Rearranging boardroom furniture no panacea
By DEREK DeCLOET
UPDATED AT 8:10 AM EDT Thursday, Sep. 11, 2003
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Good governance is all the rage in corporate boardrooms, and few companies have joined the trend with more enthusiasm than Canadian Imperial Bank of Commerce.
Every few months, it seems, the country's third-largest bank does something to prove that it has found religion. It was among the first major Canadian companies to ban its auditors from doing any consulting work. Then it said it would begin deducting stock options as an expense, an accounting treatment investors have desired for years. This summer, the bank removed chief executive officer John Hunkin from the chairman's job and installed an independent director.
The warm-and-fuzzy announcements just don't stop. Last week, the bank put out a press release to announce that Mr. Hunkin plans to exercise up to 250,000 stock options and sell the shares.
Why tell the world in advance? "We believe this disclosure further supports our overall commitment to enhance corporate governance at CIBC," he said. At this rate, it's only a matter of time before we'll see Mr. Hunkin doing television spots for the SPCA, showing off a litter of kittens he's adopted.
Farther away from Bay Street, the governance gospel hasn't reached everyone's ears. Some companies just don't understand. For example, look at Leon's Furniture, the retailing chain known for its ubiquitous advertising campaigns.
On paper, Leon's is a governance disaster by the current thinking. The board is stacked with members of the founding family -- four of the seven directors are Leons. One of them is a member of the audit committee. The CEO, Mark Leon, is on the committee that decides executive pay for crying out loud. The governance consultants have obviously never darkened the door of this place.
The Leons could take a lesson or two from the enlightened Mr. Hunkin. Now guess which company has put up a better return on equity, on average, over the past five years. CIBC, which operates in the country's most profitable industry -- a federally regulated oligopoly -- and wins Brownie points from all the governance experts? Or Leon's, a bunch of cut-rate-furniture salesmen who run a company that breaks every governance rule in the books?
The furniture guys win, by a mile. Leon's average return on equity between 1998 and 2002 was about 18 per cent. CIBC's was less than 13 per cent, thanks mainly to a series of writeoffs and lending disasters that ravaged the bank's bottom line last year.
Why the profitability gap? Perhaps it has something to do with where management's interests lie.
Mr. Hunkin owns about $10.2-million in CIBC shares. He holds another $20.3-million in various exotic securities that are tied to CIBC's share price. Those are significant sums, well above the bank's internal guidelines for how much stock a CEO should own. On the other hand, he has taken $9.5-million in cash salary and bonuses over the past five years, and he may well take in another $5-million, before tax, this month from cashing out options. His personal financial interests are aligned with CIBC shareholders, but only to a point. He is a wealthy man no matter what the stock does.
The Leons, on the other hand, have far more at stake. Collectively, they own more than $300-million in company stock. Every dollar increase in the share price adds more than $12-million to the family's wealth; every dollar it sinks does the reverse. And, unlike at CIBC, there is no risk-free ride on the options train. Leon's doesn't grant them. You can question the family's domination of the board, but you can't dispute that their fortunes rise and fall with the other shareholders'.
This comparison might seem unfair, pitting a mid-cap, family-owned retailer against one of Canada's largest financial institutions. And we hate to pick on Mr. Hunkin, since you could swap his name with a number of bank executives and the point would be the same.
Textbook definitions of governance are fine. Insider ownership of stock -- lots of it -- is better. |
