Poor Corporate Governance Led to Goldcorp’s Ignominious Demise

Commentary, Natural Resources, Ian Madsen

Many people are bemoaning the loss of yet another large, independent Canadian company to a merger with an opportunistic acquirer. With the consequent loss of many executive and other head office jobs, the real tragedy is that too many Canadian companies have aimless, dysfunctional, or outright bad managers who rarely face the ramifications of their poor decisions.

It is not just the leftish people who decry high executive pay who are frustrated with those at the top receiving enormous salaries, bonuses, ‘performance’ incentives, stock options and other emoluments; so are professional, institutional and ordinary ‘civilian’ shareholders. Numerous studies have shown that there can even be an inverse relationship between executive compensation and share price or total stock (including dividends) performance, including a major landmark one by MSCI in 2016, which covered eight hundred US companies in the 2006-2015 period.

Goldcorp’s performance is just one stinker among many. Its share price hit $54.91 on September 4th, 2011 and it has been downhill with a few hiccups upward ever since. Even as recently as February 12th, 2017, it hit $22.76. The current offer, by ravenous Newmont Mining of Denver, subject to changing share prices and other developments, is for about CAD$15.26 per share of Goldcorp, not much above its 52-week low of $11. Goldcorp is a significant holding in many shareholders’ portfolios, including pension funds managed on behalf of Canadians.

Every sector has different relevant performance criteria, other than profits and share price gains, but there are some metrics gold mining companies have in common: growth in total reserves; cost of acquired or discovered reserves per ounce of gold, silver or other metals; production level of metals and growth rate of same; and estimated or realized cash production or ‘all-in sustaining cost’, ‘AISC’.  

Perhaps another standard of evaluation would be avoidance of ‘torpedoes’ or ‘land mines’, such as legal, political, regulatory, accounting, insolvency, illiquidity or criminal events. One would presume that the board of directors of a large, previously admired company such as Goldcorp would be evaluating the Chief Executive on such criteria. One would be wrong.  

The presidents of the company each in turn earned millions of dollars, costs escalated, and expensive properties were acquired which later had to be written down. Eventually, each CEO was turfed, but after the damage was done, and thousands of shareholders suffered. Goldcorp is not an isolated example. One of its peers, Barrick Gold, had similar management and strategic dysfunction and merged late last year with a much better-run South African miner, Randgold, and lost most of its upper management in the subsequent consolidation.

Economists and some public policy pundits wonder and fret why Canadian and American investors have begun to avoid being direct shareholders. Corporate scandals are one reason; bad decisions by upper management at those firms, abetted by compliant, deferential boards of directors is even more important. Ultimately, badly run companies get taken over and the poor managers get turfed eventually – although they usually receive generous ‘golden parachutes’, insulting shareholders even more after they have suffered. It does not have to be this way.

Boards have fiduciary duty to shareholders to whom they are ostensibly, and actually legally, responsible and accountable. One of the important tasks of these boards is assessing the performance of the company, and its top management. This can and should determine the compensation of those managers, and their continued employment.

One way to compensate and reward such managers is to give them a relatively modest salary, by today’s standards, at least, and additional bonuses in the form of stock in the company, held in restricted form; i.e., unsalable, until the manager leaves. Another is to give cash or stock or stock option awards based on the performance of the company, according to pertinent and appropriate metrics, which should, as far as possible, be quantitative in nature, so that they can be measured objectively.  

For a resource company, these metrics could be acquisition or development of reserves or increases in production at very good cost; for other firms, it could be introduction of new products or services with rapid sales growth; others could be highly specific to the industry and sector they are in. Outside consultants could assist. Compensation would then be linked directly to how successful the managers helped their companies perform in these sorts of achievement.

Governments should not meddle in how corporate boards assess and reward upper echelon executives. However, in this populist environment we are in, where highly paid people are scrutinized for their gains, ill-gotten or not, it makes sense for boards to try harder to not give out scarce shareholder cash to those who really do not deserve it, and ask harder questions to ensure the right major decisions are made in the first place, so that there is no tragedy later on.  

The private sector does not exist in a vacuum; it is a key, central part of society. If it does not function well, the whole country suffers – and it has. If these directors and executives do not want more direct and draconian involvement by politicians, they need to improve their performance and focus on making Canadian companies outperform expectations, not disappoint shareholders and the public.