Magna International Inc.’s MG-T extensive network of Russian manufacturing plants turned from asset to liability after Vladimir Putin ordered the invasion of Ukraine in February, 2022. Facing worldwide pressure to exit the country, Magna ultimately took a US$376-million non-cash charge to suspend production at its six facilities.
While Magna shareholders paid the price for the company’s Russian misadventure, its leadership did not. In its recent proxy circular to shareholders, Magna reveals its board decided to ignore the Russian costs when it calculated bonuses and stock awards in its lucrative compensation programs. As a result, the executives took home millions in extra pay for 2022.
Magna says if its board hadn’t added the Russia charge back to profit, it “would have been highly punitive to management.” The cost of the Russia shutdown “was a ‘black swan’ event – unforeseen and uncontrollable.”
To the contrary: It was neither unforeseen nor uncontrollable.
As my colleague Rita Trichur noted in March, 2022, as corporate giants rushed to exit Russia, “foreign businesses, pension funds and other asset managers, including those based here in Canada, have actually spent years being willfully blind to the threat that Russian President Vladimir Putin has posed to Ukraine and the rest of the democratic world. Russia didn’t suddenly transform itself into a pariah state in recent days. Mr. Putin has long proved to the world that he is a despot.”
Indeed, after Mr. Putin’s 2014 seizure of Crimea from Ukraine, the Canadian government put multiple Russian state enterprises on a trading sanctions list.
Like many Canadian actions, this was largely toothless: The sanctions prohibited new investment in certain companies and partnerships with a number of listed individuals, but they didn’t force major investors to sell the companies’ stocks. And they certainly didn’t prohibit Canadian companies from owning manufacturing plants and employing ordinary Russians, as Magna has done since 2008.
But even if Magna followed the law, it tempted fate and underestimated risk, as all do when they dance with a dictator. Indeed, perhaps the only “black swan” event is that the international community stepped up and condemned the global investors and companies that were caught propping up Mr. Putin’s war machine. (Magna declined to comment for this column.)
So, what is the price of not being “highly punitive” to Magna’s officers? Rather large, actually, as the company has one of the most generous cash-bonus plans in Canada.
Each year, Magna calculates its pretax profit and creates a bonus pool to give its executives a slice. For chief executive officer Seetarama Kotagiri, the share is 0.2525 per cent of profit, which sounds small until you run it through the formula.
Magna says for the purposes of the calculation, it had US$1.365-billion in pretax profit, including a $376-million add-back for the Russia accounting writedown. Without the adjustment, the number would have been $989-million.
That means Mr. Kotagiri’s bonus was US$3.46-million, versus just under $2.5-million with the unadjusted number. It’s a 38-per-cent boost, or an extra $948,775 “Russia bonus” as I like to call it.
The five top-paid executives at Magna, including Mr. Kotagiri, made an extra $2.48-million in bonus money because of the Russia adjustment, by my calculations.
Magna’s Russia add-back also boosted the numbers for its 2022 return on invested capital, or ROIC, a metric that’s part of the formula used to pay out some of its performance-share awards. These “ROIC PSU” awards Magna made in 2020, 2021 and 2022 will all use that improved figure when they come due.
It’s harder for an outsider to figure out that benefit, in part because Magna said it also adjusted its 2021 and 2022 ROIC figures upward to exclude for more than $900-million in “long-term investments being made for future growth.”
When Magna doesn’t reach an ROIC minimum in any given year, it places a zero payout for that year into the formula. Without all the 2022 adjustments, Magna says it would have fallen well below that minimum. With them, it exceeded it.
After fiddling with the formula, I estimate the Russia adjustment alone could have added about US$150,000 worth of stock to Mr. Kotagiri’s payout of the 2020 awards in February and another $400,000 for the other four executives. The cumulative effect of the 2022 adjustments, I estimate, meant an extra US$1.4-million, bringing their share payouts to $3.3-million.
Once the next two payouts are tallied, in 2024 and 2025, the five executives will have made even more from the adjustments, Russia and otherwise.
Magna went to great lengths in its recent proxy circular to explain a “transformational stock grant” it made to Mr. Kotagiri and 16 other executives last year that could be worth about US$300-million for the bunch if the company’s share price triples in the next five years. The award has plenty of conditions and features to make sure the executives don’t get rich unless the rest of the shareholders do.
When it came to the Russia adjustment, however, the company’s board had a massive blind spot about Magna leadership’s gross error in judgment – and the repercussions it should have faced.
The executives of companies that have faced blowback about ill-conceived bonuses have sometimes stepped back and returned the money to the company. Instead, though, I suggest there might be some charities that serve the devastated people of Ukraine in need of a few million dollars in donations – and some individuals who have the wherewithal to step forward.
David Milstead