (an issue with stakes limited to the immediate parties) was elevated to a higher level of conflict, with increased stakes, in consequence of the federal government’s intervention on CP’S behalf. Following this, the general issue of Caisse representation on the boards of directors of public companies is examined. Given that criticism of the Caisse as a “tool of nationalism” points to the agency’s demand for board representation as a main proof of this orientation, it is important to determine the means, extent and significance for corporate decision-making of Caisse representation.

Bill S-31 At the behest of CP management, and with the public support of spokesmen for Canada’s anglophone business community, the federal government introduced Bill S-31, the Corporate Shareholding Limitation Act. This legislation would have limited to 10 per cent the share of voting equity which a province or provincial agent could hold in a private sector firm engaged in interprovincial transportation. The introduction of S-31 was precipitated by the Caisse’s request for representation on the board of Canadian Pacific, a request which was immediately rejected by CP’S chairman, Mr. Fred Burbidge. This conflict provoked two related controversies: the relationship of Caisse action to the economic policy objectives of the Quebec government; and the intergovernmental conflict between Quebec and Ottawa over spheres of authority in managing the economy.2s Our concern is with the first of these controversies, namely, the role of the Caisse in the PQ’S nationalist project.

The larger configuration of interests which have a stake in whether equity participation by the Caisse in private sector firms should carry decision-making influence includes both the federal and Quebec governments, and big business in Canada. This latter interest is both divided and ambivalent in its reaction to the Caisse’s equity investment activity.27 26 On the intergovernmental conflict dimension of the debate over Bill S-31, see Tupper, Bill S-31. 27 See Marcel C8tB et Leon Courville, “La perception de la Caisse de d6pat et placement du Quebec par les chefs d’entreprises,” in Forget, ed., La Caisse de ddppbt et placement, especially tables 2, 3, 7, and 9.



Fundamentally, the issue comes down to whether the Caisse, through its equity investment activity, operates as a tool of economic nationalism in advancing the economic policy objectives of the Quebec government. If the answer is yes, this implies that Caisse investment decisions are signifi- cantly shaped by non-commercial objectives which reinforce the provincial economic development policies of the Quebec government. No one denies that the Caisse has been crucial in the province-building strategies of successive Quebec governments, and certainly the fact that Finance Minister Jacques Parizeau was the first Quebec state actor to testify before the Senate Committee on Legal and Constitutional Affairs, in opposition to Bill S-31, confirmed the importance attached to the Caisse by the PQ govern- menta2*

However, a broad coincidence in the investment activities of the Caisse with the economic policy objectives of the Quebec government is weak evidence upon which to impugn the decision-making autonomy of the Caisse. The Bank of Canada and the Federal Reserve Board are two independent state agencies which occupy crucial positions in state management of the economy in Canada and the United States, respectively, and yet coincidence in the monetary policies followed by one of these agencies and the economic policies of the elected government does not, ips0 fucto, indicate that agency decision-making is effectively controlled by the government. The fact that an overwhelming proportion of Canadian businessmen, both anglophone and francophone, consider that the Caisse is not sufficiently independent of the Quebec government (82 per cent and 81 per cent, respectively), and that equity participation by the Caisse may constitute a first step toward gradual nationalization (85 per cent and 77 per cent, respectively), demonstrates that the Caisse is widely considered to lack the autonomy which characterizes such other formally independent state agencies as the Bank of Canada and the Federal Reserve Board. Cer- tainly the federal government, during the debate over Bill S-31, took the position that the Caisse had become under the PQ an instrument of government-directed socialism and a threat to the Canadian economic union.2g

The Caisse’s request for representation on the board of directors of CP

quickly developed from a limited conflict between Caisse and CP officials to include the federal and Quebec governments and important segments of the business community, The issue was transformed from the situation- ally specific question of whether the Caisse should be conceded representation on the board of a major private sector corporation, into the larger question of the significance of the direct investment activities of this state agency for business/state relations and federalism. In addition to engaging

28 29 Senate, Standing Committee, Proceedings, November 17, and December 7, 1982.

