Fabrice Taylor is a chartered financial analyst.
ftaylor@globeandmail.com
Don’t let anyone tell you corporate governance is enjoying a renaissance. If it were, outgoing CEOs wouldn’t be decamping the corner suite under a cloud with briefcases stuffed with money.
But while it’s the departing company head who gets the blame, it should be aimed at the directors who agreed to his pay, and in some cases who hired him in the first place.
Robert Prichard was crowned Torstar’s TS.B-T CEO in 2002. Seven years later, not to mention an 80-per-cent drop in the stock from its peak, he rode off into the sunset with a severance package worth almost $10-million.
How did that happen? It turns out the board of directors last year renegotiated his contract so that he’d get the same terms if he left voluntarily as if he got sacked (without cause). Mr. Prichard must have haggled that one hard. Imagine that: he gets to save face by leaving “voluntarily” and he gets the gold plated good-riddance gift. If I’m reading the management circular properly, he’ll even get a pro-rated bonus for this year (quote: “In addition, Mr. Prichard will be paid his annual bonus for the year in which he resigns on a pro-rated basis when the bonuses are paid to other senior executives”). If so, that’s another million or so – breath-taking given the value destruction Torstar investors have suffered. The recession is one thing, but what has Torstar done in the past seven years to deal with the Internet threat?
“The CEO has a contractual right to receive severance, and the board honours that contract,” Torstar chairman Frank Iacobucci told peeved shareholders at the annual meeting. “The board unanimously determined that the arrangement was in the best interest of the company.”
Hard to see how shareholders benefit, unless he’s referring to getting rid of Mr. Prichard.
The former CEO, it should be noted, forfeited past stock options (not the ones he’ll earn this year though), but they were massively underwater and unlikely to surface ever again. And he’s bound by a non-compete. If I were a Torstar owner I’d want him to compete with my company.
But to repeat, don’t blame Mr. Prichard. We’d all take the money and run if the only inconvenience was the brief glare of a harsh spotlight. He was the wrong guy for the job – which is the board’s fault – and he was overpaid, also the board’s doing.
The situation at Manulife MFC-T is different. Dominic D’Alessandro was an experienced CEO who made bold moves that created value. But he made one fatal error – selling stock investments that guaranteed an investor’s principal. Manulife had been protecting itself from a downturn in markets but then stopped to improve earnings.
That crushed the company’s stock when markets tumbled, and Mr. D’Alessandro’s personal wealth. At the end of 2007 his Manulife shares and options were worth more than $100-million.
The board apparently took pity on the CEO and tried to give him $12.5-million (U.S.) for a few months work before he retired. Shareholders, needless to say, were not impressed. The move especially rankled because Mr. D’Alessandro was a voice of reason on governance over the years.
He modified the deal to make it more palatable. It still annoys some shareholders. Yes, he did a lot of good. But the earnings he generated were overstated because they didn’t factor in a drastic drop in stock prices. Neither did the board, which either didn’t know of the company’s decision to stop hedging or agreed.
Warren Buffett, who knows a thing or two about insurance, called the products Manulife sold “poison” from the perspective of the insurer. Those who sold them, he said, were “crazy.”
The common denominator is: What are directors thinking? Or are they? If anything, when you consider these failures, it should serve as a reminder that investing is as much about people as it is numbers – maybe more so. People make the decisions behind the numbers – behind the red ink in the case of both Torstar and Manulife. And it’s not just the CEO.
Some will ask why stop at directors? Blame investors, who elect them, or can if they rouse themselves to vote their shares. But I don’t think you need a mandate from investors to understand that Torstar needs a leader who understands new media, or that guaranteeing anything in the volatile stock market is risky. You just need common sense.
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Tags: corporate governance, D'Alessandro, manulife, MFC, Prichard, torstar, TS.B, Warren Buffett