Board Composition and Governance Dilemma at Magna International

The ‘Deal’

In 1957, Frank Stronach founded what is now called Magna International Inc. (hereinafter ‘Magna’) in a garage in Toronto. He subsequently led it to the top ranks of the world’s auto parts makers. As his company became an auto parts colossus, he became one of Canada’s most prominent corporate personalities. Regarded as a visionary, he has been compared to Cuban dictator Fidel Castro (Keenan, 2011). ¹

On 6 May 2010, Magna proposed dismantling its dual-share capital structure which had allowed the Stronach family to control the company with just a fraction of its equity. Under the deal, the company would buy all of Stronach’s multiple-voting shares for cancellation. This would allow the auto parts giant to better align its policies with Canada’s best governance practices (Gray, 2005). The proposal consisted of three main and related party transactions:

Elimination of the dual-class share structure, whereby the Stronach Trust would receive a cash payment of 300 million Canadian dollars (CAD) and 9 million Class A (single-voting) shares, with a total financial value of CAD 863 million, in exchange for 726,829 Class B (multiple-voting) shares. This would provide Stronach with an unprecedented 1,800 per cent premium to eliminate Magna’s multiple-voting structure.

Due to Mr Stronach’s control over the company, Magna’s Class A shares had long traded at a significant discount to those of other auto parts companies, and the aim of the capital restructuring was to remove this stock price discount. The effects were seen immediately, and a stock price increase of about 8 per cent was announced. This was a significant market reaction compared to a 0.6 per cent increase in the Standard & Poor’s (S&P)/Toronto Stock Exchange (TSX) Composite Index, and given the fact that share prices declined for many other auto parts companies in the same period.

The Controversy

Since the announcement, several large institutional shareholders, including the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan, have publicly criticized the deal and said they will vote against it.

The controversy escalated on 16 June 2010 when OSC staff called it ‘harmful to the integrity of the Ontario capital markets’ (Keenan & McFarland, 2010) and scheduled a hearing on 23 June 2010, just five days before Magna shareholders were scheduled to vote on the buyout proposal. On the day of that announcement, Magna’s shares lost 5.5 per cent at the close of trading (Keenan, Gray & Willis, 2010).

The next day, 17 June 2010, the controversy reached new heights when corporate governance activist and billionaire, Stephen Jarislowsky (from Montreal), went beyond criticizing Frank Stronach and lambasted the shareholders who planned to vote for the proposal: ‘I think that the people who want to [vote in favour] have no real intentions to do anything but make money…The people who are voting for it are unprincipled people in my book’ (Deloitte, 2010, p. 6).

Frank Stronach’s reaction was:

I worked like crazy. How many times you find a guy which built from scratch a world-class corporation?...When you think [about] all the hedge funds, they reap in billions without building anything. I provided 80,000 jobs, I made lots of money for the shareholders, but anyway, it’s their choice. (Keenan et al., 2010)

There was strong opposition, but after the intervention of the OSC and the authorization of the transaction by the Superior Court of Justice of Ontario, the proposal was accepted on a vote by the Class A shareholders. Since 31 August 2010, Magna has had only one class of voting shares (TSX: MG; New York Stock Exchange [NYSE]: MGA), as presented in Appendix 3 (Magna International Inc., 2010b).

Mike Harris, former Ontario Premier (1995–2002) and Magna’s Director since 2003 (Appendix 1), was appointed Board Chair on 4 May 2011 after Mr Stronach stepped down as Chair (Magna International Inc., 2007, p. 7). He became a lightning rod for criticism of the deal when it was revealed at the OSC hearing on 23 June 2010 that he had not made a counter offer to Mr Stronach, as suggested by the board’s advisers, which would have cut his buyout to about CAD 470 million (Keenan, 2012a).

According to the Ontario Teachers’ Pension Plan website: ‘We continue to believe that these directors failed to satisfactorily represent the interests of the corporation and all shareholders and, as a result, have lost confidence in their ability to act in the best long-term interest of the corporation’ (Burns, 2012).

Following a lawsuit from some major investors, Magna disclosed in December 2011 that Mike Harris (Magna’s Board Chair), Louis Lataif and Donald Resnick, all former members of a special board committee to assess this related party transaction, had all received overwhelming ‘withhold’ votes from shareholders (62 per cent said ‘withhold’, while 38 per cent said ‘for’) (Magna International Inc., 2011).

