I wrote a post about BCE converting from a corporation to an income trust a couple days ago that set off a veritable firestorm of comments from a few readers. It quickly became the most commented on post here, which is pretty cool.

So with that in mind I jumped at the chance to blog about this article in the Globe and Mail, which talks about the other advantage of income trust conversion:

They function as a kind of a leash on executives bent on sacrificing upfront, predictable profits in their core business in favour of empire-building or diversification. Because trusts pay out the bulk of their cash to unitholders, they are forced, in essence, to ask permission from investors every time they want to raise money for a large acquisition.

BCE has a long history of making big acquisitions that have led to huge losses. The temptation of management to reinvest profits from their core business into diversified ventures has repeatedly destroyed millions (billions?) in shareholder value.

Since the conglomerate enterprise was established during the early 1980s, BCE has got into and out of businesses as diverse as pipelines, packaging, commercial property, a trust company and a television network, frequently generating losses in the hundreds of millions of dollars on its investment miscues.

This is a common problem it seems with large corporations. They diversify to manage risk, ignoring the fact that investors already diversify their portfolios to manage the same risk. The only time it makes sense for a corporation to invest profits into a new venture is when it is so closely related to their core business that they can generate higher returns than an individual (or institutional) investor could by taking their share and investing it in the venture themselves.

This has very rarely been the situation for BCE’s investments, and that’s another reason, and potentially more lucrative than the tax savings, why income trust conversion is a good move for BCE shareholders.