globeandmail.com

AN EXECUTIVE EXODUS RATTLES A STORIED FIRM

Wednesday, November 07, 2012

SEAN SILCOFF, JACQUELINE NELSON

OTTAWA and TORONTO -- A major shuffle at the top of investment management firm Jarislowsky Fraser Ltd. resulted from a decision by two of its top executives to start an investment counselling firm of their own.

The departure of president and director Len Racioppo, 56, and vice-president Marc Trottier, 53, who plan to start their own business with offices in their respective cities of Toronto and Montreal, was in the works for months, but sent shock waves through the money management industry.

Their move follows a string of recent departures by staff and an exodus by investors, as the firm founded in 1955 by outspoken, now 87-year-old billionaire chairman Stephen Jarislowsky struggles to find its place in a changing industry.

Five years ago, the firm managed about $60-billion in assets on behalf of pension funds and corporate and private investors, but today that figure has declined to about $37-billion. Some of that drop is attributed to changes in the investment world during the tense post-credit crisis period; there has been a shift away from active management of conventional equity and fixed income portfolios in favour of passive indexing on the one hand, and moves by some investors into "alternative assets" such as hedge funds and real estate on the other.

At least one client, Toronto-Dominion Bank's mutual fund arm, is known to have pulled more than $1-billion in funds from a subadvisory relationship with Jarislowsky Fraser. In addition, a wave of consolidation has swept through the industry, with several of the firm's peers, including McLean Budden, Phillips, Hager & North Investment Management and Howson Tattersall, picked up by larger financial institutions over the past five years.

But there has also been lingering uncertainty about the future of the firm given the age of Mr. Jarislowsky, who once quit the board of valve maker Velan Inc. after criticizing the founder as someone "who doesn't know how to let go."

Mr. Jarislowsky had publicly mentioned plans to retire before, and Pierre Lapointe, the company's new executive committee chairman, said that his move to step back from daily operations should not have been a total surprise.

"Mr. Jarislowsky is 87; it's not like he woke up yesterday or today and decided to do this," Mr. Lapointe said. "I think what happened with the departures of Len and Marc, this, if anything, just accelerated the process, but this is not the catalyst, it just made us deal with it right now, as opposed to wait six months, wait a year, wait something else."

Other sources hinted at lingering tensions concerning succession, ownership and compensation, but scant details were available Tuesday.

Rather than having a new CEO and president step in, the firm's new structure will see the four executive committee members split the task.

"We're making it more nimble," Mr. Lapointe said. "We're going to share the responsibilities based on specialties we do."

As a controlling shareholder, Mr. Jarislowsky will remain chairman of the board and, more important, will continue to manage some key private wealth clients, which he wants to do for as long as he can.

"He just doesn't want to be involved in the management decisions on a day-to-day basis, of running money management firm," Mr. Lapointe said.

Mr. Racioppo and Mr. Trottier each have more than 25 years with the firm.

Mr. Jarislowsky, a German-born self-made billionaire, has a net worth of $1.6-billion, according to figures from Forbes, and developed a reputation as a shareholder advocate. He co-founded the Canadian Coalition for Good Governance in 2002.

Known for being a sharp-tongued, shrewd, intelligent investor, Mr. Jarislowsky, a graduate of Harvard Business School, remained bitingly outspoken this year, slamming the Parti Québécois during the recent provincial election campaign.

Despite his strong, suffer-no-fools stance, he and the more low-key Mr. Racioppo presented a common, consistent front to the outside world. They were rarely at odds publicly, except for a rare instance earlier this year, when Mr. Racioppo commended the board of SNC-Lavalin Group Inc. - a major holding in Jarislowsky Fraser's portfolio - for its move to launch a comprehensive probe into missing funds. Just one month later, Mr. Jarislowsky publicly slammed the board for not doing enough.

The two men also made themselves readily accessible to the news media - until Tuesday, when the firm called in National Public Relations to handle enquiries and said the founder wasn't available.

Mr. Lapointe said clients should not expect the current investment strategy as a long-term, conventional independent asset manager to change.

"The style is not going to change," said Mr. Lapointe, "The players who pull the cords, that committee has not changed, and as far as new products, that's just something the committee is going to look at in the next few years based on where we want to go."

He also maintained the company is not for sale. "No, people have approached us, and there's always rumours and so on, but the partners have no desire right now. We're quite happy remaining independent and private."

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THE TOP 10

Stephen Jarislowsky's biggest battles

Canadian Tire

Opposed a 1986 deal would that have seen the Billes family sell its controlling voting shares without requiring a similar buy-out for non- voting shareholders, who owned 90 per cent of the equity. He called the offer 'unethical'.

Sun Life-Clarica

In 2002, Mr. Jarislowsky led a public campaign against excessive break fees in takeover bids after protesting a deal to pay Sun Life Financial Services of Canada Inc. as much as $310-million in fees if its offer to acquire Clarica Life Insurance Co. was trumped by another bidder.

Potash

Fought the proposed purchase of Potash Corp. of Saskatchewan in 2010 by BHP Billiton. He argued 'there isn't a country in the world' that would let a company of similar strategic importance be taken over by foreign owners.

Torstar-Southam

Mr. Jarislowsky helped lead opposition to a 1985 deal by Torstar Corp. and Southam Inc. to swap shares and take an ownership interest in each other's companies to help stave off a possible future takeover bid for Southam. Mr. Jarislowsky complained to the Ontario Securities Commission that the deal locked control of the company in Southam family hands and was unfair to minority shareholders.

Hollinger

Mr. Jarislowsky revealed in 2004 he had approached the Ontario Securities Commission three years earlier to investigate concerns about how Conrad Black was running Hollinger Inc. An opponent of side deals with insiders at Hollinger, he protested the payment of non-competition fees to Lord Black and other Hollinger insiders.

CCGG

Mr. Jarislowsky teamed with Claude Lamoureux, who was then CEO of the Ontario Teachers' Pension Plan, to form the Canadian Coalition for Good Governance in 2002. The CCGG has grown into Canada's most powerful voice for institutional shareholders, pushing major companies behind the scenes to improve their boardroom practices and reform their shareholder voting practices.

Nortel

One of the CCGG's behind-the-scenes campaigns encouraged by Mr. Jarislowsky in 2005 saw battered Nortel Networks Corp. replace five long-serving members on its board. Mr. Jarislowsky was critical of the board for the compensation plan it introduced in 2002, and the CCGG proposed names to Nortel in an effort to get the board to consider new director nominees.

Magna

Mr. Jarislowky was a long-time opponent of what he called excessive compensation paid to Magna founder Frank Stronach. In 2010, he urged shareholders to vote against Magna's proposal to pay Mr. Stronach $860-million (U.S.) to buy out his dual-class shares in the company.

Maple Group

Mr. Jarislowsky publicly backed a bid by Canadian-based Maple Group for TMX Group Ltd. in 2011 rather than see the parent of the Toronto Stock Exchange merge with the London Stock Exchange and lose its Canadian ownership. He argued the TSX didn't need to partner with the LSE to build a global stock trading business.

Stock options

Mr. Jarislowsky has been a consistent opponent of excessive compensation for top executives, and has often complained about the widespread use of stock options. He advocates banning their use, arguing options lead to short-term thinking and risk-taking because they reward executives who take temporary steps to push up the share price so they can exercise their options.

Janet McFarland

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