BlackBerry spins its wheels, but the paydays continue

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We will soon enter the 10th year of the John Chen turnaround era at BlackBerry BB-T. The shares today trade for less than they did when he took over as chief executive officer in November, 2013. In the fast-moving world of technology, BlackBerry seems to slog along with not much to show for all its efforts.

Mr. Chen does have a lot to show for it, however. As long-term shareholders have suffered, Mr. Chen has been able to sell US$96.5-million worth of BlackBerry stock, awarded to him as compensation, on the open market.

This year, angry shareholders will have an opportunity to demonstrate their displeasure with the company’s pay packages. And the early signs are that it may happen.

The two major proxy advisers, Institutional Shareholder Services Inc. and Glass Lewis & Co., have each recommended a “no” vote on the company’s non-binding “say-on-pay” resolution, to be voted on next week at the annual meeting.

They did that last year, too, when BlackBerry got 59 per cent of shareholders to vote in favour. The normal level of say-on-pay support in Canada is above 90 per cent, and only six TSX-listed companies failed to reach that threshold in 2021, so this “win” was a kind of loss.

This year, Glass Lewis has escalated its negative recommendations, suggesting shareholders sack the entire compensation committee by withholding their votes for three directors: Colorado-based tech executive Michael Daniels; Pennsylvania-based Richard Lynch, a former Verizon executive; and Prem Watsa, the CEO of major BlackBerry shareholder Fairfax Financial Holdings Ltd. (ISS recommends a “yes” vote on all directors, despite its negative say-on-pay recommendation.)

It was Mr. Watsa who negotiated Mr. Chen’s most recent contract, which Glass Lewis says “provides a case study that may be difficult to rival” when it comes to huge stock awards that executives can receive all too easily.

Certainly, BlackBerry seems to have thought it was putting in meaningful hurdles when it made an award of five million performance-based shares in March, 2018. He would only earn, and be able to sell, each block of one million shares if BlackBerry’s share price hit targets in five one-dollar increments from US$16 to US$20, each for a certain number of trading days. (The company’s stock was US$10.63 at the time.)

What no one foresaw was the bizarre meme-stock phenomenon that saw BlackBerry shares quadruple, briefly, in January, 2021. The shares opened the month at US$6.70, hit US$28.77, and then began a dismal retreat that continues to this day.

Alas, that was enough to trigger vesting of three million of the five million shares last November. And Mr. Chen promptly sold nearly US$25-million worth of BlackBerry stock on the open market.

Glass Lewis says it routinely cautions about giant stock awards that use performance targets based on share price measured over a period of days. These awards, Glass Lewis says, are “vulnerable to paying out based on short-term price movements wildly outside the influence of managers.” Specifically, it calls the vesting of the BlackBerry awards “absurd” and “incongruous ... with the company’s financial performance and shareholder experience.”

BlackBerry spokesman Matthew Chandler declined to comment for this column, saying he had nothing to add beyond what’s in the company’s proxy circular. There, BlackBerry said it recognized the result of last year’s say-on-pay vote was “below market norms” and consulted shareholders for feedback. “The company’s leading shareholders generally noted that they support the company’s strategic direction and acknowledged that Mr. Chen’s compensation package has not been enhanced since 2018,” BlackBerry said.

In October, 2021, BlackBerry said Mr. Daniels would succeed Mr. Watsa as chair of the compensation committee, with Mr. Chen saying in a news release the change “underscores our commitment to strong corporate governance and helps to further enhance the board’s independent oversight.” Mr. Chen said BlackBerry “considered [shareholders’] input and perspectives in making these leadership changes.”

However, Mr. Watsa remains on the compensation committee.

Glass Lewis says that since the three compensation committee members “have overseen the entire lifecycle of the CEO’s [stock] award along with other problematic compensation plan features, shareholders may find it surprising that the board did not see fit to refresh the committee’s composition following last year’s vote result, rather than limiting the refreshment to the occupier of the chair role ... we believe the long-serving members of the compensation committee should be held accountable for the misalignment of John Chen’s pay with company performance.”

That could indeed happen this year.

In the weeks leading up to last year’s vote, BlackBerry stock still traded in the double digits, perhaps making shareholders more forgiving of the company’s compensation programs. Those illusory gains are gone, with the stock down 60 per cent from last year’s June 23 annual meeting. Of the 196 members of the S&P/TSX Composite that have been trading since Mr. Chen’s start date in November, 2013, BlackBerry ranks 176th in total shareholder return over his tenure, according to S&P Global Market Intelligence.

The pay-for-performance disconnect at BlackBerry is real and getting worse, and shareholders will likely send that message next week. Will the company respond with more of the same, or could we see a true “refreshing” of the BlackBerry leadership - including the board?

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