Two years ago, it would have been hard to find more satisfied shareholders than those who held CP Ships Ltd. in their portfolios. Since the Gatwick, England-based company had been spun off from the old Canadian Pacific conglomerate of hotels, railways and freight ships in 2001, its stock price (TSX: TEU) had been on a tear, soaring to a high of $30 in 2003, from just over $11 when it started trading in, October 2001. And it wasn't just shareholders that were happy. Ray Miles, the veteran CEO who built CP Ships into one of the industry's most-respected companies, decided to retire on a high note. The succession would be smooth as he ceded the helm in May 2004 to Frank Halliwell, his longtime associate and the company's chief operating officer, whom investors were sure would help CP Ships ride the wave of expanding global trade.
But the company's fortunes quickly ebbed as corporate governance missteps and strategic blunders left one of the shipping industry's biggest success stories floundering. Troubles began last August when a serious accounting glitch forced CP Ships to restate nine quarters of financial results. But they only got worse. Company executives not only had to disgorge bonuses awarded as a result of those inaccurate financial statements, they also became the subject of an insider-trading investigation after it was revealed they had sold more than $1 million in stock prior to going public with their accounting woes. Those scandals, along with the sudden resignation of Halliwell in December after just seven months as CP's skipper, led many shareholders to jump ship. Then, last month, CP Ships announced it was in talks that could lead to its sale–a repudiation of its long-standing strategy to be a buyer rather than a seller in the consolidating shipping industry. “This has been a very tough year for CP Ships and its shareholders,” says Craig Sirois, an analyst with Value Line, the New York research firm. “Both management and the board have had to deal with a lot of unpleasant stuff.”
The events of the past year have shown that even companies with a model board of directors are not immune from dealing with serious governance issues. While neither CP Ships management nor its directors would comment for this story, the company has traditionally boasted about its commitment to good corporate governance. Even in its first annual report as a stand-alone company, then chairman Viscount Weir bragged about CP Ships' “high levels of disclosure, transparency and corporate governance.” In subsequent annual reports, CP Ships would continue to tout its governance, citing high marks in independent surveys by the University of Toronto's Rotman School of Management and media outlets. The board's willingness to recruit independent directors (including Peter Dey, a former chairman of the Ontario Securities Commission) and ensure that its key compensation and audit committees were independent, helped CP Ships win a place among the best boards in our 2004 annual corporate governance survey.
Unfortunately, all those independent directors and kudos for good governance were not enough to stop the company from making a number of mistakes that led to a loss of shareholder confidence–and CP Ships' exclusion from this year's best board list.
Unlike in the cases of more notorious financial restatements at Nortel and WorldCom, there are no accusations of any intentional malfeasance behind the overstatement of CP Ships' profits. How the company handled its accounting difficulties, however, left a sour taste in the mouths of many shareholders. Sharp-eyed investors might have got an inkling of what was going to happen back in May 2004 when CP Ships announced solid first-quarter profit and revenue growth–and that, by the way, new accounting software revealed that it would have to shave US$8 million of its previous year's profits. The company assured shareholders there was nothing to be worried about and predicted continued solid growth.
Despite the assurances, there were, indeed, problems. In August 2004, shareholders where shocked to learn that US$41 million would be erased from previously reported profits over the past two years. Some industry observers pointed out that had CP Ships' managers spent less time shopping for new acquisitions and more time integrating what they bought into the company's global systems the accounting fiasco might not have happened in the first place. “For years, it has been an open secret in industry circles that CP Ships had not taken the difficult decisions to combine IT systems as it headed off on the acquisition trail,” said an August 2004 opinion piece in Lloyd's List, a trade publication that covers the shipping industry.
Meanwhile, as investors encouraged by CP Ships' confident talk continued to buy shares, some company executives were selling. In May and June last year, Miles and several others exercised stock options or outright sold more than 200,000 company shares to reap more than $1.4 million in profits. If that wasn't bad enough, shareholders learned months later that the company had accelerated the vesting schedule for options held by Miles just prior to him stepping aside as CEO to take on the role of chairman. “I'm no expert on the legal issues surrounding these problems,” says Fadi Chamoun, an analyst at Toronto-based UBS Canada. “But the fact that senior officers traded stocks with knowledge of material information has damaged their credibility in the eyes of investors.”
The Ontario Securities Commission agreed. The regulator issued a letter to CP Ships stating the company should have immediately notified shareholders about its accounting problems and stopped insiders from trading while that information remained undisclosed. It was only CP Ships' subsequent co-operation with regulators, as well as its promise to redirect the money made from the insider stock sales to the Mutual Fund Dealers Association of Canada's Investor Protection Corp., that stopped the OSC from calling for a full hearing.
Shareholder credibility took another hit in December when Halliwell abruptly quit as CEO. The resignation was unrelated to the restatement debacle but rather due to “differences with the Board on future direction of the company,” CP Ships said in a terse news release at the time. That disagreement likely boiled down to one executive wanting to sell the firm and the other wanting to keep it independent. After all, “We will be a diner, not dinner” is one of the favourite phrases Miles used to describe his company.
Unfortunately, it doesn't look like it will work out that way. CP Ships has already confirmed that it is in talks regarding a sale. And while governance issues may have prompted the precipitous drop in the stock price over the past year, the company's fate was sealed by its decision to ignore Asian trading routes and therefore miss out on the explosive growth in China. “The company has lagged its peers in terms of profitability and growth,” says Chamoun. “It wasn't well positioned for this cyclical upturn, which was primarily driven by strong growth in freight volumes on east-west trading routes, and it didn't have quick access to reasonably priced assets to respond quickly to [that] upturn.”
Despite missing out on the Asian boom, CP Ships continues to post stronger-than-expected financial results and to rebuild after the disasters of the previous year. As recently as August, the company reported substantially higher shipping volumes, revenues and profits. Those healthy results, as well as rumours that the company could soon be sold, helped push the stock back up around $22 per share–close to its highest level since the accounting restatement.
In the end, despite any mistakes CP Ships may have made, its strong management and board have helped the company stay afloat when some weaker companies would have sunk. And ultimately, isn't that what good corporate governance is supposed to be about?