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APRIL 16, 2007
How Sweet It Is At Magna The CEO of the parts maker that could buy Chrysler runs the company his way On Feb. 27, Magna International Inc. (MGA ) announced a controversial decision to cut its dividend in half. The move angered some shareholders, but the Canadian parts maker said the cut was prudent given the tough times in the auto industry. That explanation fails to account for one thing: Over the past nine months, Magna bought two golf courses from an entertainment company run by Chairman Frank Stronach, spending $84 million on the purchases. That surpasses what was saved by the dividend cut. "That's our Frank," says Claude Lamoreaux, chief executive of the Toronto Teachers Pension Fund, which now has less than 1% of Magna stock after dumping a chunk of it last year. "He's a successful entrepreneur, but then you have these transactions that many people find questionable." Outside investors aren't the only ones anxious about the business practices of Stronach, whose company has emerged in recent weeks as a leading candidate to buy Chrysler Group (DCX ). In May, four longtime board members (out of 12) will be resigning. The company says the timing is "a coincidence," but one director and sources close to the board indicated that some of the departing directors grew tired of trying to keep Stronach from straying away from the core parts business and making moves that upset shareholders. Three of them—lead director Edward C. Lumley, Canadian investor Royden R. Richardson, and retired Ford Motor Co. (F ) executive William H. Fike—were independent board members. Lumley wouldn't state his reason for leaving but conceded that there has been tension between a few board members and Stronach. "Let's just say there has been some debate over the years, and leave it at that," Lumley said in a brief telephone interview. "I just had a conversation with our largest shareholder, who wasn't happy about the dividend. This isn't the first time I had been asked to talk to shareholders." Stronach declined to speak to BusinessWeek. FIRM GRIP A close look at Magna reveals a complex and interesting company. True, Stronach is a brilliant entrepreneur who delivers results. The company made $528 million last year on revenues of $25 billion, even as many parts makers succumbed to bankruptcy. But there's another side to Magna's indomitable chairman, a side some investors don't like. Although Stronach owns just 5% of the common stock, he controls the business outright, with 67% of the Class B voting stock. Critics complain he is overpaid and uses his power to approve rental agreements and other real estate deals between Magna and companies he controls. Board members say they've had to wrestle with Stronach to keep Magna from diversifying away from the parts business and into riskier ventures such as Stronach's passion, Thoroughbred racing. "It wasn't just one thing," says the departing Richardson. "You're constantly in a position of having to look out for the shareholders. They don't have a loud voice." While he is respected in the auto industry, Stronach has few fans in the corporate governance movement. He started Magna in a garage 50 years ago and has been known to take a cavalier attitude toward complaints. When shareholders challenged his salary in 2004, he told Toronto's Globe and Mail: "It's a free country. If they don't like it, they should sell their shares." Such views are more common in Canada, where major companies such as Rogers Communications (RG ), Shaw Communications (SJR ), and CanWest Global Communications (CWG ) have similar structures with powerful controlling stockholders. "The U.S. is further along in terms of reforming corporate governance," says Joseph R. D'Cruz, a business professor at University of Toronto's Rotman School. "We still have a number of companies with crony boards." Even by Canadian standards, though, Magna is exceptional. Shareholder activist groups see the golf course transaction as just another cozy deal between Stronach's enterprises. Lamoreaux says arrangements like that are the reason Magna routinely ranks toward the bottom of the Globe and Mail's corporate governance survey. "I would question why the board would approve the purchase of two golf courses. The stock isn't in my [personal] portfolio," says Lamoreaux. Magna offers an explanation for the acquisitions: Both courses abut Magna headquarters and offices. Executives have used the country club and its facilities to hold company meetings and events and paid up to $7 million a year to rent them. Buying them would eliminate rent payments. Because Magna Entertainment Corp. (MEC) put the property up for sale, Magna was also worried a new buyer would acquire it, leaving the company without easy access to the course. Magna adds that the deal was reviewed by a committee of independent directors. Other issues raise eyebrows. Canadian shareholders have long complained about Stronach's salary. Since 2002, he has paid himself $168 million, for an average of nearly $34 million a year, according to the company's annual reports. His pay amounts to 3% of profits in a typical year. By comparison, Johnson Controls (JCI ) Chairman and CEO John Barth made $14 million in cash and stock —1.4% of profits—running a larger parts company with double Magna's 2006 earnings. Magna notes that independent directors approve Stronach's pay. JUGGLING INTERESTS Then there is the matter of real estate. MI Development owns Magna's offices and many of its factories. Stronach is both chairman and controlling shareholder of MID, which has charged Magna $425 million in rent payments since 2003, according to financial statements. Magna argues that selling those properties to Stronach's real estate firm freed up cash. Also, since the real estate business was later spun out, with some shares going to Magna stockholders, the company created value for its investors. When Magna spun off the real estate outfit back in 2003, the company said it would make 11% returns on the Magna properties and had built-in rent increases. That may be fine, but with Stronach acting as chairman of both public companies, he must juggle the responsibilities of making strong rental profits for MID while keeping costs in check for Magna. The company says that all of the leases are for "fair market value" and vetted by independent directors. Despite questions about pay and governance, there's a reason shareholders tolerate Stronach: He posts good numbers. To Magna's owners, he is to the parts company what Steve Jobs is to Apple Inc. (AAPL ) "Frank created this company from his bare hands," says Boston University business school dean Louis Lataif, who sits on the MEC board and joins Magna's board next month. "I wouldn't be associated with this if I thought there was anything devious. There may be things controversial, but not devious."  By David Welch Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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