Shareholders show compensation muscle in fight for reform

If there is one area of loose consensus in Canada's polarized debate about corporate governance, it is around compensation.

Virtually every major shareholder battle in recent months has focused on excessive compensation, and shareholders have united in their determination to see reform. Companies such as CHC Helicopter, Metro, Royal Group Technologies and CoolBrands have seen their shareholders band together to demand changes to unpopular compensation plans, especially to excessive stock option grants.

Large institutional shareholders are lobbying companies to change option programs, or to tie CEO compensation more closely to performance, or to make share ownership a central part of compensation. Only this week, the giant CPP Investment Board announced that it will no longer support any stock option plans because they do not align management with shareholders.

It's no mystery why so many major shareholders are turning so much attention to flawed compensation. In the past two years, many shareholders have watched seemingly high-quality investments such as Nortel, Enron or Tyco sink in value, or even disappear amid scandal. And in many of these cases, senior executives locked in their profits in advance of the fall. Shareholders of all sizes were left with the sinking feeling they were snookered while people on the inside filled their wheelbarrows with money.

Most cases are not as dramatic as Enron or Tyco, but shareholders have become persuaded by these examples that no corporate initiative has a more direct impact on executive behaviour than compensation structure. In particular, investors have lost patience with programs that reward executives even when they perform poorly. And in many of Canada's most recent battles, shareholders have focused their frustration on the cozy arrangements in majority-owned companies, where founders operate as though they still owned a private company.

At Royal Group Technologies, CEO and founder Vic De Zen is facing a shareholder revolt over his compensation in 2002. Mr. De Zen earned a $5.6-million bonus, even though the company's share price has fallen more than 65 per cent since last summer. Mr. De Zen controls 80.5 per cent of the votes with multiple voting shares but owns only 20 per cent of Royal's equity.

It doesn't help that the company didn't have a compensation committee and that Mr. De Zen determined his own compensation levels. Recently the company said it will set up a three-person committee to review its compensation. But Royal Group president Douglas Dunsmuir, who received a $3.2-million bonus last year, will sit on the committee. This defeats the point of an independent review.

Shaw Communications also has been accused of failing to match pay to performance. It boosted the bonus paid to founder JR Shaw by 75 per cent over the past two years, to $6.3-million in fiscal 2002, even though Shaw's share price fell 50 per cent during 2002 as profit plunged. Meanwhile, his son, Jim Shaw, who is the company's CEO, received a $5.3-million, interest-free loan in 2002 to buy a vacation property.

At CoolBrands and CHC Helicopters, shareholders opposed proposals to greatly increase the size of the their stock option plans. In both cases, the main beneficiaries of such a move would have been the companies' top executives, most especially their founders and controlling shareholders.

Canadian Medical Laboratories CEO and founder John Mull took home more than $8-million last year, most of it from stock options -- but at least Canadian Medical also saw its share price soar in 2002. Shareholders can't argue that there was no link between pay and performance, but they could question other cozy arrangements. For example, Mr. Mull's private holding company, Typhon Group Ltd., received an additional $266,797 in interest-free loans from Canadian Medical, boosting its total borrowing to $721,000 as of Jan. 31. As well, Mr. Mull and Craig J. Mull have an ownership interest in facilities they rent to Canadian Medical, including the company's headquarters building in Mississauga. They received rent of $1.32-million last year.

Many closely held companies have argued that any reforms to corporate governance standards in Canada should recognize the special status and history of family-owned firms. But many of Canada's largest shareholders reject this idea, saying companies that choose to be publicly traded should meet the same high standards as everyone else. That means all companies must ensure pay matches performance, and must create incentives that truly align management's interests to those of all shareholders. The lesson of the past few months is that shareholders will now fight each and every battle where this is not the case.