Canada’s greediest man? - Macleans.ca
 

Canada’s greediest man?

Frank Stronach’s big payout


 

Rolf Vennenbernd/ZUMA/KEYSTONE PRESS

For much of the past decade, the annual meetings of auto parts giant Magna International followed a rhythm as familiar as it was frustrating: a handful of shareholders would stand up and express outrage at founder and chairman Frank Stronach’s hefty annual pay packages; the Austrian-born Stronach, with the squinted eyes of a gunslinger at high noon, would respond by effectively telling everyone to go to hell. In 2003, for example, Stronach bluntly told reporters “I should get more” when asked whether he deserved the $58.1 million he pocketed a year earlier.

The following year he offered his personal philosophy on why company founders should continue to receive rich pay packages even if they’re no longer occupying the job of CEO—it helps foster an entrepreneurial spirit, he explained­—but not because he felt the need to justify himself to critics. “I could say, ‘Look, if you don’t like it, sell your shares. It’s a free country.’ ”

That, more or less, was where the debate ended every year, much to the chagrin of corporate governance types. Stronach has been criticized for essentially milking the company he founded with the board’s acquiescence. His average annual take-home pay over the past decade was over $41 million, much of it in the form of so-called “consulting fees” calculated as a percentage of Magna’s pre-tax earnings. In 2007, at the peak of the market, he hit a personal best of $70 million. (The next best paid CEOs that year were Mike Lazaridis of Research In Motion, who earned $51.5 million in total compensation, and Royal Bank’s Gordon Nixon, at $44.2 million. Magna’s co-CEOs Siegfried Wolf and Donald Walker earned $13.4 million and $12 million, respectively.)

And it’s not just Stronach’s hefty pay that rankles investors. It’s his tendency to use his clout as controlling shareholder, made possible by the family’s ownership of a special class of multiple voting shares, to periodically grab Magna’s steering wheel as he pursued a host of risky business ideas. They included building a racetrack and casino empire, trying to buy Chrysler, the most troubled of the beleaguered Detroit Three, and selling part of Magna to a Russian tycoon with a murky background. As a result, the company’s stock trades at a significant discount to its rivals—a phenomenon known on the Street as the “Frank Factor.”

So there was a palpable sigh of shareholder relief when Magna said in May that Stronach had finally accepted a management proposal to buy out his voting control. The jubilation initially overshadowed the deal’s jaw-dropping $863-million price tag, which represents a nearly 1,800 per cent premium for Stronach’s voting shares. But even as Magna’s regular shares began to climb, a feeling of bitterness set in among several big institutional shareholders. After all, it was one thing to look past the consulting fees as long as the company was growing and making money, but quite another to allow Stronach a final egregious handout simply for agreeing to relinquish his iron grip.

Faced with mounting complaints, the Ontario Securities Commission decided to hold a hearing on the issue this week. Much of what the regulator is looking at are the technical details of the transaction, including whether the board provided sufficient information to investors before a vote on the deal, scheduled for June 28. Critics are worried that if the transaction is approved without serious changes—a likely scenario judging by the 15 per cent rise in Magna’s stock price on the day the deal was announced—it could send the wrong message to the country’s capital markets, namely that bad behaviour is rewarded. “There’s an enormous premium being paid here,” says Joseph Groia of Groia & Co., a former head of enforcement for the OSC who is now acting on behalf of shareholders’ rights group FAIR Canada in the Magna case. “And in a marketplace with a large number of two-tier share structures, that would set a terrible precedent.”

Of course, it’s not like Magna shareholders didn’t know what they were getting into. Magna and Stronach have a long history of what Richard Powers, the associate dean at the University of Toronto’s Rotman School of Management, called “non-best practices” when it comes to corporate governance. Nevertheless, Powers points the finger at Magna’s board for being too timid to offer a recommendation on how shareholders should vote. “That’s why they get paid,” he says. “The only inference you can take from that is they had questions they weren’t willing to raise in front of Frank.”

For its part, Magna has said it is doing its best to satisfy the OSC’s concerns about disclosure, raising the possibility of some sort of compromise. Last week, Magna released two internal reports about the transaction, one of which warned that the proposed deal would be “controversial.” As for why the arrangement was struck in the first place, Stronach, 77, who declined an interview request, has offered only vague references about it being time to let go of the company he started in the late 1950s. He has also said he hopes there will still be a role at Magna for his daughter Belinda Stronach, who served as CEO of the company before entering federal politics (she is currently Magna’s vice-chairman).

