Tuesday, March 29, 2011

(No.143) Manulife = another Elvis sighting

If executives equipped with something above room temperature IQ wish to understand post-2007 public attitudes to the financial crisis, its causes and aftermath and why financial services companies and those running them are regarded (variously) with suspicion, resentment, cynicism and even loathing, Canada's own Manulife is at hand to provide another illustration.

Specifically Manulife's board of directors, occupying a planet somewhere in a parallel universe, provided for another year a level of CEO compensation the origin of which can only be found to exist somewhere in cloud-cuckoo-land.

For 2009 the Manulife board lavished millions of dollars in special bonus money on departing CEO Dominic D'Alessandro and did so after Manulife had ended up in a very deep financial ditch. That serious financial position for the company resulted from D'Alessandro having decided, in the cause of further enhancing company profits, not only to vigorously pursue the sale of guaranteed variable policies in the $billions but to cease in 2004 hedging the company's large financial risk inherent in the sale of such products.

Donald Guloien became Manulife CEO in May 2009 and for that year earned total compensation of $9,658,433. Donald Stewart, the CEO of Sun Life Financial (which had not ended up in the same unhedged ditch as Manulife), Manulife's chief Canadian competitor, earned $3,836,334 for 2009. There was no rational justification for that differential even if it might have been at least partially explained by the curious 'thinking' of the Manulife board of directors.

Let's turn now to 2010, by the end of which Manulife had already been the reluctant recipient of three successive downgrades by the rating agencies. Had I been a Manulife shareholder I would have been outraged by Mr. Guloien's 2009 compensation. Happily I was not a shareholder and am even less likely than ever to become one. Had I been one now I might have been rendered speechless by Mr. Guloien's total compensation for 2010: $9.66 million.

Remember that Mr. Guloien's core role as chief executive officer of Manulife has been essentially janitorial -- i.e., trying to clean up the financial mess left by his predecessor. On the plus side he has at least acted to increase somewhat the proportion of Manulife's foolishly acquired variable business that is now hedged.

Still, in what sphere can his 2010 total compensation be justified when the company's 2010 results compared to objectives were as follows?

1. net income objective -- $2.6 billion; result -- net loss of $391 million

2. return on equity objective -- 11%; result -- 1.8%

Given these 2010 results, the rationale provided by the Manulife board for the CEO's bloated compensation package is not just weak, it is risible. Indeed it is about as convincing as another reported sighting of Elvis Presley, this time pumping gas at a Mobil station in Natchez, Mississippi.

One can only wonder how long Manulife's shareholders, especially its larger shareholders, will be prepared to tolerate ridiculous levels of senior executive compensation for inferior results.

As for the investing public (plus the public generally) a societal cynicism that already has little or no real regard for big business leadership has been provided by Manulife with yet more reinforcement.

Alastair Rickard

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blog: RickardsRead.com

email: Alastair.Rickard@sympatico.ca

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