Senate, Standing Committee, Proceedings, November 25, 1982. See Canada, House of Commons, Debates, November 3, 1982, pp. 20, 347; and



the federal government and the government of Quebec, representatives of the anglophone and francophone business communities entered the controversy, and through their respective positions demonstrated precisely what was at stake in the proposal that limits be placed on the direct investment capacities of provinces and their agents.30

To suggest that the limited question of Caisse representation on the board of CP expanded to set the federal government, supported by anglophone-controlled big business, against the Quebec government, backed by the francophone bourgeoisie, would be to oversimplify the alignment of interests. The fact that the Montreal Stock Exchange and the Quebec Chamber of Commerce opposed Bill S-31 did not signify sympathy with the Caisse’s policy of seeking representation on the boards of its private sector investments.

Rather, their opposition was based upon a realistic assessment of the role played by Quebec state agencies, including the Caisse, in financing economic de~elopment .~~ On the other hand, the support for Bill S-31 expressed by, inter uliu, the Canadian Chamber of Commerce, officials of the Toronto Stock Exchange, and the managers of nationally oriented public companies like CP, Dominion Textile and Alcan was based upon a shared understanding, confirmed by the Domtar takeover, that direct investment by the Caisse could challenge corporate autonomy. These interests were indifferent to the federal government’s arguments that S-31 was intended to maintain the integrity of the Canadian economic union, and that the direct investment activities of the federal state were, by virtue of Ottawa’s role as a national government (and in contrast to the narrower horizons of provincial governments), intended to promote the national interest. Indeed, the business interests in support of Bill S-31 would have preferred that the legislation’s investment restrictions be extended to cover the federal government and its agents as well.

More than any other single issue, the controversy surrounding Bill $31 clarified what involved interests perceived to be at stake in the Caisse’s bid for decision-making participation through representation on the boards of directors of private sector corporations. For constitutional and political reasons the federal government could not propose legislation singling out the Caisse for discriminatory treatment ( notwithstanding that the Senate Committee hearings on S-31 confirmed what was already obvious, viz. that

30 The business and government positions taken on Bill S-31 are examined in detail in chapter four of Stephen Brooks, “Direct Investment by the State: Mixed Enterprise in Canada,” Ph.D. thesis, Carleton University, 1985. 31 In opposing Bill S-31, as drafted by the federal government, Pierre Lortie demonstrated the extent and indispensability of direct investment by the state in Canada. See his remarks in Senate, Standing Committee, Proceedings, November 30, 1982, especially p. 31:Q.

115 ADMINISTRATION PU~LIQUE DV CANADA


the real object of the proposed legislation was the Caisse). But because the bill’s application was general, covering all provincial governments and their agents, the issue was transformed from the cP/Caisse conflict, and the relationship of the Caisse’s investment behaviour to the economic policy preferences of the Quebec government, into the larger issue of the state as an investor in public companies, This was the contradiction in Bill 5-31 which rendered the federal government’s position untenable: if the issue was the state as investor in private sector corporations, Ottawa’s own direct investment activities were equally called into question. Having come to the aid of CP in that corporation’s confrontation with the Caisse (and, in a pre-emptive way, to the defence of other public companies with similar concerns regarding Caisse influence), the federal government found that it could not control the outcome of the 5-31 debate when the stakes were defined as the balance between the public and private sectors in the Canadian economy.

