Wage subsidy hard to resist, also hard to justify
Government's wage subsidy is hard to resist, and sometimes harder to justify, Kevin Carmichael writes.
Angela Lekatsas, chief executive of Calgary-based Cervus Equipment Corp., a publicly traded retailer of John Deere tractors, Peterbilt trucks and other famous brands of heavy equipment, was keen to get her company's share of the emergency cash that Prime Minister Justin Trudeau was spraying over the Canadian economy this spring and summer.
There was only one problem: Cervus was making too much money.
Farmers had been deemed essential workers and they had a crop to get in the ground. The combination of strong demand for food and ultra-low interest rates combined to make the summer of COVID-19 a decent one for Big Agriculture. Cervus, which oversees 64 retail locations in Canada, Australia and New Zealand, recorded revenue of about $954 million through the first nine months of 2020, a nine-per-cent increase from the same period a year earlier.
Yet in August, when Lekatsas filed her second-quarter management's discussion and analysis (MD&A) documents with regulators, she was almost apologetic for failing to secure a cheque from the federal government.
She promised shareholders that she would keep trying.
“Due to the strong performance of our agriculture segment, the company did not qualify for payments under the Canadian Emergency Wage Subsidy (CEWS) during the (second) quarter,” the MD&A said. “However,” the document continued, “subsequent to the quarter, legislation was passed on July 27, 2020, which we anticipate will provide some limited eligibility for our transportation and industrial segments, retroactive to the second quarter of 2020.”
A generation of North American executives has been conditioned to adhere to Milton Friedman's credo that a manager's job is to “make as much money as possible” for shareholders, forgetting that the esteemed economist reasoned the attempt would be done “while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Most MBAS probably never learned that Adam Smith was actually a moral philosopher who, in The Wealth of Nations, wrote that when regulation “is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.”
Regardless, the sight of large, relatively healthy corporations feasting on sustenance meant for weaker employers during a
once-in-a-lifetime catastrophe is emblematic of why Canada's style of capitalism is in trouble. Change is coming, and I only hope those of us who are fans of that style get to take part. That's far from assured.
Some 64 per cent of the 18.2 million votes cast in the 2019 election went to parties that now demonstrate some degree of hostility towards the business establishment. That percentage surges to almost 100 per cent if you include the Conservatives, who are just as apt as Trudeau's Liberals to say mean things about the corporate elite these days, and whose leader, Erin O'toole, has lately taken to courting private-sector unions. Jagmeet Singh, the leader of the New Democratic Party, who revelled in chants of “Tax the Rich” from the podium on election night, appears to hold the balance of power in the minority Parliament.
There are no safe public spaces for Big Business right now, and it will only get more dangerous as the rich recover faster from a recession that has been disproportionately hard on working mothers, younger men and women, and Indigenous People, according to Statistics Canada's latest employment report.
A new Financial Post investi
gation of publicly listed companies that have claimed CEWS benefits while continuing to pay dividends and repurchase shares will only make it harder to insist there is nothing wrong. The Post's Victor Ferreira, with some help from me and FP
Data, determined that at least 68 corporations paid dividends as wage subsidies were flowing in. Collectively, they received more than $1 billion from CEWS through the third quarter, while paying out more than $5 billion in dividends.
“Capitalism was meant to be redistributive,” said Nadine De Gannes, an assistant professor of managerial accounting at Western University's Ivey Business School in London,
Ont. “Who would benefit from dividends? I can't see it as the groups most vulnerable in the economy. Restaurants don't offer pensions.”
In case it needs stating, we didn't compile the data to help the anti-capitalists in Ottawa. It was an accountability exercise based on information that publicly traded companies are required to disclose. Some reported the amount they received as a line item, some buried it and some felt it was immaterial and didn't report it all. The Finance Department
doesn't name the companies that receive CEWS benefits.
The various corporate decisions to take from taxpayers rather than shareholders, or to access other funds available to them, were supported, in aggregate, by hundreds of professional managers and corporate directors. The strategy was totally legal, probably smart and, arguably, necessary, depending on your interpretation of a CEO'S fiduciary responsibility.
“We were able to keep more of our people together by protecting their jobs while continuing to deliver essential services to Canadians,” said Melissa Eckersley, a spokesperson for Toronto-based Corus Entertainment Inc., which owns the Global Television Network and a few dozen specialty channels.
Corus received almost $35 million in emergency wage benefits through Aug. 31, while paying out about $34 million in dividends. “We did maintain our commitment to our shareholders, including the many individual investors who rely on our quarterly dividend for income in these challenging times,” Eckersley said.
Some people might argue that if there is an issue with CEWS, it's with Parliament, which passed laws that entitled thousands of companies to access free money with few strings attached. Banks often force creditors to stop paying dividends and repurchasing shares in return for loans. The federal government could have done something similar if it so desired.
That's true, and maybe it still will. Finance Minister Minister Chrystia Freeland this week promised to enhance the benefit, so Parliament is about to get a chance to fix anything it doesn't like. Spain and the Netherlands are among the countries that have programs similar to CEWS, but force recipients to curb dividend payments, share buybacks and executive bonuses in order to receive the cash.
Still, let's remember that Canada was coping with an unprecedented emergency and was already weeks behind European countries in setting up a wage subsidy, which had quickly become the preferred approach to supporting smaller businesses in most rich countries. The primary goal was to get money out the door. Dickering over dividends would have slowed things down even more.
The ethics of chasing wage subsidies while paying dividends isn't merely an academic concern. The spark to investigate payouts under CEWS was an email that I received from a Bay Street fund manager who said he was morally outraged by TFI International Inc.'s decision in October to increase the Montreal-based company's dividend by 12 per cent even as it received millions of dollars in wage subsidies.
Our sweep of public filings was how I stumbled on Cervus Equipment, which did cut its dividend this summer, though mostly to free up cash to temporarily increase the company's share-buyback program. The collapse of stock markets in the spring had “provided the opportunity to buy Cervus shares at a discount to tangible book value,” its second-quarter MD&A said.
Adam Lowther, Cervus's chief financial officer, made no apologies. The company's agriculture business may have soared, but its transportation and construction arms suffered. It kept people employed in situations where others might not have, he said in an interview, and, overall, payouts to shareholders will be less this year than is usually the case.
“I think we did right,” said Lowther, who confirmed that Cervus has now successfully qualified for about $5 million from CEWS and that the payment was on its way.