AIMCo ‘reset’ raises concern over political influence

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If there was any doubt Danielle Smith’s United Conservative Party government wanted a firmer hand in the direction of the nearly $170-billion Alberta Investment Management Corp., that evaporated on Wednesday.

In a news release, somewhat buried by the appointment of former Prime Minister Stephen Harper as AIMCo’s new chair, the Alberta government announced that one seat on the 11-member board will be reserved for the deputy minister of treasury board and finance. It won’t be a paid position: the high-ranking bureaucrat will be there “to ensure more consistent communications between AIMCo and Alberta’s government,” the release said.

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While the arrival of Harper and the new board seat have given the government the “reset” it sought following the purge of the Crown corporation’s entire board and chief executive earlier in the month, they are also raising questions about just how much sway the government will have over the investment manager, whose mandate spells out that day-to-day investment decisions are to be made “free from any influence or direction from the government of Alberta.”

“I’m worried about the increased number of political appointments on the board,” said Sebastien Betermier, an associate professor of Finance at McGill University and executive director of the International Centre for Pension Management. “This will potentially undermine the fund’s ability to operate at an arm’s length from government, which is a critical element of the Canadian model.”

In media interviews, Alberta Finance Minister Nate Horner pledged to make only minor tweaks to AIMCo’s mandate and to avoid exerting political pressure. He also said Harper’s stature, having run the country for nine years, would make it difficult for anyone to tell him what to do.

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However, sources close to AIMCo have said that it was clear for months that the government wanted more control.

One of Harper’s first jobs is expected to be to try to reassure stakeholders — including investing partners and the teachers, judges and police officers who rely on AIMCo to manage their pension funds — that the Alberta investment manager won’t stray too far from Canada’s globally recognized pension model, which, with rare exceptions, puts risk-adjusted returns ahead of all other considerations.

Against this backdrop, he will also have to oversee a search for a new CEO who can juggle running the large Crown corporation while satisfying the government’s plans to grow the $25-billion Alberta Heritage Savings Trust Fund, which AIMCo manages.

“A large and sophisticated investment organization like AIMCo is complex to manage and involves large and elaborate transactions, especially when it comes to derivatives and private market deals,” Betermier said. “I often like to think of large pension funds as supertankers,” he added, noting their size and the multifaceted operations that make them challenging to steer.

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One reassuring development this week, he said, was that three of the 10 jettisoned directors returned to the board Wednesday. They include Jim Keohane, a pension fund veteran who retired as CEO of the successful Healthcare of Ontario Pension Plan (HOOPP) in 2020.

“The prospect of an entirely new board was terrifying,” Betermier said. “Continuity at the helm (is needed) to ensure the ship travels fast and safely.”

The machinations at AIMCo over the past couple of weeks have drawn attention both within Canada and globally, where the country’s largest pensions, known informally as the Maple 8, are closely watched and their strategies are often emulated.

“We are not going to know the extent of government interference (or) influence for a couple of years,” said Jim Leech, a former CEO of the Ontario Teachers’ Pension Plan Board, which was a pioneer of the Maple 8 model of direct investment and internal management of globally diverse public and private assets.

“However,” he said, “the out-of-the-blue purge of board and management … and the appointment of the DM (deputy minister) to the board has sent all the wrong signals to employees, potential partners, AIMCo clients and the financial markets.”

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Leech also pointed to conflicting narratives about the wholesale boardroom and executive change — ousted interim chair Kenneth Kroner sent a letter to the government disputing their public statements about costs and returns — and he predicted that it will take several years for the fund to regain the confidence of the markets.

“That process will only start with the appointment of a legitimate CEO and the release of a new strategy, appropriate for the clients,” Leech said.

He noted that this isn’t the first time Alberta’s government has installed a senior bureaucrat on AIMCo’s board to keep an eye on things and that the previous experiment, in 2007 and 2008, didn’t last long.

“There was an outcry from the board and management and others in the financial community that that was a big mistake,” he said. “So (the) government removed him.”

Back then, AIMCo, an arm’s-length Crown corporation, had just been created, with investment management operations and $70 billion in assets spun out from within Alberta’s finance department. By that time, however, Ontario Teachers’ and the Canada Pension Plan Investment Board, already seasoned investors in private and alternative asset classes such as real estate and infrastructure, had demonstrated that operating independently of political whims could generate steady long-term returns.

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Leech sees AIMCo’s latest moves as a regression and a threat to the Canadian pension model. Other pension and governance experts say the board appointments announced so far could lead to significant changes at AIMCo, even if pressure isn’t applied explicitly.

“The developments over the past two weeks have shown an increased politicization of the process and this is a real concern,” Betermier said.

Simply having eyes on AIMCo’s operations from inside the boardroom today — overseen by the government’s top pick as chair  — could redirect the investment management organization to focus more on Alberta. Before the boardroom and executive purge, sources familiar with events at AIMCo said the organization’s international expansion — with offices opened in Singapore and New York over the past couple of years to hunt for private and co-investment deals in the United States and Asia — was a sore point for the Alberta government, which prioritized not only lower costs but also investment in the province.

One area of focus for the new board and management will certainly be on the home front: the Alberta government’s Heritage Savings Trust Fund, which represents about $25 billion of AIMCo’s $169 billion in assets under management.