Chesapeake-like CEO compensation wouldn’t fly in Canada
It's 'extremely difficult' to slip rewards or gains by shareholders, observer says
In this supposed golden age of corporate governance, with tighter rules often seeping into Canadian regulations from increasingly vigilant securities regulators in the United States, bad-boy executives and their toady boards still creep out from under corporate rocks with some regularity.
Take the recent case of executive compensation (non)disclosure involving Chesapeake Energy Corp. CEO Aubrey McClendon, who also chaired Chesapeake’s board.
McClendon is a big-spending billionaire. Last April it was revealed (not by Chesapeake) that McClendon, the highest-paid CEO (at US$112 million) in 2008, must have come across a new pair of Berlutis or something else he just had to have, but thought he couldn’t afford.
So McClendon borrowed US$1.1 billion by pledging his personal stake in oil and gas wells controlled by Chesapeake. Some of the massive loans he’s taken were with banks that do business with Chesapeake and other entities that have expressed interest in buying Chesapeake assets, according to reports.
McClendon’s borrowing spree has, critics say, breached business ethics and put him in a serious conflict of interest. And it’s made his board look like a collection of high-paid ostriches. As Forbes writer Christopher Helman wrote: “Shouldn’t shareholders know that the CEO of their company has found someone to lend him $1.1 billion against assets that they co-own with him?”
But there’s another question Canadian shareholders in the energy sector might be asking. Could the McClendon fiasco happen here?
A recent study by Quebec business school HEC Montréal found that, of 184 corporations studied, a significant number failed to disclose executive compensation methodologies in a way that would make investors trust them more than, say, a used car salesman. The business school found 36 per cent of public companies with a bonus plan didn’t disclose information about the performance standards used to award those bonuses, essentially failing to comply with Canadian securities regulations.
Nevertheless, John Tuzyk, a Toronto corporate lawyer with Blake, Cassels & Graydon LLP, couldn’t imagine anything close to a Chesapeake scenario happening in Canada. And he should know. Tuzyk has spent 30 years as a corporate lawyer working in areas of proxy disclosure, compensation plans, director duties and liabilities.
“In a Canadian context, the kind of arrangement described there would be unbelievably unusual in Canada,” says Tuzyk, referring to the fact that McClendon’s compensation package includes an automatic 2.5 per cent permanent stake in every well Chesapeake drills (the company plans to halt the practice). “It’s not the way that executives are compensated in Canada, not even in the oil and gas world.”
Canada has had fairly rigorous executive compensation rules since the 1980s. The Canadian Securities Administrators (CSA) rules have essentially mandated disclosure of all CEO compensation for more than 20 years. Tweaks to those rules have ironed out most loopholes. “It is extremely difficult for there to be any kind of reward or gain or any kind of compensation to be rewarded to the CEO, CFO and the three other most highly paid executive officers which doesn’t get disclosed,” Tuzyk says.
In fact, Tuzyk says because of the adoption of voluntary “say-on-pay” rules by about 70 major Canadian corporations so far, some corporations are actually reporting facets of executive compensation they aren’t legally required to reveal to shareholders. Say-on-pay provisions give investors a chance to give a “thumbs down” on executive compensation packages that seem exorbitant.
As for Chesapeake, six directors were booted from the board as a result of the compensation brouhaha and McClendon has been stripped of his board chairmanship. His pay has been docked by 15 per cent to under $20 million a year. For his shareholders’ sake, let’s hope that doesn’t spur him to take out some more loans.