The composition of a public corporation’s board of directors is not usually affected by government elections. At Hydro One Ltd., however, the election of Premier Doug Ford occasioned a complete turnover of the board. Mr. Ford threatened that the province of Ontario, a 47 per cent shareholder of Hydro One, would fire the board of directors and CEO. In the spirit of the prevailing governance agreement between the province and Hydro One, directors agreed to resign once they were assured that the province would follow an orderly process for selecting the new directors.
Mr. Ford sought to rein in high hydro rates, which he harshly criticized on the campaign trail. But he seemed to have overlooked two points: first, the Ontario Energy Board, not Hydro One, determines Ontario’s hydro rates. Second, replacing the entire governance structure of Hydro One was sure to damage the corporation.
And that it has. After the removal of the board and CEO, Hydro One shares dropped to an all-time low of $18.57, down from a 52-week peak of $23.35. Shaving billions of dollars off Hydro One’s market cap has hardly benefited the corporation, its shareholders or the people of Ontario.
Referring to CEO Mayo Schmidt as the “six million dollar man,” Mr. Ford seemed to have misunderstood the compensation structure under which Mr. Schmidt was retained. Mr. Schmidt’s base salary, which was competitive with comparable corporations, was about one million dollars, and he was to be provided with additional incentives if aggressive targets were met. Our politicians have a moral responsibility to not tell false stories. Did Mr. Ford genuinely believe that Mr. Schmidt’s take-home salary was six million dollars, and that a new CEO acting under new, lower-paid directors would bring hydro rates down?
Let’s go back to basic corporate law for a moment. Board members must act honestly and in good faith with a view to the best interests of the corporation. Every decision that the board makes, including a CEO’s 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 all others. The board's duty to the corporation has nothing to do with the “public interest.”
Now, one could make the argument, weak though it is, that the new premier had a mandate from the electorate to replace the Hydro One board. Herein lies the potential conflict of public corporations with governments as controlling shareholders. It is difficult for boards of these entities to act in the corporation’s best interests and to maximize shareholder value when the leader of the day steps into the boardroom and demands that the board alter its decisions for the benefit of the ever-so-nebulous “public interest.” That is exactly what has happened at Hydro One.
Under the new Urgent Priorities Act governing compensation of Hydro One executives, the company’s board must consult with the province and the other five largest shareholders to develop a new compensation structure for the board and senior management. The structure must be approved by the management board of the cabinet. They can issue “directives” restricting total annual compensation with which the board is required to comply. Whether this legislation will positively impact hydro rates is unclear. In my view, it is unlikely.
Of course, it is not uncommon for large, activist shareholders to engage with boards of public companies either on a friendly or hostile basis. The difference here is that the Ford government acted not as a controlling shareholder using applicable corporate law mechanisms, but as a political overseer granting itself the ability to implement mandatory “directives,” something that shareholders in a public corporation surely cannot do.
The Ford government has said that, “we will be clear with the new board that the company needs to operate in a way that respects the public interest.” But the public interest is not an objective with which shareholders qua shareholders are (or should be) concerned. Nor is it a concern that boards of public companies are legally bound to address.
The bottom line is that the province had already expressly accepted significant, though not unlimited, rights as a shareholder of Hydro One under the governance agreement. The Ford government chose not to pursue its rights under that agreement, but instead to exercise legislative authority. This conduct is disconcerting: once a government decides that it can use its power to usurp a corporation’s governance, what are the limits on such conduct? What is to prevent the province from intervening in any arm’s length or independent corporation based on its unilateral determination of the “public interest”? Consider gas distributors, securities regulators, energy providers and others. Can the province simply fire boards and CEOs through legislative fiat regardless of whether it owns shares in these entities? The rule of law would say no.
Mr. Ford claims that his is the government “for the people”. This claim is illogical and incorrect: all elected governments in this country are “for the people” by virtue of the democratic process. Moreover, let us not be lured into believing that Hydro One is a public corporation like all others. It is not. Rather, it is a public corporation in which the largest shareholder is acting as a political overlord, not a shareholder seeking to maximize the value of its investment.
Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto.