As announced July 11, 2018 Doug Ford and the Progressive Conservatives have effectively removed the Hydro One CEO and board of directors. There were no firings. There was no evidence of poor performance or misconduct. To the contrary. All indications are that the executives were doing a good job. CEO Mayo Schmidt retired and the 14 member board resigned.
By industry standards neither the CEO nor the board members were being overpaid for the roles which they were hired into. They were earning considerably less than their investor-owned utility counterparts in the US according to the Financial Post where in 2016 the top five CEOs each earned more than $15 million. A Canadian-based energy company “Emera Incorporated” paid their board members well in excess of $200,000 annually.
Welcome to the reality of investor-owned utilities.
What about severance?
Whenever an employee is terminated there is a question of what compensation or severance is appropriate. Unless the employee is terminated for cause, they must be compensated by some combination of notice and financial settlement. The term severance refers to the latter. The amount of entitlement depends on many circumstances including job responsibilities, length of employment, estimated time to secure a similar position and the ability of the employer to pay. There is no shortage of historical cases from which employers and employees can determine what is fair and reasonable to avoid expensive litigation.
In the case of Mayo Schmidt he is well positioned to receive in excess of $10 million. Apparently he has a contract that states so.
There are alternatives to termination in some cases. The employee can quit or if eligible, retire. Retirement may be an attractive alternative if there is a pension and post-retirement benefits involved. Mayo Schmidt has the option to retire, receive several million dollars in shares and collect pension income for the rest of his life. The gross value of this alternative is in excess of $10 million. For a wealthy individual, there are likely tax benefits that would make retirement the best option.
Doug Ford has boasted that the CEO of Hydro One was ousted with “zero severance” as if it was some kind of victory for the government. In reality it is just more nonsense to try to salvage a public relations win out of an arrangement that works out very much in Schmidt’s favour.
Schmidt gets over $10 million with the best after-tax compensation possible. He gets to leave behind a steaming pile of horse manure which the PC government has now made worse than with the Liberals. I wouldn’t put it past Doug Ford to tell us how great this is because where you find a pile of horse manure there is sure to be a pony close by – and who doesn’t like ponies?
What is the total cost?
It has wound up costing $10 million dollars for the CEO and coincidentally impacted the share value of the company.
In the two days following the announcement of the CEO and board resignation Hydro One shares dropped by 5%.
That’s a staggering $571 million dollar drop in the market value of the company!
At the close of trading on Jul 11, 2018 Hydro One stock was worth $20.17. In the two days following the announcement of the CEO retirement, share price fell to $19.17 or by 5%. That represents a drop of $571 million dollars in the Hydro One Market Capital (the market value of Hydro One).
The bigger picture
The changes at Hydro One may not be easy to measure because of the internal corporate impact.
Practically the entire Hydro One Executive team was put in place after the appointment of Mayo Schmidt and the sale of Hydro One. These are individuals with experience in successful investor-owned utilities and major companies familiar with private sector business protocol. The new government will likely want Hydro One to follow a different direction even though they no longer control it through ownership. They will also want the remaining executives to clear out.
There has been no new strategy announced and no direction for the future. Without a CEO or board of directors Hydro One cannot make major decisions and is now paralyzed. This is an investment disaster. While no one cares to admit it, the company will be bleeding money until competent leadership, board of directors and strategic direction is re-established.
Clearly this government has little aptitude for business unless you consider a circus show to qualify.
Two years and millions of dollars have been wasted pursuing the growth opportunities that a newly investor owned, publicly traded company would do.
It would appear that Ontario has a split personality. One side wants to operate like a business without government interference, the other wants a specific socialist-flavour of public opinion to govern.
The problem is that we have elected a party that says it favours less government and wants private business to run things but acts out by doing the opposite – interfering with businesses. What do you call someone who says one thing and then does the opposite? A number of unflattering terms come to mind but it sounds like a Politician.
If a government-owned business is sold to investors it can no longer be run like a government agency. Either sell it off and move forward or retain ownership and continue to fumble along with it.
You can’t have it both ways.
Let’s not forget…
Keep in mind that the CEO payout and the board members settlements will have no noticeable impact on electricity rates. Most ratepayers aren’t even Hydro One customers. Only 1 in 4 ratepayers are Hydro One customers. Three out of four ratepayers can follow this drama for entertainment-only purposes.
This is all for show. Are we having fun yet?
The impact
The biggest impact would appear to be on shareholders, potential investors, credit agencies and those concerned about the Hydro One Market Capital.
Collateral damage will be felt by employees, contractors and suppliers.
Investors will be concerned about who will fill the CEO and board positions now vacant. No doubt there are plenty of political patronage appointments coming soon. That is not a comforting thought.
If I were a Hydro One shareholder I would be livid. Sell now and buy Fortis Inc.
This is somehow going to make Ontario attractive to new investors?
It is more like The Gong Show.
There was an easy fix…
The government still regulates the vast majority of Hydro One’s business and the process of rate-setting.
There was an incredibly simple solution to all of this that would have dealt with the financial part of the Hydro One issue. The Ontario Energy Board takes its marching orders from the government. All the OEB needs to do is determine the executive and board compensation to be excessive and exclude those costs from the rates Hydro One charges. It then costs shareholders through a reduction in their dividends. The amount would be very small and shareholders probably wouldn’t notice. If it was an issue, the existing business processes would deal with it.
Case closed and nobody loses an eye.
It does not satisfy the segment of the population that wants to vent about how much executives earn for running multi-billion dollar enterprises. Nor does it solve world hunger or create peace on earth. But it’s a start.
The takeaway
Doug Ford and the Progressive Conservatives misled the public by claiming that there “was zero payout” in the removal of Hydro One CEO Mayo Schmidt. It will cost well over $10 million for the CEO and board members by the time the dust settles. It would appear that whenever information comes from the new government it is subject to interpretation by a University English Major and legal counsel before it is ready for public consumption.
We are only a few weeks in on the PC’s term. The show is just getting started.
“We will save a dollar – no matter what the cost”
There is also the issue of share prices. Following the announcement on July 11th, share prices dropped by 5% in two days. That is $571 million dollars. Was it worth it?
The changes do nothing to reduce rates and actually cripple Hydro One. Somehow this is supposed to be a good thing?
Lowering rates will require dealing with the cost of electricity. Not delivery – which is Hydro One’s business.
All of this was to get votes.
Now we have a $25 billion dollar company in turmoil. Not a very smart business move from a government that claims to have business savvy.
In fact it is downright stupid.
Politicians aren’t completely useless.
They can always be used as a bad example.
Derek
