Richard Guay and Henri-Paul Rousseau’s legacy

The departure of Richard Guay and Henri-Paul Rousseau was the best thing that could happen to the Caisse.

THE FACTS

Mr Guay was responsible for the ABCP fiasco as he was head of risk when the Caisse decided to buy 40% of all ABCP available. He was the person who increased the active risk budget of the Caisse just before the financial crisis of 2007-2008. He is the person responsible for the creation and implementation of a new compensation plan which lead to million-dollar compensation for himself and Mr Rousseau, and the departure of talented people.

HENRI-PAUL ROUSSEAU's LEGACY

Contrary to the popular belief, Mr. Henri-Paul Rousseau’s legacy was highly questionable. Henri-Paul Rousseau’s arrival at the Caisse was immediately followed by the firing of some 135 employees. These were quickly replaced. This show of authority ensured employees would follow his ideas – otherwise, you are out. Among those being fired, there were numerous Executive Vice-Presidents (EVP) who sits with him on various management committees. Those EVP were replaced with people close to him, many former Laurentian Bank employees ans some who were not qualified for the EVP position.

Mr. Rousseau, a former banker with NO EXPERIENCE in portfolio management discussed many times at the management committee his project of investing himself BILLIONS of dollars. Many members of the management committee were scared of such a thought. Fortunately, Mr. Rousseau’s busy schedule did not leave him the time to implement such a ridiculous plan.

Mr. Rousseau surrounded himself with many former Laurentian Bank employees.
Some of the most controversial nominations of Mr. Rousseau are:

Richard Guay: Former professor. Under Rousseau’s leadership, he had an impressive progression at the Caisse. He joined the firm in 1995 as a Manager of Performance Measurement and Analysis. From 1998 to 2002, he was Vice-President, Depositors' Accounts Management with the responsibility for clients’ communications and relationships. He was responsible for providing the Caisse captive clients with counsel on investment policy and asset allocation.

In 2002, the new President Mr, Rousseau decided to give Mr. Guay extra responsibilities: RISK MANAGEMENT. Mr. Guay, who had NO PRIOR EXPERIENCE IN RISK MANAGEMENT, did his best to do the job. One would have thought that in such a complex organisation like the Caisse, and without prior risk management experience, Mr. Guay would buy a third party risk system with proven capabilities. No. Instead, it was decided to develop an internal risk management system. After years of unsatisfactory results and realizing that it did not answer the needs of the various portfolio managers at the Caisse, it was decided to replace it by a third party system. While this third party system is used by dozens and dozens of investment managers, it took years to the Caisse and its inefficient IT department to get it to work. Meanwhile, many portfolios’ risk were either improperly measured or not measured at all.

It is under Mr Guay’s reign as Executive Vice-President, Risk Management and Depositors’ Accounts Management that risk in ABCP was taken. The Caisse’s position in ABCP is approximately 40% of all ABCP in Canada! This is not proper risk control.

The risk group is constantly being criticized for its inability to measure risk properly in many businesses. For those businesses where risk is measured, it is being measured with a ridiculous lag. In fact, risk measures in simple equity and bond portfolios are generally available 3 weeks after the end of the month! So if a portfolio manager makes an error early in the month, it can take up to 7 weeks for the risk department to react and panic. The norm today is to have risk measured on a daily basis. Errors do occur. Large Wall Street firms made huge errors in the past which were quickly detected by their risk system and the errors were corrected within hours – not weeks or months! Furthermore, the risk in some portfolios and complex strategies is either not measured, or measured by the portfolio manager himself!

In March 2006, Mr. Rousseau decided to promote Mr. Guay to the newly created position of Chief Investment Officer (CIO), in charge of all liquid assets: equities, bonds, and hedge funds. It created a lot of dissatisfaction internally as people did not accept the nomination of someone WITHOUT EXPERIENCE IN MANAGING ASSETS. There were internal fights following this nomination which lead to Mr. Guay firing the Executive VP Fixed Income.

One key initial decision by Mr. Guay was to increase the "active risk" taken by the Caisse – so much that various portfolio managers had to compete for either more risk budget or even keeping their risk allocation. Risk budget allocation was a new exercise which was not properly understood by those in charge. Some insiders say that the closer you were to Mr. Guay, the bigger the risk allocation you obtained.

At a press conference for his nomination as president on September 5 2008, a journalist asked about risk controls and ABCP. His answer was “new risk management procedures had been implemented to minimize a reoccurrence of the ABCP debacle.” (see The Gazette “ Guay takes charge at Caisse de dépôt”). “We will do better next time”! Coming from the person responsible for this huge mistake, one has to be sceptical…

Mr. Guay’s progression at the Caisse was impressive. In 13 years, He went from being a newbie to being promoted President!

