Blogs & Comment

Frank, baby, our bromance is over

It is no secret that I am a fan of Frank Stronach, Canadas king of dual share corporations. If truth be told, a lot of other journalists actually think a desire to become Stronachs PR guy generated my man-love for the founder and chairman of Magna International. Not true.
Magna is perhaps the best-run automotive play on the planet. But Stronach has never let a reporters tape recorder stop him from speaking his minddespite all the controversy that typically surrounds his way of doing business. I like that.
Furthermore, the self-made empire builder doesnt accept that institutional shareholders should have excessive powers over executive pay or judgment, not to mention the lives of a companys workers. I like that, too. Why should hedge funds be able to force companies to borrow money to pay special dividends to short-term investors?
Stronach, of course, isnt perfect. I frequently use the word king to describe the manbut he does, too. He is a megalomaniac. But as a journalist in need of good quotes, that just makes me like him even more.
Anyway, I have always accepted that Magnas legendary corporate constitution is worthy of respect. Simply put, it was designed to make sure corporate profits are shared with employees and society. The Magna rulebook requires the company to spend 2% of pre-tax earnings on charitable works, twice the benchmark for corporate giving recommended by the Canadian Centre for Philanthropy. It allows managers to roll the dice as entrepreneurs, but sets limits on their ability to play around with shareholder money, which is why I always thought investors had no right to argue about Magnas foray into the airline business or the nightclub scene or magazine publishing or horse racing or whatever.
I have repeatedly attacked critics of Stronachs multimillion-dollar annual pay, because, thanks to the Magna constitution, compensation for the companys chairman and top executives has long been linked to a fixed percentage of pre-tax profits. That means whenever there was more money for management, the constitution made sure there was also more money for investors, employees and society. This, of course, is supposed to work both ways. Indeed, I once asked Stronachs lead director, Mike Harris, about the naysayers who called Magnas board a bunch of sycophants. Magna is unique. Magna is different, he said. The corporate constitution is essential to the success of the company. And if rigorously upholding the constitution means Magna’s directors are yes-men, then we are yes-men to the constitution, not Frank. I ate it upwhich is why I am now choking.
Frank, you have looked me in the eye (over a nice “Frank Caesar” salad, at your posh investors-financed restaurant, which serves your posh investors-financed golf course) and told me your executives will only get big bucks if there are pre-tax profits. You boasted about how much of an incentive that provides, precisely because the base salaries you typically offer are relatively low (not to average folks, of course). But now, when push comes to shove and the empire hits hard times, Magnas board has decided to offer one-time adjustments to executive compensation because the severe economic downturn that had started in the late summer of 2008 was not a mere cyclical downturn.
Magnas two CEOs, Don Walker and Siegfried Wolf, along with its vice-chair, Stronachs daughter Belinda, CFO Vince Galifi and COO Tom Skudutis, will be handed a combined salary top-up of more than $10 million (plus potentially lucrative stock options) for last year. In 2009, because this one-time assault on the Magna constitution will take place twice, they will split more than $14 million in addition to base salaries.
In the wake of hurricane Katrina, Stronach deployed his unique corporate powers as chairman of three dual-share Magana companies to whisk hundreds of storm victims to safety while Federal Emergency Management Agency officials were still untangling red tape. He then made a five-year commitment to help his chosen people rebuild their lives. He bought them land and built them a town. The Times-Picayune in New Orleans credited Stronach with being the individual who has done the most to shore up poor America’s leaking trust in capitalist society. They guys generosity “shames us,” it said.
But while Canadaville was a noble effort, it raised an interesting question for Magna apologists since it was actually built with shareholder resources. Magna initially announced it was going to make Stronachs Louisiana purchase, but project costs hit the companys constitutional limit on charitable projects, so a sister firm without a constitution to justify the action picked up significant costs. The sister firm in question was posting losses at the time due to its controversial ownership stake in Stronachs horse racing company that led investors to drag Magnas king to court.
At the time, my bromance with Frank (and a tour of Canadaville) convinced me this was somehow OK. I actually compared the guy to Thomas Jefferson, noting that when the former U.S. president made his Louisiana Purchase, in 1803, he decided it was a special case, one in which the greater good that came from controlling the Mississippi was more important than worrying about strict adherence to constitutional rules. I stand corrected. The Magna constitution is just for show.
DOUBLE TAKE:Aside from trying to promote myself while generating Web traffic that helps put bread and butter on my table, this blog aims to stir debate by taking a harder look at current news and events. I obviously enjoy voicing my own opinions, but I am a big boy and I welcome all comments that dont require R ratings. So let me have it via this blog or send me an email at tom.watson@canadianbusiness.rogers.com. I reserve the right to post email comments without disclosing the senders name. If you don’t think I am a total twit, follow my DOUBLE TAKE posts via my NotSOCRATES Twitter site at http://twitter.com/NotSocrates
THOMAS WATSONis a Senior Writer and editorial board member at Canadian Business magazine. Since winning a community journalism award as a cub reporter with the Hamilton Spectator in the early ’90s, he has covered business, finance, politics and technology for various news outlets. Prior to joining CB in 2001, he reported on the steel and automotive sectors for the Financial Post. Watson received his first magazine award nomination for exposing a stock manipulation plot aimed at Waterloo, Ont.-based Open Text in 2000, when he was head of investor relations for an international venture capital outfit in the City of London. Watson holds graduate degrees in journalism, international relations and public finance and undergraduate degrees in history and politics.