I like to say that for many investors, corporate governance doesn’t matter – until it does. All sorts of icky stuff can be ignored or rationalized as long as a stock is delivering market-beating returns. But when things go south, governance issues suddenly rise in importance.
For most of GFL Environmental Inc.’s GFL-T life as a public company, the performance of its stock has quieted potential complaints. Despite an underwhelming 2022, GFL shares are among the best performers in the waste industry over the last three years. And they’re near the top of the pack so far in 2023.
So as GFL’s shareholders cast ballots next week at the company’s shareholder meeting, don’t be surprised if the board and management get hearty endorsements – despite two major proxy advisory services’ extensive concerns about the way things work at GFL.
Both Institutional Shareholder Services and Glass Lewis & Co. Inc. recommended shareholders vote “no” in GFL’s non-binding advisory vote on its executive compensation approach, known as “say on pay.” It’s the third straight year the two have made negative recommendations on pay, covering GFL’s entire history as a public company.
Vaughan, Ont.-based GFL – which declined to comment for this article – may have expected a different result. After all, CEO Patrick Dovigi’s pay decreased in 2022 to “only” $16.8-million. He had received more than $80-million, combined, in 2020 and 2021, largely from the value of grants of stock options that GFL intended to be multiyear awards.
GFL did not give Mr. Dovigi stock awards in 2022. He did receive an $8.77-million cash bonus, however. And the company spent $5-million to pay the premiums for insurance policies and cover Mr. Dovigi’s taxes that he owed for that benefit.
ISS acknowledges that Mr. Dovigi’s 2022 pay is “substantially lower” than in the prior two years, but says it is still twice the median pay for CEOs of the company’s peers – even as GFL stock underperformed those peers and the broader industry in 2022.
ISS says the company has had “persistent problematic pay practices” and had a “lack of response” to the low say-on-pay support at last year’s annual meeting. (The company got 82-per-cent support; Canadian companies average more than 90-per-cent support, according to research from Kingsdale Advisors.)
The repeated “no” recommendations from ISS and Glass Lewis have also led both to recommend shareholders withhold votes from director Paolo Notarnicola, the chair of the board’s nomination, governance and compensation committee. Mr. Notarnicola is a former KKR exec who now supervises the Canadian investments of BC Partners. That’s GFL’s largest shareholder, with 30 per cent of the company or $5-billion worth of shares.
That’s where ISS stops – it recommends “for” votes for the remainder of the GFL board. But Glass Lewis, the smaller and younger of the two advisers, advocates greater activism.
Glass Lewis recommends withholding votes from six of 10 directors, including all four members of the compensation committee. (In addition to Mr. Notarnicola, that includes Dino Chiesa, the former CEO of both the Ontario Housing Corp. and the Ontario Mortgage Corp. government agencies; Jessica L. McDonald, previously CEO of the BC Hydro and Power Authority; and Arun Nayar, a top finance executive at Tyco International from 2008 to 2015.)
Glass Lewis adds another reason for its withhold recommendation for Mr. Notarnicola, noting GFL paid $5.8-million in 2022 to lease five properties in total from Mr. Dovigi and an unnamed director. GFL says the leases are on an arm’s-length basis and the terms of the deals are supported by rental rate comparisons prepared by third parties.
But Glass Lewis says it questions the need for GFL to lease property from its directors. “We view such relationships as potentially creating conflicts for directors, as they may be forced to weigh their own interests in relation to shareholder interests when making board decisions. The opacity of the disclosure only adds to our concern.”
Glass Lewis also recommends shareholders withhold votes from Mr. Dovigi himself, to hold him responsible for the way GFL has structured its dual-class share structure.
Mr. Dovigi controls nearly 24 per cent of GFL’s shareholder votes with an economic ownership of 3.8 per cent, based on Glass Lewis’s calculations. Glass Lewis says GFL has “governance risk posed by the divergence between the economic stake of each shareholder and the allocation of voting power.”
Glass Lewis also recommends withholding votes from Raymond Svider, the chairman of BC Partners, who missed three of the seven GFL board meetings in 2022.
All of this, of course, may be just an intellectual exercise. Mr. Dovigi, BC Partners and long-time investor Ontario Teachers’ Pension Plan have a combined 53.9 per cent of the company’s voting power, and they have an agreement in place to back each other on director voting. Teachers, for its part, voted in favour of GFL’s say on pay in 2022 and offered a statement of support for GFL’s leadership at the time. (It did not respond to requests for comment for this column.)
Still, it will be interesting to track the votes of the other shareholders this year and in the future. That will particularly be true if GFL has another year of underwhelming stock performance as it did in 2022, when rapidly rising rates called its debt-heavy business plan into question.
In the governance world, many investors prefer the concept of engagement, rather than divestiture. The idea is to benefit from a company’s economics while encouraging it to shore up its governance practices.
But that assumes the company will actually listen to the suggestions. GFL and its controlling shareholders seem to like things the way they are. And that may leave the governance-minded no choice but to follow the flip advice given in these situations: If you don’t like it, sell the stock.
David Milstead