1995-1998 Manager of Performance Measurement and Analysis
1998-2002 Vice-President, Depositors' Accounts Management providing the Caisse
captive clients with counsel on investment policy and asset allocation.
2002-2006 Executive Vice-President, Risk Management and
Depositors’ Accounts Management
2006-2008 Chief Investment Officer (CIO)
2008 President

Mr. Guay has a good academic background. His initial jobs were probably the only ones he was qualified for. Recognizing that, the Board asked him to go back to what he was best at: providing captive clients of the Caisse with counsel on investment policy and asset allocation, the responsibility he had before being given three promotions he was not qualified for.

The January 5 press release mentioned:

Further to this decision, Mr. Guay will continue to work for the institution and, starting January 8, will hold the position of Strategic Adviser to the President and Chief Executive Officer, providing counsel on investment policy and asset allocation.

Perhaps the Board recognized that he was appreciated by clients when he had those initial responsibilities. Clients may change their minds though once they know the truth.

The departure of Mr. Guay was known in advance. The Prime Minister may have asked Mr. Guay to postpone his announcement to after the election (2 days after). As it was too obvious, it was later postponed to January 5th. We know that the Caisse had hired an external consultant to advise on Mr. Guay’s compensation in his new consulting role (see La succession d'Henri-Paul, prise deux by Sophie Cousineau in La Presse January 6, 2009 http://lapresseaffaires.cyberpresse.ca/article/20090106/LAINFORMER0206/901060603/5930/LAINFORMER02 )
And we now know that the Government wants to replace some Board members before announcing the nomination of a new president. (see Charest close to naming new Caisse board in the Globe & Mail January 13th,
http://www.theglobeandmail.com/servlet/story/RTGAM.20090113.wrcaisse13/BNStory/politics/home )

On January 15, the Minister of Finance Monique Jérôme-Forget said that the risk of ABCP were not understood by the leaders of the Caisse (see Les PCAA incompris par les dirigeants, Journal of Montreal, Jan 15:
http://www2.canoe.com/infos/quebeccanada/archives/2009/01/20090115-091300.html )
Since risk was Richard Guay's responsibility when ABCP were purchased, why was he promoted President?

The Caisse does not need another politician. The Caisse needs a leader with strong investment experience in public markets.

Susan Kudzman: She joined the Caisse in 2005 as Executive Vice-President, Risk Management and Return following Mr. Guay’s promotion as CIO.

Previously, from 2000 to 2002, Ms. Kudzman was Chief HUMAN RESOURCES Officer at the Laurentian Bank where she worked for Mr. Rousseau ! and from 2002-2005, Chief human resources officer at BCE Emergis. She had NO EXPERIENCE IN MARKET RISK MANAGEMENT. The first month was very difficult for her as she felt she was not prepared for such a job. During a discussion with friends, she mentioned she was happy she was surrounded with people who seemed to understand the business.

The Caisse Web site strangely forget to mention that Mrs Kudzman was hired by Mr. Rousseau while he was President of the Laurentian Bank.
http://www.lacaisse.com/en/lacaisse/organisation/Pages/susan-kudzman.aspx

How can you go from being Chief Human Resources officer to Executive VP, Risk management and return? Among all the investment management firms that I have seen in Canada, the Caisse is the one with the largest number of portfolio managers and analysts, who are doing the most complex investment strategies. There is one simple maxim in risk management: If you can’t have an appropriate understanding of the risk of an investment strategy, you can’t invest in it. INVEST IN WHAT YOU UNDERSTAND, even if you forgo profitable investment strategies.

She did such a good job in HR at the Bank that Mr. Rousseau gave her the top RISK job, something she was not qualified to do.

The Caisse lost Billions in commercial paper and they are still counting the losses. With such lack of proper risk controls, shall we be surprised?

Michel Malo was hired in 2004 by Mr. Rousseau as Executive Vice-President, Analysis
and Optimization. Prior to joining the Caisse, he was Chief Investment Officer - Canada and Director of Portfolio Management at State Street Global Advisors where he was responsible for one of the largest fiasco in the history of Canadian Equity management. SSGA Canadian active strategy was among the worst performer over periods of 3, 4 and 5 years which lead to the loss of all clients, and the closure of the funds under management. Employees involved with the Canadian strategy were terminated. Michel Malo surprisingly managed to convinced Mr. Rousseau and the Board that after managing Canadian equities with such a bad track record, he was qualified to work on the asset mix of the Caisse – one of the most important investment decisions.

Did his questionable experience in Canadian equities made him qualified to be in charge of one of the most important decision that the Caisse take: the asset mix decision?

In the 2006 reorganisation Mr. Malo was appointed Executive Vice-President, Hedge Funds Investment Division. Was he qualified for such responsibilities?

Following his arrival in the hedge fund group, the unhappy commodity group reporting to him left and was replaced with a new junior group. Unfortunately, this new group kept the same high level of active risk as the previous experienced group and the young team lost over $100M in a few months before its active mandate was shut down. Was it normal to give the same high risk budget to a new younger team, even if these analysts showed great potential? Was it authorised by the risk group?

Why give an EVP job to an equity expert whose track record was among the worst?