At the 2012 annual meeting in May 2013, the three directors (Mike Harris, Louis Lataif and Donald Resnick) were replaced by two new independent directors (Scott Bonham, United States [US], and Peter G. Bowie, Canada), marking the end of a two-year battle between the controlling shareholder, institutional investors and regulators. Along the way, the controversy also led to Frank Stronach’s resignation as Chairman and the elimination of a cumbersome management structure with co-chief executive officers (CEOs) (Magna International Inc., 2012a, p. 10). More details on Magna’s board structure and composition are presented in Appendices 1 and 2.

The Company

Magna is a Canadian automotive supplier. It conducts business around the world, with a focus on innovative processes ² for the design, development, engineering, manufacturing and sales of automotive systems, assemblies, modules and components. One of Canada’s largest manufacturing companies, its stocks are traded on the TSX (MG) and the NYSE (MGA). As of January 2014, Magna had operations in 29 countries and employed about 125,000 people (Magna International Inc., 2014). Its headquarters is located in Aurora, Ontario. The most diversified automotive supplier in the world, Magna has a number of subsidiaries, including Magna Steyr, Magna Powertrain, Magna Exteriors, Magna Interiors, Magna Seating, Magna Closures, Magna Mirrors, Magna Electronics and Cosma International. Magna supplies its auto parts primarily to General Motors Inc., Ford Motor Company and Chrysler LLC. In addition to these major US automakers, Magna also supplies to German and Japanese car makers such as Volkswagen, BMW and Toyota (Product History, n.d.).

Magna’s Background

Magna was originally called ‘Multimatic’. It was founded in 1957 by Frank Stronach, an emigrant from Austria. The company began operating with a single mould shop, and General Motors was the first customer to order its auto parts. On 20 December 1962, Multimatic became a publicly traded company on the TSX. In 1965, it began delivering goods to the US, and within a decade, it had opened a division in Iowa. In 1969, it merged with Magna Electronics Corporation Limited, a manufacturer of aerospace, defence and industrial components. In 1973, Multimatic adopted part of the name of this newly merged company, and has been known as Magna International Inc. ever since (Bureau Van Dijk, 2012).

From the start, the Stronach family was deeply involved in the company’s operations. Founder Frank Stronach was the Chairman of the Board for many years (1997–2011) (Keenan, 2012b), as shown in Appendix 1. His daughter, Belinda Stronach, also held several positions. She was president and CEO from 2000 to 2004, and vice president from 2000 to 2004 and from 2007 to 2010. Andrew Stronach, Frank Stronach’ son, also acted as vice president for Corporate and Business Development (Zoominfo, n.d.).

The Automobile Parts Manufacturing Industry

Companies in this industry (Standard Industrial Classification [SIC]: 3714; North American Industry Classification System [NAICS]: 3363) manufacture automotive parts, including transmission and power train components, engines and engine parts, body parts and trim, electronics, braking systems and steering and suspension components. The major companies include BorgWarner, Dana, Lear, Tenneco, TRW Automotive, Visteon and the automotive division of Johnson Controls (all based in the US), ³ along with Robert Bosch and Continental (Germany); Delphi Automotive PLC (United Kingdom [UK]), DENSO and Aisin Seiki (Japan); Faurecia (France); and Magna International Inc. (Canada) (Office of Transportation and Machinery, US Department of Commerce, 2009). As of 2014, the worldwide auto parts manufacturing industry has generated about CAD 1 trillion in annual revenue, with economic expansion in emerging markets expected over the next several years (Automobile Parts Manufacturing Industry Portfolio, n.d.).

The industry has seen numerous ups and downs since automobiles began to be mass produced in the early twentieth century. In North America, sales peaked at $111.6 billion (in 2012 dollars) in 1999, and then declined steadily thereafter until 2008, when the financial crisis occurred. Demand for new vehicles then dropped dramatically as consumers coped with major financial problems. Sales slowly rebounded from 2009 to 2012, but never regained pre-crisis levels.