Representation Caisse officials maintain that the agency has no threshold level at which board representation is sought, but that their policy is flexible across investments, depending upon such factors as the expected duration of the Caisse’s investment and the proportion of equity held by the Caisse. The rejection of Caisse representation requests by Dominion Textile, Alcan and CP, respectively, during the period 1981-82, led to a reassessment of the Caisse’s method of acquiring representation. Instead of the pattern observable in the CP and Domtex cases, whereby the Caisse made a rapid and significant increase in its share of equity and then approached corporate management with a request that the Caisse be accorded the right to nominate members to the board of directors, one Caisse official observes that, “There are other ways to get representation on the board.” In explaining the Caisse’s ap- proach, this official points to the way in which the membership of a corporate board of directors is usually decided upon: One can’t simply point to a board and say, “Well he is their representative, and he is our representative,” and so on. A particular board may be proposed to us as a major shareholder, and we will indicate whether we are satisfied or whether we have reservations. At other times we will directly nominate candidates.32 This suggests that methods followed in seeking board representation have become more subtle, and indeed it is arguable that the Caisse’s record of non-interference in the management of Domtar since the 1981 takeover has contributed to an increased receptivity of the agency’s claim to repre- ~ e n t a t i o n . ~ ~ 32 Personal interview, February 3,1984. 33 In response to the statement, “The Caisse should be able to place its representatives on boards of directors,” a majority of CEOS surveyed in a recent study agreed that this



Currently, the Caisse has representation on the boards of approximately fifteen public c ~ m p a n i e s . ~ ~ In some instances the Caisse is represented directly. Carmand Normand, vice-president in charge of variable income assets, holds directorships on the boards of Provigo and Prenor; Jean La- brecque, vice-president in charge of fixed income assets, is a director of Trust General; Phillippe Girard, a portfolio manager with the Caisse, is a director of Gaz MBtropolitain; and Denis Giroux, the Caisse’s manager of equity investments, sits on the boards of Domtar, Le Groupe Vidkotron and La Verendrye. In other cases, representation is achieved through directors who are sympathetic to the Caisse’s views as shareholder. For example, Fernand Pare, a director of the Caisse, sits on the board of Noranda Mines which is controlled by Brascade Resources ( a partnership in which Bras- can holds 70 per cent ownership, and the Caisse 30 per cent). Antoine Turmel, chairman of the board of Provigo, sits on the boards of several corporations in which the Caisse has a major shareholding, including Quebec-Telephone, Noranda Mines and the Banque Nationale du Canada. Roger Charbonneau, president of Laboratoires Anglo-French LtBe, holds directorships on the boards of Rolland Inc., Gaz Mktropolitain, and Dono- hue Inc. (in each of which the Caisse is a principal shareholder). As a final example, Yves Pratte, a Montreal-based lawyer with close ties to the Que- bec government, was installed as chairman of the board of Domtar in December 1982.

In regard to the extent and nature of Caisse participation in corporate decision-making through representation on the board of directors, this varies with the particular circumstances of the investment. An example of very active involvement in the affairs of Caisse holdings was provided in the merger of three small food retailing corporations into Provigo, a reorganization which was spearheaded by the Caisse and which was con- gruent with the provincial government’s policy of encouraging, through merger, the creation of more scale-efficient corporations in the Quebec economy. While this intervention was unusual in its degree, it demonstrates the sort of circumstances which could compel the Caisse to play an active part in the decision-making of its investments. More generally, Caisse

right should be accorded the Caisse (anglophone CEOS, 52%; francophone CEOS, 60%; client CEOS, 52%). See Marcel CBt6 et LBon Courville, “La perception de la Caisse,” table 9, p. 82, 34 During the Senate Committee hearings on Bill S-31 the chairman of the Caisse, Jean Campeau, indicated that the Caisse had representation on the boards of “about fifteen companies.” He listed four of the corporations (Noranda, Brascade, Domtar and Gaz Mdtropolitain), but in response to Senator Godfrey’s request for a list of Caisse nominees who are not agency officials, Campeau would say only that they are prominent business people. While in its annual report for 1983 the Caisse discloses the publicly traded corporations in which the agency holds equity, information on Caisse-nominated directors who are not Caisse officials remains unavailable.

11.7 ADMINISTRATION PUBLIQUE DU CANADA


officials insist that juggling two fiduciary roles (viz. the Caisse’s responsibility to contributors to the Quebec Pension Plan and other citizens whose contributions are invested through the Caisse, and the responsibility to a corporation’s shareholders as a whole, which is incumbent upon any member of a public company’s board of directors) and an acknowledged economic development role may seem problematic in theory, but has posed no problem in practice.