THE IT MESS

In 1996, when the Caisse selected CGI as its outsourcing partner for its IT functions (infrastructure management, applications maintenance, consulting, development and integration), many employees (close to 100 !) of the Caisse were transferred then to CGI which allowed the Caisse to show that it had significantly reduced its number of employees. This arrangement has always been criticized for its inefficiency over the years. Recognizing the problem, the Caisse decided to bring back internally the development of specific computer systems in 2003 – yet still keep CGI as a significant outsourcing partner (i.e. with about the same huge budget).

Mr. V. P. Pham joined the Caisse in November 2003 as Executive Vice-President of IT. Prior to that, he was Executive Vice-President and Chief Information Officer working for Mr. Henri-Paul Rousseau at the Laurentian Bank.

Mr. Pham’s mandate at the Caisse consisted in providing the institution with quality and reliable information technology services. He is also responsible for ensuring the implementation of transformation programs to increase the effectiveness and efficiency of business processes. The truth: IT is highly bureaucratic. The projects of the IT group are multi-years projects. Even very simple projects take several years! It is a running joke at the Caisse. Nobody believes that this new IT group will deliver anything important – yet the IT budget is larger than the sum of all IT budgets for all investment managers in Canada. The absence of results in the IT group led to the development of separate smaller IT groups (thus a third layer) within investment groups. These smaller IT groups are closer to operations and therefore are able to answer the needs of the various groups much faster.

In a barely announced news, Mr. .V.P. Pham has left the Caisse at the end of 2008. GOOD! Is he going to work at Power Corp?

THE HR MESS

Not a nomination by Mr. Rousseau but a strange relationship:
Robert W. Desnoyers joined the Caisse de dépôt et placement du Québec in 2000 and is now responsible for all aspects of human resources management. Before joining the Caisse, he was in charge of HR at Laurentian Bank where he was FIRED by the then President, Mr. Henri-Paul Rousseau who hired Mrs Kudzman in his place!

In an internal survey at the Caisse, the HR group was the most criticized group and judged to lack competence. In a business where employee turnover is negatively viewed, the Caisse has one of the highest turnover rates in the industry. Competent analysts and portfolio managers are continuously leaving for better workplace. The Caisse uses a socialist approach in its employees' relationships. It is not your knowledge and expertise that counts but rather who you know. Following the nomination of Richard Guay as CIO, most projects have been frozen to allow a new parallel investment group (without experience) to grow - under the authority of Richard Guay!


The Caisse’s compensation program.

In 2006, Mr. Rousseau and Mr. Guay implemented a new compensation program which permitted huge bonus payments to portfolio managers delivering value added – what is called alpha in the industry. The key beneficiaries of this new plan were Mr. Rousseau and Mr. Guay.

The Caisse has been targeting an operating cost of 0.20% to 0.22% of total assets under management. With $155B, the Caisse can spend well over $300M. In order to make room for total compensations in the $millions, and because the total salary budget of the Caisse is pre-determined, the Caisse needed to contain salary expansion. A few measures gave room for those huge bonus payments:1. There was a hiring freeze – projects with pre-agreed hiring were frozen (except in new investment groups created under Mr. Guay where he hired inexperienced people and friends).2. Salary increases were rigorously capped like never before. This lead to numerous departures of talented people.

To illustrate, if you want to give an extra $1M to someone, you may need to subtract $10,000 from 100 employees

Mr. Rousseau and Mr. Guay managed to get a huge total compensation last year despite generating losses. The 2007 financial statement mentions that if the Caisse excludes the ABCP $1.9 Billion loss, the Caisse made a gain! WOW! Wouldn’t it be nice if all of us, analysts and portfolio managers, could exclude their major losses so that we qualify for a big bonus too!

TIME TO DO THINGS RIGHT

It is time for the Caisse to:
1. Hire a President with long financial market experience.
2. Hire a CIO with long financial market experience
3. Hire a Risk manager with long financial market experience
4. Hire an IT manager with long financial market experience
a. Develop or buy state of the art systems to monitor the Caisse portfolios and risk
5. Hire competent HR personnel with experience in investment management firms
6. Get rid of the bureaucratic mentality, the red tape.
Slim down the organisation. KEEP TALENT, not bureaucrats.
7. Get people with long financial market experience on the Board of Directors too!

Some people want to rush the replacement of the President. Let’s not make that mistake again. Let’s not forget that they were the one responsible for taking undue risk. We hear about potential suitor for the job. Please… do not name another politician, nor a bureaucrat. AND PLEASE NOT ANOTHER FINANCIAL NEOPHYTE!

Find a business person, but not anyone. Find a person with a LONG FINANCIAL MARKET EXPERIENCE. We do have talented people in Quebec. It is time to do things right

And stop presenting Henri-Paul Rousseau as God. Those who were there before his arrival know about the bureaucratic transformation that occurred at the Caisse. Many of the direct reports he hired were not qualified for such senior position - it is no surprise that they would tend to agree with him on various management committees.