Corcoran … Say on pay: Loud and unclear.
TERENCE CORCORAN
We return to the executive compensation “say-on-pay” confrontations now taking place within some Canadian corporations, beginning with the ongoing kerfuffle at Barrick Gold. At Barrick’s annual meeting Tuesday, shareholders voted 75 per cent against the company’s executive pay regime and deliberately sought to embarrass the four Barrick directors who sit on the board’s compensation committee.
It was left to Barrick Chairman John L. Thornton to answer the baying pension funds at the door. “We have heard you loud and clear,” said Thornton. Well, we’re glad Thornton understands what the shareholder activists at Ontario Teachers’ Pension Plan and other organizations are up to, because their ongoing harassment of Barrick and other corporations has been loud but far from clear in its objectives.
We’ll return to Thornton’s circumstances, although at this point Canadians should be aware that he has more investment money on the line at Barrick than Ontario Teachers, which has spent most of the last year unloading its Barrick stock and reducing its holdings.
The rise of say-on-pay votes at major corporations is largely a function of U.S. securities regulation and the Dodd-Frank Act of 2010. Dodd-Frank, born during post-crisis regulatory frenzy, took aim at executive compensation on the grounds that excessive CEO pay was partly to blame for the 2008 financial crisis. By forcing corporations to place say-onpay resolutions before shareholders, it was thought that executive compensation would be reduced. No such reduction has taken place.
The New Yorker’s business watchdog, James Surowiecki, wrote the other day that while these reforms were “well-intentioned” it turns out that their “effect on the general level of CEO salaries has been approximately zero.” This non-result has become a big headscratcher for the world’s anti-corporate proselytizers, including Surowiecki, who can’ t understand what went wrong with their theories of corporate governance and board behaviour.
Could it be that they had it all wrong from the start? Marc Hodak, a consultant and Adjunct Professor at the Stern School of Business at New York University, writes in a commentary elsewhere on this page that the say-on-pay regimes are based on the false assumption that boards of directors are lazy, stupid or corrupt. The fact that executive compensation has not declined as anticipated is because, in short, the system works.
In a broader context, the say-on-pay campaigns are part of a grand ideological belief that market capitalism is a broken machine that needs to be fixed by governments and politicians. In a new book just published by University of Chicago Press — Wasting a Crisis: Why Securities Regulation Fails — Paul G. Mahoney argues that a pervasive belief in the “market failure narrative” drove the creation of Dodd-Frank, Sarbanes-Oxley and a host of other reforms that will prove to have been failures.
Due to deregulation, it was said, free-range capitalists were allowed to destroy the world financial system. It’s a conclusion Mahoney, dean of law and the University of Virgina, rejects. “As in the case of the Great Depression, government officials (in 2008) created a market failure narrative and used it as the basis for financial reform legislation.”
Barrick and other companies in the say-onpay crosshairs are in effect under attack as part of the belief that the market is a failure in need of regulation and control.
At Barrick, the board, including the four compensation committee members singled out by Teachers and others, will now — as Thornton put it at the annual meeting — “go back and refine our system, particularly as it relates to me.”
What’s to reform? According to company records, Thornton was awarded cash compensation that required him to purchase Barrick shares. He bought 177,500 in December, 2012, at $34 a share. In May, 2014, he bought 167,000 at $17.50 and another 360,000 shares at $11.37 on Mar 27 this year. That’s 705,000 shares that, under his compensation terms, he cannot sell.
From hi s personal funds, Thornton also bought 250,000 shares in August of 2013 at $19.50, and another 415,000 in December, 2014, at $12 a share. Astute investors will note that with these two purchases, each worth $4.9-million, Thornton was in effect doubling down. As of today, Thornton owns about 1.3-million shares with a $13 value for a total of $16.9-million, representing a loss of $5-million from his purchase prices.
So what has Teachers been doing with Barrick while Thornton is increasing his exposure? In late 2012, Teachers held more than 5.5-million Barrick shares. Since then, while Thornton was buying, Teachers unloaded most of its holdings. At last report, the pension giant holds about 650,000 Barrick shares.
Due to restrictions, Thornton also cannot sell more than half of his holdings. He must stick with 705,000 of his Barrick shares until retirement. As Teachers has shown, it’s just a fly-by institutional investor. If it doesn’t like Barrick or another other company it can sell. Thornton has no such luxury.
In the grand scheme of corporate governance and executive compensation, who can best be counted on to increase corporate performance, the board or outside investors with no permanent stake in the company?
Attacks on executive compensation based on failed regulation and misguided belief in market failure