Business

Why Your Taxes Keep Bailing Out Bombardier

With so many jobs and so much money on the line, the company is running the political equivalent of a protection racket

Photo by kenneth-cheung
kenneth-cheung

In a way, you have to admire their gall. After all, if you’d just gone to the government, hat in hand, begging for billions of dollars in taxpayer money to help save your failing business, you probably wouldn’t go looking for a raise. But that’s exactly what the executives at Quebec’s Bombardier received—and accepted—just months after hitting up the federal government for $372.5 million in interest-free loans and the government of Quebec for a $1 billion (US) investment in its troubled C-Series division, which was $2.2 billion over budget and more than two years late on its orders. And they didn’t just get a cost of living increase, either—the company’s six highest-paid executives saw their compensation rise by nearly 50 percent, to a combined total of $32.7 million. Even Postmedia’s Paul Godfrey, the CEO of a company that has a habit of handing out raises to its executives while it lays off its employees, would think twice about collecting a payout so conspicuously offside.

Bombardier can afford to be so brazen for two reasons. First, for all the government money that’s been poured into its coffers over the course of its fifty-year existence—upwards of $4 billion, according to some estimates—it’s still run like a family compact. The company’s dual-class structure ensures that the Bombardier family and that of Laurent Beaudoin, the son-in-law of founder Joseph-Armand Bombardier, retain full control over who runs the company. Unlike virtually all publicly-traded companies, the voting shares at Bombardier—the ones that decide who gets appointed to the board, who sits in its head offices, and ultimately who determines its direction—aren’t for sale. This structure isn’t unique to Bombardier, and it isn’t necessarily a guarantee that a company will be run poorly. But when a company with a dual-class structure is run poorly, that structure makes it far more difficult to do anything about it.

Second, and more counterintuitively, the sheer size of the government handouts appears to have strengthened Bombardier’s negotiating position rather than weakening it. As American industrialist J. Paul Getty once said, if you owe the bank $100, that’s your problem. If you owe it $100 million, it’s the bank’s problem. That’s the lucrative lesson that the families behind Bombardier seem to have taken to heart. After all, for the last seventy-five years, the billions that the company has received from governments in Quebec, Canada, and even Great Britain haven’t just helped to keep the lights on. They’ve also bound its interests ever more tightly with those of the governments who have helped to underwrite its operations—and made it impossible for those governments to cut off the flow of funding, like a tumour that’s pressed itself up against a bunch of vital organs.

That’s why, when asked about the generous raises that Bombardier’s executives received, Prime Minister Justin Trudeau responded in measured terms. “We respect the free market and the choices that companies will make,” he said. “But we also have a responsibility to ensure that the investments we make with taxpayers’ dollars are leading to good jobs and growth.” And therein lies the rub. As much as Trudeau or any other federal politician might like to cut the cord and let Bombardier fend for itself, they know that the impact of that choice would be felt well beyond the walls of Bombardier’s head office. That’s because a cluster of high-value industries, and high-paying jobs, have developed to feed Bombardier’s supply chain. As Martin Patriquin noted in a Maclean’s story on the company, there were 41,750 people employed in Quebec’s aerospace industry as of 2014, and most of them were tied in some way to Bombardier.

In essence, Bombardier has developed—and perhaps perfected—the political equivalent of a protection racket. “Essentially,” Patriquin wrote, “Bombardier has made itself too big to fail.” Maybe. But it also appears to be too incompetent to succeed. The C-Series debacle is just the latest in a string of failures for the company, which appears to be incapable of delivering products on time and on budget. That’s already starting to have real consequences in Toronto, where worries that the company won’t meet its 2019 deadline for delivering 204 new streetcars forced the TTC to start pulling old ones out of service and begin retrofitting them. As the Toronto Star reported last December, that means it has had to redeploy buses to cover those routes, which in turn has led to more congestion and longer wait times—and spurred an open letter from TTC chair Josh Colle and mayor John Tory that called Bombardier out on its tardiness.

The company’s recent run of trouble, Patriquin wrote, is a reflection of a dysfunctional corporate culture—one that’s inextricably linked with the dual-class share structure that shields Bombardier’s founding families from the wrath of its shareholders. “The reason the company is where it is today is because of the leadership,” a former Bombardier senior executive, who spoke to Maclean’s on condition of anonymity, told Patriquin. “Pierre would never have been CEO of that company if he didn’t have his name, period.” This may be yet another example of what Douglas Cumming, a finance professor at York University’s Schulich School of Business, called the “idiot heir” problem in a 2016 interview with Bloomberg’s Eric Lam. “It’s a problem when the people with the dual-class control are no longer the same people you started with.”

One of those people, Laurent Beaudoin, did step aside for current president and CEO Alain Bellemare in 2015. But he didn’t exactly go away—and as the chairman of the board, he was the one who approved the recent odious pay increases. And while they were linked to so-called performance objectives, including “securing significant C Series contract orders,” those orders were secured by nearly giving them away. A Reuters story earlier this year cited two sources familiar with the deal who said Bombardier offered a two-thirds discount to Delta Air Lines, which agreed to buy seventy-five of the jets, in order to win their business over Brazilian rival Embraer SA. That version of events is supported by the $500 million “onerous contract” charge Bombardier booked in the second quarter of 2016 related to the Delta order, and a separate one from Air Canada (an onerous contract is one where the cost of fulfilling an agreement is higher than the economic benefit obtained from it).

On its own, this is bad enough—but it’s compounded by the fact that the C-Series also ended up costing Bombardier upwards of $2 billion more than it had expected. If you can only sell your products at a loss, what’s the point of making them in the first place? Bombardier’s answer, it seems, is because governments continue to allow them to. There are an awful lot of federal and provincial seats in Quebec, and as long as Bombardier is able to link its existence to that of thousands of good-paying jobs, the politicians who hold those seats are going to be reluctant to cut Bombardier off, however much they might want to.

Then again, Bombardier’s management may have finally overplayed its hand. With a White House that’s obsessed with the idea of so-called “fair trade,” and a renegotiation of the North American Free Trade Agreement near the top of its agenda, the subsidies that Bombardier has traditionally received could be seen as putting competing American firms at a disadvantage. Bombardier also has to face down the mounting public scrutiny over its compensation practices, both from outside and within Quebec. On Sunday evening, Bellemare announced that he’d asked his company’s board of directors to defer 50 percent of the pay they’d awarded the company’s six top executives until 2020.

That might placate a few of the company’s critics, but it won’t address the fundamental rot at its core, which could very easily add Bombardier’s name to the list of Canada’s biggest corporate disasters, alongside Nortel, Blackberry, Bre-X, and Valeant. That’s why, although it’s too late to unwind the most recent round of taxpayer-funded cash infusions, it’s time to start to preparing for the next one. The federal government needs to be ready with its list of demands, beginning with the elimination of the dual-class structure. The company needs to operated in the best interests of all shareholders, not just the ones related to its founders. To their great credit, the Bombardier family has built an iconic business, one that employs thousands of people and generates billions in tax revenue. Let’s not let them destroy it.

Max Fawcett (@maxfawcett) has written for the Globe and Mail, Hazlitt, and Eighteen Bridges.

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