It doesn’t take a rocket scientist, or even a corporate governance expert, to understand that having a former Ontario premier on a company’s board can offer plenty of potential upside, especially for an Ontario-based auto parts maker such as Magna International. Nevertheless, it isn’t hard to see why there is little shareholder support for Mike Harris in his current role as Magna’s chairman of the board.
As The Globe and Mail points out, when appointing directors, Canadian companies have no legal obligation to listen to the will of their equity owners. They don’t even have to release the results of votes held to gauge investor support levels for a company board.
Nevertheless, thanks to pressure from institutional investors, Magna has now released voting data from its last annual meeting. And it shows Harris and two other directors—Louis Lataif and Donald Resnick—were named to the board with the approval of less than 40% of the eligible voting shareholders.
According to the related press release, the low level of support for these board members stems from “the voting recommendation of a major proxy advisory firm which recommended that its institutional shareholder clients withhold their vote in respect of these three directors.” That advice, of course, stems from the perceived lack of leadership displayed by Harris et al. when they served on a Special Committee that didn’t take a stand against the unprecedented amount of money Stronach demanded last year in return for allowing Magna to ditch its former controversial dual share structure.
As Magna’s chairman, Stronach worked part-time. But he was still paid more than US$200 million during his last decade on the job. To give up control, he received US$300 million plus common shares worth another US$563 million at the time (thanks to a jump in share value related to his departure, these shares more than doubled in value after the transaction was done).
The deal, which diluted other shareholders’ holdings by about 11.4%, gave Stronach an unprecedented premium of 1,799% for his equity holdings. He also gained control of a potentially lucrative electric-car joint venture. And although he is no longer an executive, he’ll still participate in management profit-sharing programs until 2014, landing him an estimated US$120 million more.
Institutional investors believe the special committee should have advised shareholders that the price of freedom was too high. But Harris and the other directors involved didn’t make a recommendation for or against the deal, which was supported by a majority of shareholders.
There is no reason to suspect Stronach would have agreed to anything less. And as Magna notes, under the stewardship of Harris, the company’s first independent chairman in over 40 years, a wide range of corporate governance best practices have been adopted since Stronach left.
Magna would obviously like to move on. The problem, of course, is that Harris represents everything the institutional crowd hated about the old Magna. And the current controversy over his presence on the board is a natural extension of the Frank Factor—the term coined by market watchers to describe the discount attached to Magna shares when Stronach was at the helm.
There is no question that Magna was a my-way-or-the-highway company under Stronach, who famously founded the company in a Toronto garage in 1954 (after arriving in Canada with some tool-and-die training, and not much else, aside from natural business savvy and ambition). The only thing that kept Stronach in check was a corporate constitution, which tied executive bonuses to a fixed percentage of pre-tax profits (that’s why Stronach’s pay rose so high over the years) and ruled them out when the company was losing money.
The constitution also forced management to share the wealth in fixed amounts with line workers, shareholders, society and R&D. When it was introduced in 1984, Stronach said the goal was to prevent him from acting like greedy executives who “stuff their pockets with all the gold they can find.”
Years later, while I ate a “Frank Caesar” salad at the posh investors-financed restaurant attached to Magna’s investors-financed golf course, he explained how Magna executives will always be motivated to make profits because they will never get rewarded for failing to do so. Management at Magna, he insisted, gets paid well enough to survive downturns. And so they don’t deserve more money when the company isn’t producing more for all concerned.
Around the same time, I asked Harris about the institutional naysayers who see Magna’s board members as a bunch of sycophants. “Magna is unique. Magna is differen’t,” 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.”
But when the 2008 economic downturn cut into senior management pay, Stronach and Harris both managed to justify offering millions of dollars worth of one-time adjustments to Magna’s executive compensation packages. And that suspension of logic was nothing when compared to what was needed to justify Stronach’s buyout.
Magna is doing some things different since Stronach gave up control. For example, Magna recently announced it would be willing to embrace debt to finance growth, something Stronach always refused to consider (at least at his auto empire).
But by appointing a chairman that does not instill trust amongst shareholders, the company has shown that it still has a lot to learn about respecting its owners. And that adds insult to injury after justifying Stronach’s golden handshake as the cost of making Magna an investor-friendly company.
In other words, Magna appears to be maintaining the arrogance of the Stronach years while ditching Magna’s founder’s unwavering opposition to leveraging. And that does not appear to bode well for a company known for frequently wasting shareholders money in the past.