National Post (National Edition)
CEOS COLLECTED DIVIDENDS WHILE ACCEPTING CEWS.
FP analysis raises governance questions, experts say
The chief executive officers of 68 Canadian companies that paid out dividends while receiving the pandemic wage subsidy earned an estimated $30 million in dividends themselves during the quarters in which their firms accepted the Canada Emergency Wage Subsidy (CEWS), according to an analysis of share ownership stakes by the Financial Post.
This month, a Post investigation revealed that at least 68 companies that received more than $1 billion in CEWS — a subsidy designed to help companies that have seen their revenue drop significantly cover payroll costs and keep employees in their jobs — paid out more than $5 billion in dividends over the past two quarters.
The results of the investigation found their way to the House of Commons, where Finance Minister Chrystia Freeland reminded companies that “the wage subsidy must be used to pay workers.”
The CEWS program does not prevent companies from paying dividends and the Post has no evidence that companies violated its rules.
For the CEO analysis, the Post used a combination of share ownership data available on Bloomberg and in the proxy circulars of the 68 companies to determine the number of common shares held by each CEO and multiplied that by the dividends declared in the quarters in which their firms received CEWS. The Post did not include the hundreds of thousands of deferred shares, performance shares and restricted shares that many of these CEOs own or the shares they might own through control groups.
On Monday, the Canada Revenue Agency for the first time released a complete list of all companies that had received CEWS. That list included additional public companies that were not part of the Post's original analysis, among them Rogers Communications Inc., which has continued to pay a dividend and did not disclose receiving CEWS by name in its public filings.
Those additional companies were also not included in the current analysis, which found that 61 of the original 68 CEOs received dividend payouts during the quarters in which their companies collected CEWS, with five of them earning more than $2 million.
Quebecor's Pierre Karl Péladeau earned nearly half of the group's total in one quarter, taking in an estimated $14 million in dividends.
One individual, K. Rai Sahi, was chief executive of four companies on the list — Morguard Corp., Morguard Real Estate Investment Trust, Morguard North American Real Estate Investment Trust and TWC Enterprises Ltd. — and earned $3.1 million in dividends as his companies received more than $22 million in CEWS.
WHAT'S INTERESTING IS THAT WHEN YOU BRING DIVIDENDS INTO PLAY AND THE ABILITY OF AN ORGANIZATION TO DETERMINE DIVIDEND PAYOUTS BASED ON A GOVERNMENT SUBSIDY, IT DOES RAISE QUESTIONS ABOUT THAT LINKAGE AND THE OPTICS OF THAT LINKAGE. — CHRISTOPHER CHEN
In a written response, Quebecor said its telecom business, which is responsible for 96 per cent of its EBITDA, did not qualify for CEWS, but its media subsidiaries did. The company also said Péladeau cut his base salary in the early stages of the pandemic.
Morguard would not comment on dividends received by Sahi.
Christopher Chen, the managing director of Compensation Governance Partners, said that companies have required executives to own shares for almost 20 years now — it's the gold standard of good governance. But the dividend earnings of these executives is now making him rethink what was once set in stone.
“The orthodoxy is that executives owning shares is absolutely the proper corporate governance because it aligns the philosophy, the risk and the performance period with payouts,” Chen said.
“What's interesting is that when you bring dividends into play and the ability of an organization to determine dividend payouts based on a government subsidy, it does raise questions about that linkage and the optics of that linkage.”
To date, the government has paid out more than $51 billion to 359,880 unique applicants through the CEWS program, which was recently extended to June 2021.
Other CEOs at the top of the Post's list of dividend recipients included Savaria Corp.'s Marcel Bourassa, who earned an estimated $3.4 million in dividends while his company received $4.5 million in CEWS and TFI International Inc.'s Alain Bedard, who was paid an estimated $2.3 million in dividends in the quarters his company received $24.9 million in CEWS. Evertz Technologies Ltd. chief executive Romolo Magarelli rounded out the top five, taking in an estimated $2.1 million in dividends in one quarter.
An additional 21 CEOs received more than an estimated $100,000 in dividends.
Richard Leblanc, a York University professor and governance consultant, said the matter of executives owning shares isn't black and white and has always involved a “small-c” conflict of interest in that the executives and board members who decide what gets paid out in dividends may be among the largest beneficiaries of those payouts themselves.
“You may be less willing to suspend dividends because you have an interest in receiving the dividends,” Leblanc said. “To say (CEWS) is different money or the left hand doesn't know what the right hand is doing I don't think addresses that conflict that certain CEOs have seven digits in dividends at the same time they're accepting the government subsidy.”
Finding a solution is difficult, Leblanc said. Many of these companies have already argued that their dividends are crucial. They've built their reputations around consistently paying dividends, for decades, through good times and bad and aren't willing to sacrifice that. Investors of all types, whether it be Canada's largest pension funds or the retirees that live off those dividends, become shareholders because of that consistency. Suspending dividends, the companies argue, would break that cycle and could lead to a downturn for the stock price.
If a company decides that a suspension is not possible, then suspending dividend payments to executives and directors isn't going to happen either, Leblanc said, because a company cannot treat individual shareholders differently.
And so Leblanc offered another solution.
“What you could do is voluntarily take a haircut so your net total compensation remains the same ... and say we're not going to benefit financially during receipt of taxpayer money,” Leblanc said.
Some CEOs on the Post's list have done just that. Péladeau, for example, cut his salary by 50 per cent in the early stages of the pandemic. But according to Quebecor's circular, his base salary for 2019 was $1.33 million and so a 50 per cent cut wouldn't have offset the $14 million in dividends he earned.
Telus Corp. CEO Darren Entwistle donated his salary for April, May and June — the equivalent of $400,000 — to Canadian health-care workers, and his family's charitable foundation, the Entwistle Family Foundation, matched it. Entwistle would've earned an estimated $109,324 from dividends in the two quarters Telus received CEWS.
Mullen Group CEO Murray Mullen does not receive a salary for his work, a spokesperson said, or any other form of compensation aside from his dividends and profit sharing in the years it's paid out. When Mullen Group suspended its dividend for one quarter during the pandemic, Mullen wasn't paid. When that dividend was reinstated at a lower level, he earned less as a result — an estimated $145,168 while the company received $10.8 million in CEWS.
Stingray Group Inc. CEO Eric Boyko received an estimated $603,406 in dividends in the top quarters that his company received $18 million in CEWS, but a company spokesperson said he only received 25 per cent of his base salary between March and October, agreeing to defer the rest along with a bonus. A spokesperson also said Boyko spent $7 million of his own funds buying shares in the company throughout the summer.
The Post had to estimate the dividend payouts of the executives because unlike share ownership and base salaries, these figures are not directly disclosed.
There's never been a requirement to do so, Chen said, because dividends are not considered compensation. “By the time you actually own a physical share, it's considered an after-tax investment the same way it would be if you bought mutual funds,” he said.
The decision to own those shares, however, is not always made by choice. Some companies, through share-ownership guidelines, require their executives to own a multiple of their base salary, as high as five times, in shares. This is particularly common in the largest Canadian corporations, Chen said. Certain types of shares are also awarded to executives based on performance. Chen calls them “phantom shares.”
Aside from the common shares they own, multiple executives on the Post's list own performance share units, deferred stock units and restricted stock units that convert to actual shares only at a certain time or when a performance metric has been met.
Some CEOs own very few common shares and the bulk of their ownership is in these other units. Chen said some companies do pay dividends on these shares and so the Post's $30 million estimate in dividend payouts is conservative.
There would be no downside to disclosing dividend payouts for executives and directors going forward, Chen said.
Frank Li, a finance professor at Western University's Ivey Business School who specializes in corporate governance, said an executive's compensation should be linked to his or her firm's performance. When taxpayer funds such as CEWS are introduced into a company and injected into revenue and net income figures, they can exaggerate performance metrics and lead to higher compensation while facilitating payouts such as dividends.
Li said this results in executives continuing to collect their dividend income, not because they led their companies to great quarters, but because of “luck or taxpayer money.
“If you perform badly, then you are fired, but in this case, they performed badly, they received (CEWS) and executives still enjoy high pay and high compensation,” Li said. “That's not an efficient corporate governance mechanism.”