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He did it his way

Frank Stronach's departure as chair of Magna is bittersweet

Canadian billionaire Frank Stronach bid farewell to his duties as chairman of Magna International this week, a year after agreeing to give up control of the auto parts company he founded decades ago in a Toronto garage.

You couldn’t write a better rags-to-riches story. In 1954, Stronach landed in Canada from Austria with about $200. He worked other odd jobs and eventually saved enough capital to open a machine shop, where he slept on a cot. Business grew because customers loved his motto: “Better product for a better price.” Employees, meanwhile, embraced his willingness to share responsibility and wealth. Together, they built one of the strongest and most diversified autoparts companies on the planet, which currently has more than a billion in the bank.

That’s why, despite all the complaints over Stronach’s pay and his penchant for taking automotive investors on risky side adventures (ranging from ski chalets to horse tracks), Franz Stronach received a standing ovation when he stepped aside on May 4.

Nevertheless, Stronach’s departure is a bittersweet affair. For reasons he says he hasn’t fully explained, he chose not to fight a gentle push out the door by managers who don’t fully buy his entrepreneurial philosophy. In return, he left with a pocket full of cash.  But having people believe in his way of doing things is far more important to Stronach than making more money.

Years ago, while treating me to a nice “Frank Caesar” salad at the Magna Golf Club, which rests next to the company’s regal corporate compound in Aurora, Ont., Stronach told me to think of the company as a church, which he headed like a Pope. Simply put, Stronach said his job was to make sure management never lost faith with his religion, which revolves around the company’s corporate constitution.

The so-called Magna Carta was designed to protect shareholders while keeping them out of any decision making, allowing publicly traded companies to run like private ones. It limits senior managers to salaries below industry average and rewards them with bonuses only if profits are generated for all stakeholders. When the company is operating in the black, 10% of pre-tax profit must be set aside for employees; up to 6% goes to senior management; a minimum of 7% goes to research and development; and 2% goes to charities to support “the basic fabric of society.” Shareholders get, on average, 20% of the company’s annual earnings.

When the constitution was created in 1984, not everybody agreed with Stronach’s assessment that the document was “perhaps the most important chapter in western industrial society in many years.” But it was widely seen as a bold initiative. Now it is despised by critics for allowing executive pay to soar at Magna over the years, despite the fact that the increase stems from a proportional growth in profits.

An older generation of shareholders, of course, also saw nothing wrong handing Stronach absolute power (via a dual share structure) over most things Magna in return for a big portion of his ownership stake in the company. Today, shareholders want a say on how their money is spent.

Times change. Religions lose steam. For better or worse, Magna is now on the road to becoming much more like traditional companies. If Stronach’s church is acquired by foreign interests, or lands into trouble borrowing money to reward short-term shareholders, or both, Stronach will make even more money as a major common shareholder. But if Magna loses its way, the founding father won’t be the guy to blame.

In other words, Canada’s corporate governance crowd needs to find a new punching bag.