It’s a major about-face for a man who has long argued that family-controlled companies are desirable because they’re not as beholden to short-term goals like meeting analysts’ quarterly profit targets, and can instead focus on long-term strategies. Critics, however, say such ownership structures aren’t fair to the company’s real owners—the shareholders—and create opportunities for abuse.

Few investors are thrilled with the idea of paying a massive sum just to see Stronach go away, but not everyone agrees that the regulator should have become involved. If the OSC decides to kill the deal, it could mean the era of Stronach rule at Magna will continue indefinitely, since no one can force him to sell his shares. “I think Frank Stronach is extracting a pound of flesh,” says David Taylor, a portfolio manager at Goodman & Co., which own $5 million worth of Magna stock. “But the beauty of this deal is you get to vote on it. I can’t think of anything fairer than that.” Taylor also dismisses the idea that Magna’s board could have handled things better. “We can all do the math,” he says. “We know the price they are paying per share and it’s a ridiculous number. So the board can do all the analysis and calculations it wants, but it wouldn’t change anybody’s view whatsoever. We know it’s a stupid price.” At the end of the day, he says, the elimination of the dual-class structure should boost the stock from its current price of about $69 to around $100, based on the valuation of Magna’s rivals. “So we’re paying $800 million and change to add $3 billion in value—there’s your analysis.”

Other investors, however, say it’s time to take a stand. The Ontario Teachers’ Pension Plan was previously a big Magna shareholder, but sold off all but one share (to remain involved with Magna as it fights dual-class share structures as a matter of principle) several years ago following Stronach’s decision to sell a big piece of the company to Russian billionaire Oleg Deripaska, an industrialist with close ties to Russian Prime Minister Vladimir Putin. (Deripaska sold his shares a year later amid the global economic collapse.) “We had repeatedly spoken to them about the compensation they provide to Mr. Stronach in terms of these consulting arrangements because we didn’t think there was any justification for that,” says Wayne Kozun, the senior vice-president of public equities for Teachers’ investment arm. “We’ve had an issue with that because he’s not actively involved with running the company but he’s getting a life-long annuity of tens of millions a year. And we didn’t like the dual-class shares and the lack of independence of directors either.”

Like other critics, Teachers’ is concerned the deal to buy out Stronach will set a bad precedent, but Kozun says there’s other dangers lurking under the hood. Under the current arrangement, Stronach will get control over Magna’s new electric car division (and another four years of consulting payments) even though he would have a minority financial interest in the undertaking. At present, the project is considered to be peripheral to Magna’s core auto parts business, but if that changes, Kozun says Stronach could once again end up in the driver’s seat. “What they could be setting up here is a new dual-class Magna similar to the way it has existed in the past,” Kozun says. “And then if we wanted to buy out Mr. Stronach, we would have to pay another 1,800 per cent premium.” All of a sudden, $41 million a year is starting to look like bargain.


 

Canada’s greediest man?

  1. I didn't read the article, and haven't really followed this story, but is the gist of it that Stronach wants his money out of his company? If so, what's wrong with that?

    • Bet you are one of the sad fools who dutifully thinks of himself as wealthy, is anything but, and happily votes in a way that demonstrably harms your own self-interest.

      But the Con philosophy makes you feel like a hard man, and that's all that matters.

      • likewise, youare probably one of the sad fools who thinks of himself as hard done by by the evils of capitalism and entrepreneurship and resorts to bitter jibes at people who have a bit more optmism about their ability to make their own way in life.

    • That will be the "entrepreneurial spirit" that Stonarch is looking to foster speaking.

  2. 1) Read article.
    2) Form opinion.
    3) Post.

    • There are three ways to do things:
      1) Right way
      2) Wrong way
      3) My Way

      My way is like number 2, but quicker.

      • To paraphase Abraham Lincoln, "you typed on your keyboard and removed all doubt"

  3. Although the premium is high, and a precedent will be set, shareholders knew what they were getting into when they bought the shares. If it wasn't for Frank many of these large institutional investors wouldn't have already made millions on their investments. Shareholders need to remember that all company founders get buyouts at the end and it is relative to earnings and assets of the business. As David Taylor stated " At the end of the day, he says, the elimination of the dual-class structure should boost the stock from its current price of about $69 to around $100, based on the valuation of Magna's rivals. “So we're paying $800 million and change to add $3 billion in value—there's your analysis.”
    Yes Frank may be a bit greedy but it's hard not to admire him for being cleaver enough to set this company and its structure up. A compromise will be found and the deal will go through, and chances are he will go on to the electric car division and make millions more for the institutional investors again.

