The fate of Hydro One has been troubled since the election of Doug Ford as Premier of Ontario last year. One of Mr. Ford’s main platform pitches during the election campaign was that he would fire Hydro One’s CEO, Mayo Schmidt, not because of poor performance but because of his compensation, which Mr. Ford erroneously tied to Hydro One’s rates. The board of directors resigned and a new board, with the required four provincial nominees, was appointed. The Ford government then passed the Hydro One Accountability Act, which provided that any board-approved compensation framework would be ineffective until approved by cabinet.
The new Hydro One board undertook a detailed and robust process in arriving at the proposed compensation of its next chief executive. It proposed that the CEO’s total compensation would range from a target of $2.475-million up to a maximum of $2.775-million, with a cash $750,000 base salary and the remainder in performance bonuses and shares tied to benchmarks. The data on which the board based its decision are comprehensive, containing compensation data for CEOs of 13 peers consisting of public- and private-sector entities which include six utilities.
Hydro One’s key metrics are above the median of its peers, while the proposed CEO compensation of $2.475-million is below the median. Arguably, Hydro One would be justified in setting CEO compensation at $3-million, bringing it more in line with its peers. Furthermore, Hydro One’s proposed range was at the bottom of its list of peers and would result in a reduction of more than 60 per cent in CEO pay, consistent with Mr. Ford’s promises to the electorate.
Yet, even this proposed reduction was unacceptable to the Ford government. Ontario Energy Minister Greg Rickford stated, “Hydro One’s board has delivered a framework that we do not believe adequately addresses the interests and concerns of Ontario’s ratepayers.” Let us pause for a moment and ask: What are the interests of Ontario’s ratepayers? Yes, we care about hydro rates, but we must all realize that Ontario’s hydro rates are set by the Ontario Energy Board (OEB), not Hydro One. CEO compensation is not causally related to a decrease or increase in hydro rates. All executive compensation, including CEO pay, is excluded from the “rate base” allowed by the OEB. Hydro One has made this clear in its published framework. Therefore, reducing CEO compensation further has zero impact on the costs of energy in the province. CEO compensation is borne entirely by Hydro One shareholders.
The purpose of examining comparables is to ensure that Hydro One is competitive with other Canadian publicly traded and government-owned utilities and energy companies. The proposed peer group reflects both its core business as well as the complexity of a publicly traded company. Why would qualified individuals come to work at Ontario Hydro for much less compensation? The Ford government is making it extremely difficult to recruit and retain a suitable, experienced, public-company CEO at its proposed compensation level.
At issue is not simply the compensation of the next CEO, but the ability of the Hydro One board to fulfill its statutory obligation to act with a view to the best interests of the corporation. Hydro One’s corporate-governance guidelines explicitly state that shareholders “will provide their collective advisory role” and the “the directors of the corporation remain responsible for overseeing the corporation’s executive compensation practices.” Can the board fulfill its fiduciary duty to the corporation by acquiescing and accepting the province’s constraint on compensation?
Mr. Rickford threatened to “take any and all action necessary” if the Hydro One board does not comply with its ceiling. But let’s be clear: When government sets a ceiling on CEO pay of $1.5-million, it is interfering with one of the main responsibilities of the board and substituting its politically driven judgment for that of experienced board members bound by a fiduciary duty to act with a view to the best interests of the corporation.
The questions arise: How did the government arrive at the figure of $1.5-million? What was its process? Where are its comparables? How will hiring a CEO with this compensation package lead to lower hydro rates? These questions must be asked and answered if the government’s intervention in the decisions of Hydro One’s board are to be understood and supported by the people of Ontario. More transparency, please.
Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto.