Suncor’s attack on COS board not backed up by the numbers

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"Skin in the game." It is what the board of Canadian Oil Sands Ltd. does not have, at least according to the folks at Suncor Energy Inc.

Suncor, of course, is no disinterested observer: The company would like to buy Canadian Oil Sands, and Suncor is putting the "hostile" in the hostile bid, judging by the tone of a wide-ranging letter to Canadian Oil Sands shareholders. Let's see exactly what Suncor said in its Dec. 15 letter:

"COS board members and management have almost no skin in the game, yet they want you to take a huge risk by rejecting our offer. Despite their overheated rhetoric and claims that COS would be a strong independent company, all COS board members combined (including CEO Ryan Kubik) own less than 0.1 per cent of the company's shares. If they believed their own rhetoric, wouldn't they own more than that?"

There's something rather curious about this line of attack, though: If you were to take a peek at the holdings of Suncor's own board, you'd find the non-employee directors hold roughly half as many shares as the Canadian Oil Sands board, using Suncor's chosen measure.

To do the math, I reviewed the two companies' proxy statements to shareholders, then checked insider-stock transactions that have occurred since the companies presented their numbers. I excluded Suncor's and Canadian Oil Sands' chief executive officers, because stock-based awards are a huge part of executive compensation. Suncor CEO Steve Williams, in the top job since 2012, has had 13 years at the executive vice-president level or higher to accumulate shares. Mr. Kubik, by contrast, served as Canadian Oil Sands' chief financial officer since 2007 before rising to CEO at the beginning of 2014.

So, then, the results: The 11 non-employee directors of Suncor hold a total of just under 775,000 shares, either outright or through a "deferred share unit" (DSU) plan that credits stock equivalents to a company account, to be cashed out only when the director's service ends. With Suncor's 1.45 billion shares outstanding, that's 0.05 per cent of the company.

The nine non-employee directors of Canadian Oil Sands hold 514,655 shares or DSUs; with just under 485 million shares outstanding, the directors' holdings represent 0.11 per cent of the company, more than twice what, proportionally, the Suncor directors hold. (Canadian Oil Sands directors have picked up more than 100,000 shares since the May proxy, which means Suncor's allegation about "less than 0.1 per cent" was true, based on the out-of-date numbers.)

Suncor's better case is to focus on the value of these shares, as its directors have more than $28-million worth of stock, versus $4.4-million for the Canadian Oil Sands board. That's what spokeswoman Sneh Seetal did in an e-mailed response Tuesday.

"The non-management team on the COS board may hold more shares, but they are shares of a much lower-valued company," she said. "As such, the Suncor board has a more significant financial stake."

We should, then, look at how the directors obtained the shares in the first place.

At Suncor – as well as at Canadian Oil Sands, and most Toronto Stock Exchange-listed companies – share awards are an increasingly large part of director compensation. What makes Suncor different from Canadian Oil Sands is just how much the directors are paid. In 2014, the worst-paid Suncor director made just over $324,000. At Canadian Oil Sands, only chairman Donald Lowry made more than that, with the majority of the directors making less than $200,000.

On the surface, that's fair; Suncor, at $31.6-billion in revenue over the past year, is more than 10 times the size of Canadian Oil Sands, so it's no scandal that its directors earn significantly more. Since both companies pay a significant portion of their annual directors' fees in stock, however, that discrepancy means Suncor board members can quickly rack up big numbers in the value of their shares. Specifically: Suncor gave its board $3.4-million in share-based awards in 2014, versus less than $1.4-million at Canadian Oil Sands.

What it really boils down to is this: Directors today sometimes put their own money into the companies they serve by buying stock on the open market, but mostly, they have "skin in the game" because they've been given their shares in exchange for their service. Any suggestion otherwise could be said to be overheated rhetoric.