    • I agree! I'm going to buy some shares…I think a guy could make some money here. This guy might be a real shark, but I admire him just the same. Beats digging ditches for peanuts!

  4. The Teacher's Pension Fund getting screwed just for once. LMAO. It's called karma and they soundly deserve it for the mess known as the Toronto Maple Leafs, oh which they are partially responsible. In the grand picture I am amazed that people put money in that giant Ponzi game, called a stock market. Maydoff, Goldman-Saks and a host of other crimials that never got caught run it. Enter that snake pit at your own peril. Cheers.

  5. Of course, it's not like Magna shareholders didn't know what they were getting into.

    Bingo.

    Wah! Hey, OSC, please save us from our prior awful decisions!

    • Exactly. I think the OSC's decision was the right one in the circumstances. They let the shareholders decide, but I agree that the information contained in the circular was, arguably, skimpy and deficient.

      It would be unbelievably paternalistic to say that you won't even let the shareholders vote on something that fundamentally affects their welfare.

  6. Good for you Frank(Thats the way take those teachers to school )

  7. As an entrepreneur, I have to side with Frank on this one. He took the initial risk, built a company that has employed thousands of Canadians and made a lot of people very weathly through executive positions and stocks. When did enjoying the fruits of your labour become a sin? Perhaps he should have started Magna in another country that doesn't condemn reward-for-hard-work.

    • Agreed. He took the initial risk, made a great company. Made a lot of people a lot of money. Gave a lot of people jobs. Thinking big. We need that spirit here.

  8. There are leaders, and then there are followers. Frank is a leader, enough said!

  9. It will send the message that bad behaviour is rewarded???? And since when has this NOT been the case. Welcome to Canada!

    • The allegedly bad behaviour is only "rewarded" if the shareholders vote in favour of the transaction. What have you got against shareholder democracy and shareholders making up their own minds about whether they approve a transaction or not?

  10. I guess the issue here is that the stockholders ARE part of the company, or at least they USUALLY are but not really in this case. As far as accepting risk goes, the shareholder accept as much as Frank does and as far as the shareholders knowing what they are getting into goes – well, they don't really as Frank seems to make decisions they aren't a part of. He is right about one thing though – you don't like it? Sell your shares. Of course, with that kind of mentality, who can complain about anything? Your food cold at a restaurant? Don't like it? Leave. Car dangerous? Don't like it? Don't drive it.. etc etc

    • Your counter examples don't work because unlike the shares of Magna, getting cold food or a dangerous car is not what's expected or promised.

      The dual share-structure of Magna isn't hidden, however, so anybody getting into it either did so knowing full well what they were getting into, or did so without doing their homework. A more accurate analogy would be "You don't like raw fish? Perhaps you shouldn't have gone to the sushi bar."

  11. Sure everyone want's to be a conservative. "Lower taxes, get rid of gov't spending!" Till the business, or the bank ,or the crops, fail then it's "Hello comrade, we need a government bail-out"
    Cons are the worst hypocrits

    • Way to stay on point.

  12. What a story:From penniless immigrant tradesman to billionaire! A dream come true through hard work and applied smarts.Every investor who bought stock in his company knew from the beginning the different voting rights of the shares.Why beef now; it is perfectly legal and nobody has been had, even if it might feel like it. This is no " Sir Konrad Black",who showed an arrogant disregard for the law and even more so toward his company's share holders.
    I only wish Canada had more entrepreneurs of Mr. Stonach's caliber!

  13. When you give your company up to public ownership, your so called 'Family Run' business model disappears …
    The owners of Magna are the public domain, not Frank Stronach's domain!
    Yes, he might own the majority of stock, but that does not diminish the fact that it is a publicly
    run company.
    The fact that he takes large cash advances for 'so-called' consulting services is in essence a sham.
    The Board of Directors should shut him down, as most boards would …

    • Mr Stronach doesn't own a majority of the stock. He has a majority of the votes based on the dual share structure where his supposedly equal value shares get 100 time the voting rights per share compared to other shareholders Sure he is an entrepenure, and people who bought Magna knew what they were getting. Still that doesn't make this right. He built the company, but the current shareholders have provided much more capital than Mr Stronach.
      It is legal, and he is smart – however in my view it is not right, it doesn't pass the smell test, and shows all what is wrong with Big Business and the markets.

      • If you don't like dual-class share structures, then don't buy shares in companies that have them. What's so difficult about that? The overwhelming majority of Canadian public companies, and public companies period, do not have dual class share structures, so it's not like you're forced to invest in them or anything like that.

