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Poorly run = undervalued: An activist's theory

Stephen Griggs' new venture, Smoothwater Capital, is on the hunt for mid-tier companies in need of a boardroom shakeup

Stephen Griggs is putting one of his firmest beliefs to a real-world test, setting out to prove companies' profits will climb if their corporate governance is improved.

Mr. Griggs has launched a new foray into activist investing with Smoothwater Capital Corp., marrying his longtime interest in board governance with his earlier background in the mutual fund sector to help build a new investment portfolio that will acquire and restructure mid-tier companies that have good hard assets but are undervalued in the market and have weak boards or poor strategic oversight.

The investment model is a logical next step for Mr. Griggs, who is former executive director of the Canadian Coalition for Good Governance (CCGG), a powerful association of Canada's largest institutional investors whose mission for the past decade has been to improve board governance practices at Canada's largest companies.

"If you really believe good governance adds value, by definition bad governance in the broadest sense detracts from value," Mr. Griggs says. "So if you can find a company that has not been well governed in the broadest sense, you'll almost certainly find the market has not been giving full value to that business."

Among his targets are underperforming small firms with a board comprised of directors who are close associates of an entrepreneurial founder. Such boards may lack independence to challenge a CEO's weaknesses, and may lack other key skills such as strategic planning experience or knowledge of capital markets.

Smoothwater holds the investment assets of one man - Garfield Mitchell, a member of Canada's wealthy Weston family, who has spent decades building a portfolio of private holdings. Those assets were combined earlier this year to create a single fund called Smoothwater with Mr. Griggs becoming its first chief executive officer.

Mr. Griggs will not disclose the value of Smoothwater's holdings, saying only it is "in the hundreds of millions of dollars." But he says the fund has enough capital to do deals involving mid-tier companies valued at $150-million or more.

The first deal was unveiled in May, when Smoothwater announced it had acquired a 22-per-cent stake in Calgary real estate firm Genesis Land Development Corp. and urged the company to develop a clearer long-term strategic plan for its land assets.

After being rebuffed in attempts to reach an agreement with Genesis, Smoothwater launched a proxy battle, proposing a slate of directors for the company. Genesis countered with a court challenge, and succeeded in winning a ruling postponing the vote. The battle was settled in August with Genesis agreeing to add two of Smoothwater's proposed director nominees, including Mr. Griggs, who will become chairman of the board.

"I don't like fighting - to me you should focus on productive activities. And a proxy fight is really a last resort," Mr. Griggs said. "Unfortunately in this situation we had to do it, and it was a very expensive process for everybody. But we ended up at a good place."

Mr. Griggs is a former Bay Street securities lawyer who worked in the mutual fund sector for much of his career, including as chief executive officer of Legg Mason Canada. When U.S.-based parent company Legg Mason Inc. closed its Canadian operation in 2007, Mr. Griggs joined the CCGG as managing director in 2008, helping to promote key initiatives such as majority voting and say on pay.

He left the coalition in 2011 to become CEO of OPTrust, which manages $15-billion of pension assets for Ontario government employees, but the experience did not go well. Mr. Griggs was at the pension fund less than a year before departing amid a cloud of controversy. He alleged he was fired after trying to rein in "lavish" spending at the fund, while the board denied his claims and alleged he was fired for incompetence.

Mr. Griggs' wrongful dismissal lawsuit was resolved with a private settlement and a requirement that he not discuss details of the settlement agreement.

Now at Smoothwater, Mr. Griggs says his fund is facing its largest competition from U.S. investment funds also looking for turnaround deals at companies worth $150-million to $300-million in market value. One competitive advantage for Smoothwater, he argues, is that he knows the Canadian market and many people in the country's investment sector.

"It's about having relationships. ... It really is a small market, and people who invest in these smaller companies are even a smaller subset of that world. So having their confidence is very important to success."

© 2007 The Globe and Mail. All rights reserved.

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