Winnipeg Free Press - PRINT EDITION

Why Scrooge visited Potash Corp. workers early

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EDMONTON -- This Christmas, Potash Corp. spread the holiday cheer by raising dividends to its shareholders and gifting 18 per cent of its workforce with layoff notices.

These actions may appear counterintuitive and even bizarre to employees and those who don't study business, but the reality is they are not out of the ordinary and are becoming more and more common in Canada. A corporate culture of maximizing shareholder value and short-termism has overtaken building "real value" and long-term corporate sustainability.

The theory of maximizing shareholder value was originally developed in the 1970s by free-market economists at the University of Chicago. Its raison d'être was to protect shareholders from a "managerialist" philosophy that taught corporations should be professionally managed to serve not just shareholders, but also employees, customers, and the broader society. It taught the purpose of the corporation was to serve shareholders and the best way to maximize the total value of the company was to maximize share price.

An increase in share price was viewed as proof of greater economic efficiency, a view that is currently held in most publicly-traded companies. Right leaning governments use this philosophy to justify their effort to reduce employee rights and environmental constraints to making profit.

Under the theory of shareholder value, business performance is measured through the metric of share price: high share price means "good corporate governance." Good corporate governance is rewarded by offering shares to executives. Rather than protecting shareholders, the system has created a culture where executives focus on the expectations market (share price), rather than the real job of running the company. There is little monetary incentive to improve the company five or 10 years in the future.

In 2012, the CEO of Potash Corp. made approximately $1.2 million in salary but his total compensation, including stock options and stock awards, was nearly $11 million. According to its own corporate documents, the performance metrics that determine executive compensation are based on cash flow and market value, not "real value" of the company or even the amount of potash sold. So, executives who want to maintain their multi-million dollar compensation don't need to increase sales when they can reduce expenses (workers) to increase cash flow. They then raise dividends to maintain a higher share price than performance alone would justify, all in the name of shareholder protection.

This is not the first example of Potash Corp. maximizing shareholder value. It has continually made decisions based on short-term goals rather than long-term sustainability. Between 2007 and 2013 it nearly doubled production capabilities, but production is actually lower now than in 2007. Its decision to expand production potential increased future expectations, which meant share price increased along with the executives share rewards.

Potash Corp. and its Canpotex partners built expectations using flawed economics and unrealistic demand predictions. They estimated long-term fertilizer growth of three to four per cent per year, which equates to almost two million additional tons of potash demanded each year, and that the potash price would be inelastic on the upward side -- price can be increased without altering demand.

As in any bubble, these assumptions were good enough to keep the bubble inflating but in the real world sales were falling as the price of potash exceeded the short-term benefits to farmers and farmers chose to reduce the amount of fertilizer purchased. Internationally, demand was being destroyed when key customers like India and China became angry about price increases and looked for, and found, alternatives.

The mass layoffs and raised dividend that Potash Corp. doled out this holiday season simply follow a trend long established in its corporate culture. It shut-in production rather than produce at a lower margin (even though it is a low-cost producer and has the structure to compete head-on with the Eastern European suppliers that are gaining market share in Asia) because this allowed it to value potash in the ground with a future value that can be estimated at a higher amount than the "real value." This, in turn, maintains a higher share price and executives share compensation while creating little "real value" to the communities they work in or the employees they have a responsibility over.

Potash Corp. is just one company among many that practices short-termism and adheres to the myth of shareholder value. It and other publicly traded companies will continue to act this way until the culture of business changes.


Ryan Lijdsman is a Canadian-based international business consultant.


-- troymedia.com

Republished from the Winnipeg Free Press print edition December 11, 2013 A9

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