Potash mess points to golden share solution

The PotashCorp situation could have been averted through a golden share arrangement, writes Don Pittis

Harnessing market forces without losing national champions

When I worked in the woods and someone gashed themselves with an axe there was an official form you had to fill out that asked the question, "How could this accident have been prevented?" As you can imagine, the question on the accident report form — used for any accident, not just spurting axe wounds — often inspired humorous suggestions. "Victim should have found a cushy office job." "Accident would not have happened if crew had been sleeping in truck."

But as Saskatchewan goes through the turmoil of trying to maintain control of one of its most important industries, as the government spurts cash and political capital, it might be useful if someone asked the same question. How could this accident have been prevented?

The Saskatchewan government has been greedy. It wants the best of both worlds. A previous government sold the Potash Corporation of Saskatchewan to take advantage of the free market. Now another government of roughly the same stripe doesn't like the consequences.

Live by the sword, die by the sword, you might say.

And that is a completely fair thing to say. One recent letter to the editor in a daily paper makes the reasonable case that private shareholders have invested in a company the Saskatchewan government didn't want. The letter-writer says private shareholders should be able to sell those shares at a profit without the rules suddenly changing.

Both the province and Stephen Harper's federal government have been forced to take sides. Either they are in favour of shareholders' rights and the free market. Or they support hanging on to a Canadian industrial champion. Either way they offend a lot of voters.

The secret

Saskatchewan premier Brad Wall is "Canada's Hugo Chavez," said Andrew Coyne on CBC's Lang & O'Leary Exchange. For those who don't know Hugo Chavez, he is the Venezuelan leader who has forcibly nationalized large swaths of that country's commercial interests as the economy crumbles. 

But it didn't have to be that way. Instead of being Canada's Hugo Chavez, Brad Wall could have been Canada's Lula da Silva or Canada's Jens Stoltenberg. They are, respectively, the heroic president of booming Brazil, now stepping off the political stage, and the prime minister of Norway, the Nordic country with a $500-billion (yes billion) national savings fund filled with oil revenues.

Sorry Brad. It could have been so easy.

If only Saskatchewan had remembered the secret to national success. The secret of the golden share.

The golden share is the reason Canada's Inco, once the world's dominant nickel producer, is now the puppet of a Brazilian upstart and not the other way round.

The golden share (many shares in this case) is also the reason that oil wealth continues to pour into the pockets of Norwegian taxpayers instead of the other way round. 

With a golden share, the person or government that holds that share or block of shares must vote "yes" on crucial issues as outlined in the company's letters of incorporation. In the case of Norway's Statoil, the government holds a 67 per cent majority in the company.

But that does not stop them from taking advantage of the miracle of the free market.

Both Brazil's Vale and Statoil trade on the New York Stock Exchange. The companies have access to international capital markets and face the rigors of market competition. Both companies stride the globe, growing as they gobble up strategic interests in other countries, including Canada.

You can buy stock in either one. But you can't buy the whole company. Not unless the governments of Brazil and Norway say it's OK. It is very possible that Vale and Statoil will remain Brazilian and Norwegian forever. 

As with PotashCorp, the majority of Vale's and Statoil's resources (at least at the beginning) were at home. And it is true that no foreign buyer can move the potash in the ground offshore. Despite that, a growing number of Canadian business leaders have expressed concern that our corporate champions are being picked off one by one. And when you look at the national advantages of controlling Vale and Statoil, you can see why.

They will do most of their research at home. They will keep their head offices (their real head offices) at home. They will do business with banks from home and give money to universities at home and hire a majority of senior executives from their home market. Most of the important people in the company will speak the home country's language and relate to the home country's ideals.

When they have to chose whether to shut down two equally productive operations, when the choice involves one at home and one overseas, they will choose to keep the jobs at home. They will pay taxes in their home market. They will worry about how voters at home vote. They will organize new financial issues from home using home-based expertise, and their legal affairs will be controlled by firms close to their (real) head offices.

And as Chinese government-controlled entities increasingly strut the world stage, these kinds of companies are going become more, not less, common.

It's about control

The golden share principal — hanging on to voting control no matter what the other shareholders say — is by no means unique to governments. Or to overseas companies. 

Bombardier and Frank Stronach's Magna are two Canadian examples of companies whose founding families held on to control by using a special class of shares wielding the majority of votes. The news and financial agency Reuters had a golden share arrangement that had to be satisfied before Canada's Thomson could buy the company.

As we see right now with General Motors, governments often take control of companies when they are on the ropes. As with General Motors, governments tend to lose lots of taxpayers' money while doing it. In that way Air Canada, CN and many others have passed through government hands after public bailouts. That is the time for governments to set up the corporate structure that includes the golden share. 

For a more activist government, there are other techniques. Remember Petro-Canada? Except for an Alberta-based ideological backlash, it could be out trading blows with Statoil as we speak, pouring billions into our national nest egg.

The great thing about golden shares is that they never have to be used, and probably never will be. But they require forethought and planning.

When you have to ask, "How could this accident have been prevented?" the victim is on the way to hospital and it's probably too late.