Since the 2008 crisis in the automotive sector, the Government of Canada has supported the industry for the major economic benefits it provides to the country. For example, in 2011, the auto parts manufacturing industry generated a value added of nearly CAD 9 billion to the gross national product (GNP) (Gillespie, 2014). Government grants for research and development worth several million dollars have been distributed in order to maintain good-quality jobs and support industry modernization.

The Board of Directors

As stated in Magna’s Board Charter, the fundamental responsibilities of Magna’s board of directors include:

overseeing the management of the business and affairs of the corporation pursuant to the Act ⁴ and other applicable laws, and

Accordingly, the board dynamics at Magna have included boardroom battles, departures by managers and complaints by institutional shareholders. This type of discord is expensive, distracting and not always in shareholders’ best interests. A strong and effective board of directors should have a clear view of its role in relation to management and/or the controlling shareholder. As summarized in Table 1, during the period under analysis (before and after the above-described controversy), Magna’s board changed in response to the changing environment. The following changes are highlighted.

OPEN IN VIEWER

Table 1.

Changes to Magna’s Board of Directors

	2003	2007	2012
Board Size (directors)	12	17	12
Board Tenure (median yrs)	6	2	5
Outside Directors	67%	71%	83%
Director Age (median yrs)	59	62	66
Director Gender (male %)	92%	94%	92%
Directors with Honorary Title	33%	47%	50%
Board Chair	Frank Stronach	Frank Stronach	William L. Young
CEO	Belinda Stronach	Donald WalkerSiegfried Wolf	Donald Walker

2003–2006: Adapting to the Sarbanes and Oxley (SOX) Act (Bill 198)

Magna is a Canadian company whose founder emigrated from Austria (‘Facts & History’, n.d.). It is therefore not surprising that the majority of the members of the board of directors resided in either Canada or Austria. It was only in 2004 that the board began to include directors from countries other than Canada, Austria and the US, as shown in Figure 1.

The percentage of outside directors increased from 2003 to 2005, as shown in Table 1 and Appendix 1. All outside directors become independent during the same period, resulting from the post-SOX Act regulations in the US. As a member of top management, Belinda Stronach, daughter of Magna’s founder, headed the company until 2004, when she left Magna to pursue a political career (see Table 1). Don Walker then took over the position, jointly with Siegfried Wolf, who remained on the board of directors until 2010.

Starting in 2005, Magna’s financial performance began to decline, as shown in Figure 2. As mentioned earlier, the company had two joint CEOs at this time, who also sat on the board: Don Walker and Siegfried Wolf. In addition, the outsider director, Gerhard Randa, resigned from the board and become Magna’s Vice President of Planning (Magna International Inc., 2005, p. 5).

2007–2009: Traversing the Global Financial Crisis

Year 2007 marked the beginning of the financial crisis in the US. Four directors left the board (see Appendix 1), giving rise to rumours about the reasons for their departure. The announcement that dividends would be cut in half for the first time in eight years (Reuters, 2008) following a steep drop in profits appeared to be the immediate culprit. Edward C. Lumley, Lead Director since 2003 (Magna International Inc., 2007, p. 13), admitted that there had been tensions between some directors and the Stronach family for a few years (Welch, 2007).

In 2007, two outside directors, Mr Richardson and Mr Lumley, left the board after 16 and 17 years of service, respectively. Two inside directors also left: Mr Fike, who had served for 12 years; and Mr Gingl, who had served for five years. Mr Fike was Magna’s executive vice president from 1994 to 1999. Mr Gingl had also worked for Magna, starting as a factory worker and climbing the ranks to become CEO from 1988 to 1993 (Keenan, 2007).

OPEN IN VIEWER Figure 1.

Magna’s Board of Directors

In 2007, the board welcomed the second female member in the company’s history, as shown in Appendix 1. Lady Barbara Judge had studied law and history and worked internationally for several organizations, providing her with extensive governance experience (Magna International Inc., 2008, p. 7).

Three other directors were newly appointed in 2007: Louis E. Lataif, Gregory C. Wilkins and James Wolfensohn. All had completed a management degree and acquired strong business experience, although not all had worked in the auto industry. James Wolfensohn had been President of the World Bank; Gregory Wilkins had extensive expertise in the gold production industry; and Louis E. Lataif had worked in the automotive industry and served as dean of Boston University School of Management. All the company’s directors had acquired expertise by sitting on boards of directors for various companies, and three had earned honorary titles. In addition, Belinda Stronach returned to Magna’s board in 2007 (Magna International Inc., 2008, pp. 6–8) (further details on the board’s background and expertise are presented in Appendix 2).

