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On Friday we received news that the Board of Trustees of the Colleges of Applied Arts and Technology Pension Plan had put its CEO on ‘administrative leave’ which is code for the lawyers are negotiating severance.  When I posted a comment on LinkedIn last week, I saw no other outcome that was going to work.

It’s been almost 20 years since Ontario issued its Report on the Expert Commission on Pensions titled A Fine Balance which was authored by Harry Arthurs as commissioner.  Deep in the report is recommendation 9-2 which calls for the “growth and operation of large-scale pension plans or…enable or encourage cooperation among small- and mid-size plans”.  The rationale for this recommendation was that larger plans – notably the largest government plans – had the most robust governance and in theory the greatest economy of scale.  Out of this recommendation, pension laws were changed in Ontario to allow the CAAT Pension Plan, and others, to fold in smaller pension plans in pursuit of this dream of better governance and economy of scale.

CAAT has been the most effective at responding to this call to action and has folded in hundreds of smaller pension plan for employers that have decided that participation at arms length in a ‘target benefit plan’ is better than full control over a single employer pension plan (I recently had an argument with a lawyer that thinks CAAT is a defined benefit plan – I call it a target benefit because a material level of benefits being ‘targeted’ are not guaranteed). 

I have always tried to give the best advice that I can regardless of my commercial interests, and we have in fact worked with several clients to consider the option of joining CAAT and a few have made that choice.  Explaining when CAAT is the right answer and when it is not, is beyond the scope of this commentary and is always highly dependent on the structure and the goals of the organization considering the option to join.  What I will acknowledge is that to this point in time, CAAT has done an incredible job marketing their plan.

Governance 101

So, with the noted success of CAAT over the past decade, what has gone wrong?  There seem to be three separate issues surrounding the CEO.  A relationship with a member of staff, an enormous $1.6 million payment in lieu of vacation, and the simultaneous resignation of three of the six top executives.  It is quite possible that the third is related to one or both the first two.

I can only work with what is rumored in the media – but my suspicion is that most of the facts are there to explain the departure of the CEO.  What is interesting is the departure of the chair and vice-chair of the Board of Trustees.  I am not sure we will ever know the true order of events, but surely some or all the Trustees were involved in approving the three situations noted above.

On the issue of a personal relationship with a member of staff, I am not sure what anyone was thinking.  Personal relationships in the workplace are not uncommon.  The catch is that in any well-run organization there are ‘rules’ to ensure lines are not crossed.  The golden rule in these circumstances is that no individual should form a personal relationship with someone over whom they can be seen to be able to influence their pay and promotions.  Over at RBC there is an ongoing case surrounding an alleged relationship that broke the rules.  I just can’t imagine the lapse in the CEO judgment here – but what is really surprising is a Board that thinks there is a way to put “guardrails” around the situation.  There is no guardrail that can prevent outsiders to pass judgment and the reputational damage that results.  No surprise to anyone, there is also damage to the culture and morale internally and my understanding is that recent turnover is higher than usual.  Building a capable team takes time and unnecessary turnover is expensive and stressful.

But to me, this part of the story makes me feel like we are driving past an accident on the 401 and knowing that taking a peek helps no one – we look anyway because we are curious how bad of an accident has held us up.

Money

In what world does someone accrue $1.6 million in vacation pay?  CAAT doesn’t pay bonuses and surely the CEO to this moment has done a fine job building a team and building a resilient pension program.  Was this a backdoor way to pay a bonus for good performance?  Union and non-union trustees alike should have asked some hard questions.  For the Board to now turn around and say they don’t like what is going on seems like window dressing to me.

Harry Arthurs thought ‘bigger was better’ and we hear that all the time from the Maple 8 as if they have cornered the market on running a good pension plan.  Hidden costs and super high contribution rates are the main part of the story for these mega pension plans – but don’t expect that level of honesty from the managers of these plans.  At least with a plan like CAAT, the contributions are transparent although the level of funding is largely presented as a ‘trust us’ message.

The problem I have with very large plans is the desensitization to costs.  With $25 billion in assets, surely some CAAT Trustee thought $1.6 million was only 0.06% of assets – a rounding error at that level.  I won’t be surprised when the even larger severance package is justified using the same metric.  Don’t forget there were at least three other severance packages paid out to quiet the noise – or attempt to quiet the noise, because that action now amplifies the spotlight.

People

More than anything, this is a story about people.  A CEO and a staffer that chose to ignore the known rules of workplace relationships, a group of senior executives that tried to take the high road, and a group of trustees that must have thought the CEO could walk on water and needed to remain regardless of the compromises chosen.  So many warning flags and yet the Board let three capable executives leave to only fail in its attempt to keep the messiah.

Having taken the Directors Education Program and U of T, I can tell you, and my friends from DEP64 can tell you also, being a director is not always an easy job.  Disagreements on strategy arise and selecting, managing, terminating the CEO is extremely difficult.  The danger is ‘board capture’ where the Board feels that they would be lost without the CEO and therefore need to protect the CEO to keep them in place.   Directors would be wise to read the room and figure out how to stay on the good side of the CEO lest they be dismissed.  I have a long history of failing to read the room and here I am out on my own, free to express my opinions, but it comes at a cost.