Jim Shaw (L) and his brother Brad in the Shaw corporate head office in Calgary, Alberta, October 22, 2010.Todd Korol
As departures go, it was one to remember. In his final act as Western Canada's kingpin of cable, Jim Shaw walked into an Italian restaurant in Vancouver last November for a lunch with a small group of investors. On the menu: drunkenness, with a side of verbal assault. He was inebriated enough, witnesses say, to mock his guests (calling one a "lightweight"), to snap at his fellow Shaw Communications executives in order to get them to shut the hell up, and to turn the affair into a bizarre, awkward occasion.
On Bay Street, his behaviour triggered a ripple of gossip, and a written apology to guests from one of the unlucky CIBC employees who had arranged the event. But it also stoked heartfelt concern. Among Canada's financial class, there are people who like Jim Shaw, respect him, or are grateful for all the money they've made on the stock. When word of the CEO's meltdown leaked out, Shaw Communications announced that he would retire sooner than planned. Yet one of his defenders urged us to ignore the story, and not compound the problems of a troubled man.
Shaw immediately repaid this loyalty by adding financial injury to the insults: Company filings revealed that the board had increased his pension, which was already one of the more lucrative executive retirement plans in corporate Canada. At the ripe age of 53, Shaw will collect nearly $6 million a year for as long as he lives. The maximum yearly retirement benefit from the Canada Pension Plan is $11,520; Shaw will earn that amount in just 17 hours. But at least there will be no family envy: New CEO Brad Shaw, Jim's brother, already has a pension entitlement with a current lump-sum value of $38 million, and he's only in his mid-40s.
For the two boys and father JR Shaw, the company faces a future retirement bill of some $147 million, according to its own actuaries. The amount these three men have paid into this plan: zero. The amount the company has set aside for the liability: zero.
Some people will tell you this is an example of a medieval attitude to corporate governance at Shaw Communications, and it is. But more than that, it's a manifestation of the lack of competition in Canada's communications sector. In the end, the Shaw family gets away with it only because the other shareholders don't complain about it. Why don't they complain? Because despite all the fat, the company remains ridiculously profitable, just like the rest of the major players in the Canadian cable and phone racket.
A generation ago, the monopoly structure of these businesses wasn't merely accepted; it was government policy. Bell Canada, BC Tel and other regional carriers had exclusive control of the phone market. Rogers Communications, Shaw and the cable guys had a hammerlock on TV, with minimal competition from satellite. Foreigners of all stripes were kept out (and still are, mostly). But those privileges came with a catch, spelled C-R-T-C. To even wipe his nose, JR Shaw needed the regulator's permission.
The Mulroney government, wisely, saw the inefficiency of maintaining an army of bureaucrats to argue about what Bell's profit margins should be. A long, slow march of deregulation gained momentum with the Telecommunications Act of 1993. Soon, real long-distance competition arrived, and the 35-cent-a-minute call from Montreal to Kamloops vanished. Local phone rates were overhauled and a new wireless industry bloomed.
But cable was never really threatened, partly because of satellite's lack of appeal to city folk and the limited capabilities of the telcos' phone lines. All the same, a decade ago, the cable companies were given the freedom to raise rates without CRTC approval in specified circumstances. Over the next six years, Shaw and Rogers jacked up the cost of basic cable packages between 55% and 90% in Toronto, Vancouver and Calgary, according to one watchdog that tracks such data.
They keep raising them. It's truly a gilded age for the cable guys. Shaw gets about 48 cents in profit (excluding interest, taxes and depreciation) for every dollar it receives from its TV customers, say Dvai Ghose and Sanford Lee, communications analysts at Canaccord Genuity. Rogers gets about 45 cents. Of course, much of this money pays for equipment and other capital expenses, and goes toward debt and taxes. But basic margins are much higher than at big U.S. cablecos like Comcast and Time Warner (40 cents and 36 cents, respectively). The story in the old wireline phone business is the same: Bell and Telus enjoy lush profit margins compared to, say, AT&T and Verizon.
Who pays for this outsized profitability? You do. But rather than re-regulate, Ottawa should introduce a bit of competitive tension. Mulroney's telecom act ushered in a new era of regional duopolies in Internet, phones and TV. That reform is now 18 years old, and it's time to take the step into adulthood. That means opening the gates to foreign providers, on fair terms.
The incumbents can handle it. For proof, see page 19 of Shaw's executive-pay documents. If the company can afford a $147-million retirement plan for the founding family, it can surely afford to compete with DirecTV.