OPEN IN VIEWER

Figure 2.

Notes: EPS data not available for 2003, 2004, 2005 and 2009. EPS: Earnings per share, ROA: Return on assets, ROE: Return on equity.

The departure of some directors and the arrival of several new ones decreased the average board tenure from 6 years in 2003 to 2 years in 2007 (see Table 1).

In 2009, two further directors left the board: Klaus Mangold and Erik Eberhardson, a representative of Russian Machines. M. Eberhardson had been brought in as a director so that Magna could develop a partnership with Russian Machines, which bought 18 per cent of Magna’s authorized capital— although the Stronach family retained a majority of voting rights (see Appendix 3). In the wake of the global financial crisis, Russian Machines decided to withdraw its investment, which explains the departure of their representative (Lesova, 2008). The percentage of independent directors remained stable at 71 per cent throughout 2008 and 2009 (see Appendix 1). We also note changes in the percentage of different countries of residence for directors (providing specific market knowledge). The percentage of members residing in Austria decreased, while the percentages of directors residing in the US and other countries increased.

In sum, this troubled period led to a major transformation of the board. Over 50 per cent of the directors left the board from 2007 to 2009 (see Appendix 1). The changes in board composition during the crisis had a marked effect on the combined expertise of the directors and their specific market knowledge, which became more diversified.

2010–2012: Moving to a Diffuse Ownership Structure

In 2010, the percentage of business experts on the board dropped to a low of 36 per cent compared to 57 per cent in 2008 and 2009 (see Appendix 2). Two business experts who left the board were replaced by a legal expert. The presence of Frank Stronach on the board for several years is explained in part by the fact that he was a major (that is, controlling) shareholder until Magna dismantled its dual-share capital structure in 2010, at which time he lost control of the company by agreeing to sell his Class B shares (Deveau, 2012; see also Appendix 3). In 2012, when Frank Stronach left the board, William L. Young was appointed Chairman (as of 10 May 2012) (Magna International Inc., 2012a, p. 12). Chief Executive, Don Walker, stated at the time that although Mr Young was not a renowned figure with as much prestige as some former presidents, he had very strong business skills, which suited Magna’s needs (Deveau, 2012). When he was appointed Chairman of the board, he had been a director for only one year. As an outsider, he brought valuable financing and investment expertise to the board, and as an independent director who had served on several boards, his experience in mergers and acquisitions was perfectly aligned with Magna’s stated overall growth strategy, specifically in emerging markets (Magna International Inc., 2012c).

Year 2012 was a record year in terms of percentage of outside directors on the board, and the first year when there was no director residing in Austria (see Appendix 2). Appendix 2 also shows that all Magna’s directors had served on other boards, but that the independent directors were more likely to have served on boards in industries other than the automotive industry.

At the beginning of 2012, Magna announced new governance initiatives by the board of directors designed to improve the board’s functions and duties. It planned the removal of the directors’ options of purchasing shares, the disclosure of detailed poll results, a renewal and assessment of the board of directors, training for directors and an advisory vote on executive remuneration and the absolute majority vote (Magna International Inc., 2012a). After three directors had stepped down, from 2010 to 2012 (Siegfried Wolf, Frank Stronach and Franz Vranitzky), the board wanted to recruit new directors who could contribute needed expertise in business, the automotive industry and corporate governance (see Appendix 2). In addition, the number of directors with honorary titles increased.

Now that Richard has completed a preliminary review of the available information on Magna’s board of directors, he is surprised to see that there have been so many changes. He quickly realizes that in order to make an accurate assessment of Magna’s governance practices, he must understand why these changes occurred and how (or whether) they affected the board’s ability to fulfil its functions. Richard also feels the need to better understand the responsibility of Magna’s directors for the controversy surrounding the buyout transaction. With so many governance regulation reforms going on in the same period, Richard needs to identify whether the changes to the board were simply responses to the market or whether they were internal initiatives intended to improve the board’s functioning.