The fact that the Caisse views board membership as a means of express- ing and protecting the agency’s preferences for its holdings is confirmed by the statement of a high-level Caisse official: “We at the Caisse don’t want honorary board members, and we don’t support the idea of non- voting participation or companies controlled solely by officer^.''^^ Repre- sentation is not sought as an end in itself but as a means of sensitizing a corporation to the provincial economic development goal which, within the constraint of the Caisse’s fiduciary role as the investor of various compulsory contribution programs, forms an acknowledged part of the agency’s mandate. In acquiring board representation the Caisse contributes to the achievement of an apparent goal of former Finance Minister Jacques Pari- zeau and the PQ government, namely, state representation on the boards of directors of major private sector corporations operating in the Quebec economy.

Given that the Caisse’s representatives are typically members of Quebec’s francophone business class, the process of Caisse influence through the board of directors of a private sector corporation clearly is more complex than participation through a delegate. And aside from the Caisse-inspired reorganization of Quebec’s food retailing sector, through merger leading to the creation of Provigo, it is difficult to isolate specific cases where Caisse representation on the board of directors of a private sector corporation has been used to influence particular corporate decisions. With representation being “indirect” (through members of the francophone business class who are considered sympathetic to the economic nationalism goals which in- form state economic intervention in Quebec), and Caisse decision prefer? ences being general rather than specific (in other words, that the indicative economic policy signals of the Quebec government figure as a constraint in corporate decision-making, not that particular investment or production decisions be taken), the board of directors of a public company is unlikely to be transformed into a forum for the reconciliation of sometimes con- flicting public and private sector goals simply because of Caisse representation. Caisse influence through representation on a corporation’s board of directors is properly understood as latent, an observation made by a senior official of the Caisse: “Certainly a corporation like Noranda is made more sensitive to provincial economic interests because of the Caisse’s ownership parti~ipation.”~~ 35 Personal interview, February 3,1984. 36 Ibid.



Conclusion Contrary to Pierre Fournier’s recent assessment of the Caisse, there is little evidence that the investment policy of that agency is influenced in a direct and systematic way by the political project of the PQ government. Fournier infers on the basis of a few isolated cases (notably Provigo, Vidbotron and Bombardier) that the Caisse has as its main objective to carve out an accumulation base for the emergent Quebec bourgeoisie. The instrumental relationship between the PQ government and the Caisse is, according to Fournier, an important means by which the “relative a~tonomization”~7 of the Quebec bourgeoisie is promoted. While there is a measure of truth in this interpretation, to the extent that the Caisse has both reduced the dependence of the Quebec state on non-francophone capital and contributed to provincial economic development through financing Quebec-based corporations, analysis of this investment agency’s evolution over time and the practical significance of its recent demands for representation on the boards of public companies in which it holds a large ownership stake discloses that the Caisse is more accurately characterized as a blunt tool of economic nationalism.

Indeed, the investment data presented in Table 2 suggest that a competitive return on investment is the principal consideration determining the Caisse’s direct investment decisions. This is not to deny that the agency has, from its inception, had a sympathetic relationship to the economic development objectives of successive Quebec governments. And indeed the Caisse’s recent demands for board representation and its role in the Domtar takeover indicate an increased concern with this dimension of the agency’s relationship to the provincial interest. However, from this evidence to the overstated claims of Fournier on the left, and spokesmen for the federal government and the Anglo-Canadian bourgeoisie on the right, is a leap which the evidence will not bear. To this point the PQ government has given no indication of being disposed toward the politically perilous exercise of reforming the Caisse’s charter and the agency’s relationship to state organs of economic planning - steps which would be necessary to transform the agency into the government-directed tool of nationalism which the Caisse’c more impassioned critics argue it has become.

37 Pierre Fournier, “The New Parameters of the Qukbec Bourgeoisie,” in Alain G. Gagpov, ed., Quebec: State and Society (Toronto: Methuen, 1984), p. 213.


Documents

Quebec's Caisse de dépôt et placement: tool of nationalism