Royal’s pain shows worth of CEOs
By Michael LeGault, editor
If you've picked up a newspaper in the last few months you probably know that high-flying Royal Group Technologies Ltd. has hit some turbulence. Once the darling of Bay Street, the building products m...
If you’ve picked up a newspaper in the last few months you probably know that high-flying Royal Group Technologies Ltd. has hit some turbulence. Once the darling of Bay Street, the building products manufacturer has lately endured the wrath of both investors and analysts.
As of press time (mid-March) the company’s stock had plunged to $7.30 a share, its lowest level since it went public in 1994. Revenues, which used to average well over $500 million a quarter, have steadily fallen, forcing Royal Group to issue four profit warnings in a six month period. Dominion Credit Rating Service has downgraded the company’s credit rating and financial analysts have harshly criticized the company for over promising and under delivering; even questioning if management knows what it is doing. In one particularly poignant picture run by several newspapers in Toronto, Royal Group chairman and CEO Vic De Zen is seen pleading with an irate shareholder at the company’s annual meeting. Certainly not what a man who recently received the Order of Canada is accustomed to.
De Zen (as you may know) attracted shareholders’ ire when, at a time of falling profits, it was announced he would be paid a $5.6 million bonus. We are not privy to the formula or reasoning used to figure the bonuses of De Zen and other top executives at Royal Group. In response to criticism the company has formed an executive compensation committee to review all executive pay, including De Zen’s bonus.
Yet, these events suggest that, post-Enron, investors may have become more prickly about executive compensation. They also pose the following question: what is fair compensation for a CEO? A CEO, in the case of De Zen, who founded and built a company on his seemingly infinite capacity for hard work and his willingness to take on considerable financial risks.
Certainly the investor community has some justification for its concern over the way the company has recently been run. Royal Group needs to seriously question its method of forecasting profits. Rising resin prices were somewhat predictable, while a severe winter (which has delayed housing starts) was not. I am not a financial guru, but it seems a company would be better off erring on the side of caution in its forecasts. Promising and not delivering undermines investor trust and burns fund managers, who will then be twice shy to recommend your company as a good buy.
Investors have also wondered about the soundness of business dealings between Royal Group and a family-owned Caribbean resort. One prominent CEO in the plastics industry told me flat out he believed De Zen was getting distracted with outside interests and needed to refocus on his business.
In light of these issues, if I were a Royal Group shareholder (and I am not), my concern over De Zen’s bonus would be way down the list. Someone in an executive search firm once told me a CEO was essentially a salesman. De Zen is much more than this. He is first and foremost a leader with a vision. He is also a person with a tremendous understanding of how to integrate new technology into a company and into the market.
That said, no one person or company can stand still. In the post-9/11, post-Enron era, running a company has become more complicated. There is greater scrutiny, greater accountability, greater risk. Royal Group’s future, as well the future of every company in this industry, will depend on how well its leadership understands and adjusts to these new conditions.