  14. For those protesting the premise of this story, you need to realize in today's leftist philosophy,

    demanding that others give from them to you isn't "greed".

    Spending the fruits of your own labour is.

    The vast majority of journalists range from mild leftists to outright marxists. When you consider that filter, the premise of such stories make perfect sense.

  15. Where`s the casino and race track Frank? It appears that this dude and his lovely daughter have been milking the shareholder`s for many years and there is a dam anyone or institution can do bout it. There is something fishy been going on with Magna for a long while, Frank has been getting a lot more than his yearly consulting payments! Frank loves his daughter very much though!

  16. hope they all die soon, greedy bastards…

  17. To those with sour grapes, i say tough apples built the company, kept the greedy unions out pays his workers fairly he has done a great job a what he does. I would have to say i will be purchasing more shares of magna and in closing i say thank you Frank for a job well done

  18. Frank built the company from nothing, investors bought their stock knowing how it was structured (or should have – it's not hidden from them). I see nothing wrong, if you now don't like the deal – sell your stock, stop complaining.

  19. Although Stronach built magna from scratch. The man is 77 yrs old what does he need all tthat money for? Does he do anything to help the poor and hungry? His life is but a shadow and he can't take it with him.__James

  20. To answer the headline question concisely: Yes. He should have followed Bill Gates' example years ago and started giving it away. Now, he's 77 and it's too late.

  21. if you believe in an afterlife, then suffice it to say: Frank will really get everything he is "owed", and those payments will be eternal

  22. We should breed a few philanthropic entrepreneurs like Bill Gates and Warren Buffett in Canada, but we don't. Where are the innovators here? They sell out to big money if they invent anything; and they succumb to greed if they keep their businesses. 'KInd' and 'generous' applies not to the big entrepreneurs and the corporate executives they hire, but to the average, lowpaid, decent citizens who know that the world needs fewer greedy people. I wish the greedy ones a vision of the future as in The Ghost of the Christmas Yet To Come. They will get a severe shock…but it will be permanent.

  23. at the end of the day if in the 50's Frank didn't open the company and worked hard and put his family through goods knows what we would not be having this conversation, so stop whinning and give him the retiring package he sees is fit for all the hard work and get moving making money on his well oiled horse, its not like everyone is going to the poor house, everyone says he is greedy but look in the mirror and the story is all the same WE ALL WANT MORE

  24. If it weren't for Frank Stronach, Canada would never have heard of MAGNA, now would we? This European immigrant came here in the late 50s and started a company that employs thousands–most of them Canadians. I actually think Ayn Rand was a psychopathic uber capitalistic personality, but that doesn't mean I don't appreciate the fact that a man who built this company from his sweat and hard work and "deals" should not be getting most of the action!

    Give Stronach what he asks for. The company will get some fresh blood and he deserves it. And, as an aside, his daughter has been contributing a hell of a lot of time and money to some of the most worthwhile causes around. When Belinda crossed the floor 5 years ago, she showed guts and principles–and was vilified by the sexist bunch of neanderthals on the Hill! Her huge effort on the G20 (the girls representing 20 countries from around the world) will have an impact far and wide. She's got what the hippies used to call "social conscience". So what if her dad's rich!
    Pres. Hoover was from a humble family and his policies helped only the super rich. FDR was wealthy and guess who benefited from his rich background: the dirt-poor Depression era folk.

    Give Frank what he asks for. Well-deserved and will probably do some good in our society….unlike some really greedy Wall Street piggies like Lloyd Blankfein and Fabulous Fabrice who should be in jail!
    At least Stronach participated and benefited THE REAL ECONOMY!!!

  25. What about the guys like me? I was at the root of the economic down turn.. i worked in the factories here in Belleville, Ont. and i was laidoff permenently… It's has become very hard to eccept his pay check every year when you are sitting in your monthy meetings and hearing about how 400 poeple are losing their jobs because of cost and how the automotive sector is suffering. Maybe he isn't that smart after all…. because the old PR. can't take it with him. I'm still looking to replace the income i was earning. Sold all my shares too… had no choice!!! Thanks Frank.

  26. Are you sure he's Canada's Greediest Man? It seems there are so many candidates. Perhaps this could be a new annual feature in MacLean's. If all those rich, exploitive CEOs knew they could end up on a magazine cover named A**hole of the year, some of them might at least try to act a little bit less dispicably. Consider it a public service for us, your peon readers.

  27. I laugh when I read the word 'greed' in connection with business and finance! it dont mean a damn! the operative word is 'legal'. is it or aint it? and 'moral' and 'resposible' dont count for much as well!