Anita Anand is a professor of law and is cross-appointed to the Rotman School of Management at the University of Toronto @anitaanand2.
A central pillar of Doug Ford’s election platform was bringing Ontario’s hydro rates down. He erroneously claimed that replacing Hydro One’s board of directors and CEO was a means to this end. This faulty assumption bears little relationship to the fact that Ontario’s hydro rates are set by the Ontario Energy Board. Intervening in Hydro One’s governance was sure to damage the corporation. And that it has.
Last week, the state of Washington rejected a deal that would have seen Hydro One acquire Avista for $4.4-billion. The reason? The Ford government’s interference in the affairs of what Avista (and the market as a whole) previously understood to be a public corporation. This week, Standard & Poor’s, which had already lowered Hydro One’s credit rating, warned that it may downgrade Hydro One again. (Separately this week, Moody’s cut Ontario’s credit rating for the first time since 2012.) Meanwhile, costs of the cancelled Avista deal continue to mount, including the US$103-million termination fee and the $49-million in commissions to investment banks, not to mention adviser fees.
Now some claim that the Avista deal itself was good neither for Hydro One nor for the province of Ontario. That claim misses a larger point about governance. Corporate law requires board members to act honestly and in good faith with a view to the best interests of the corporation. Every decision that the board makes, such as a major transaction like the takeover of Avista as well as chief executive compensation, must be made in accordance with this duty. This rule does not allow the board to prioritize the interests of any one stakeholder over others, meaning that the board cannot simply execute the political wishes of the provincial government, even if it is a 47-per-cent shareholder.
Now there is no doubt that the past board, as well as the present board, of Hydro One are aware of this basic point. Without question, boards of Ontario’s arm’s-length bodies are continually dogged by the threat of government intervention, a government that claims to be acting in the interests of the people of Ontario. In Hydro One’s case, the reality is that the corporation has suffered immensely and hydro rates have not come down. The Ford government is not acting as a majority shareholder but as a political overseer, poking its fingers into the governance of what is supposed to be a public corporation.
This can happen when the objective of the controlling shareholder is not maximizing shareholder value. But when government puts a Crown corporation into the public markets, it must allow the corporation (and its board) to operate as a public company that is not subject to political whims of the day. It must not abuse the facts and misguide the electorate by explicitly stating that its interventions in corporate governance will bring hydro rates down. Hydro rates have not come down, as they are unrelated to executive compensation.
Yet the Ford government appears not to understand these basic points. Ontario Energy Minister Greg Rickford stated that “… this is a private company, but in many respects resembles a public utility, and we have a corresponding obligation to live up to a campaign promise that would reduce hydro rates.” Let’s be clear: This is not a private corporation at all. It did an initial public offering to bring in public shareholders, and its shares trade on the Toronto Stock Exchange. Minority shareholders are now stuck with a very different corporation than the one they purchased when Hydro One went public, which undermines investors’ confidence in the capital markets.
But the larger issue here is the view taken by the Ford government that, at will, it can intervene in the affairs of arm’s-length bodies that are not established to run as political entities. Take the firing of Alykhan Velshi (who had previously been Patrick Brown’s chief of staff) at Ontario Power Generation, as well as the statement by Finance Minister Vic Fedeli that the government disagrees with the Ontario Securities Commission’s decision to propose banning certain commissions to dealers on mutual fund sales.
The bottom line is this: When a board of directors is formed to lead a corporation, let it do its job.