Crescent Point Energy Corp.’s primary message to shareholders this spring is that in the past year, it has “remained focused on what we can control.”
The company defines this as “operational excellence, long-term value creation and financial discipline.” This is the tell that what it presumably cannot control – the recent performance of its stock price – offers little good news.
Indeed, over the past few years, Crescent Point has been a value-destruction machine, even by the dismal standards of the Canadian energy business. And that is what has attracted the attention of an activist shareholder, Cation Capital Inc., which has proposed it place four directors on Crescent Point’s board.
Chief among Cation’s criticisms in a proxy document released Tuesday is that Crescent Point has provided outsized compensation to its executives – $93.5-million over five years – even as the stock price has declined by 76 per cent since the beginning of 2013 and the dividend has been slashed by 87 per cent.
Cation, certainly, is not the first shareholder to notice this. Crescent Point, in fact, had in 2016 one of the worst performances in the short history of Canadian “say-on-pay” votes, when just one-third of shareholders expressed approval of the company’s approach to executive pay.
Crescent Point’s been spending a lot of time retooling its pay plans since, and shareholders gave a thumbs-up in 2017. The company’s latest compensation moves, however, raise the question of why, if Crescent can’t control its stock price, the executives stand to be richly rewarded if the shares come back from the dead.
Let’s first look to 2016, the year of the embarrassing pay vote. Two major proxy-advisory services, Institutional Shareholder Services and Glass Lewis & Co., recommended that shareholders vote No on Crescent’s pay advisory question.
In response, Crescent Point cut CEO Scott Saxberg’s pay by 50 per cent, reduced or eliminated other compensation, and set to work on a performance-share program.
Even then, ISS, which influences the votes of many institutional investors, seemed to struggle with its advice. Crescent Point, it noted in its 2017 report, still had a long-term shareholder return that was in the bottom 25 per cent of peers, even as Mr. Saxberg’s stock-grant compensation was in the top 25 per cent. It called its recommendation a “contentious FOR.”
The company’s disclosure of 2017 executive pay just came out a couple of weeks ago.
Crescent Point says that as part of its overhaul, it desires approval of a new 13-million-share stock-option plan. The rub is that the company’s board already approved the plan in early January and issued almost three million of the options on Jan. 9, when the stock traded at $10.06. It gave 450,000 options to Mr. Saxberg.
The company will be forced to cancel the shares if shareholders don’t vote Yes on the plan, so it’s not a done deal. But Crescent Point says they should approve it, because it’s part of a “robust, well-balanced compensation plan” that also includes other performance-based awards. The stock option plan, Crescent Point says, “only rewards share price growth.”
And that, we have learned, is a key problem. A share price might grow, and stock options gain value, as part of an industry or market-wide boom. Whether the stock outperforms peers is irrelevant. That is why companies have been minimizing, not expanding, the use of stock options. (Crescent Point notes 87 per cent of S&P/TSX 60 companies and 75 per cent of energy companies on that index still have a stock option plan.)
Cation notes that it wasn’t so long ago Crescent Point was rewarded with an above-peer price multiple and a$30-plus share price. Now, with a “depressed exercise price, these options are essentially risk-free money – for management, at shareholders’ expense – that rewards insiders for having decimated the share price.”
Harsh, but not totally unfair. To be polite, it was a very timely of Crescent Point to decide to make options a significant part of its compensation program. If the management of the company can just get the stock back to its Jan. 2, 2013, price of $37.62, it’ll collect a little more than $82-million in stock-option profits, with Mr. Saxberg receiving $12.4-million of that. Whether that result is within their control, or not.
David Milstead