How a corporate focus on the short term drove Sears into the ground

By Cole Eisen
Special to The Globe and Mail

In a surprise reversal of course, Sears Canada struck a deal with current and former employees that will see it continue to pay pension and benefit contributions through the summer. Rather than ask an Ontario court for permission to immediately halt mandatory payments, Sears agreed to continue funding on a voluntary basis until Sept. 30. While welcome relief for the families of more than 16,000 plan members, there remains no guarantee Sears will have sufficient funds to cover promises made down the road.

Employees who paid into these plans through payroll deductions may still wind up settling for cents on the dollar after banks and landlords – who come before workers under the federal statutes governing bankruptcy and receivership – have their way with the department store.

Sears Canada’s woes stem from what appears to be a methodical process of value extraction. While Sears’s pension funding position deteriorated from a $220-million surplus in 2008 to a $110-million funding shortfall last year, its leadership funnelled cash out of the firm. Over the period, Sears Canada paid out more than $1.4-billion through special dividends and share buybacks, with a large chunk of the proceeds going to Eddie Lampert – chief executive of Sears’s U.S. parent company – who holds a combined 45-per-cent stake in the Canadian subsidiary personally and through his hedge fund ESL Investments. After selling off real estate and profitable divisions of the company for cash, Sears’s Canadian leadership – recently approved to receive millions in bonuses – are now poised to make the gutting of the once-iconic brand complete by slashing pensions and benefits.

These practices are not unique to Sears, but reflect a fixation on short-term gains that drives corporate decision making in Canada. Of the firms in the S&P/TSX 60 Index, 40 sponsor defined-benefit pension plans of which 34 recorded funding deficiencies for both 2015 and 2016. As the total net pension funding position among these firms collapsed from a $560-million surplus in 2007 to a $13-billion shortfall last year, they paid out a staggering $410-billion to shareholders. Share repurchases and special dividends can be a legitimate course of action in certain circumstances, but these payouts are also used for inflating share values and triggering quarterly executive performance bonuses. With nearly 80 per cent of U.S. chief financial officers admitting to turning down projects expected to produce positive returns in the long run to avoid lower quarterly earnings, the distortion short-term pressures yield becomes apparent.

While pension funding obligations are just one item on corporate balance sheets, the practice of starving plans while disgorging value reflects an economy-wide embrace of attitudes that privilege short-term payouts over investment and innovation. These attitudes reflect the ongoing financialization of the private sector and pose a serious threat to Canada’s future economic prospects.

Financialization sees financial capital, exporting the culture of a growing financial sector throughout the economy, demand increasingly short-term profits while displacing productive capital and crowding out investment. Executive pay structures that lend themselves to financial engineering only fuel the process.

These trends have been criticized by the business community itself. In 2013, major Canadian institutional investors, consultants and corporate players founded Focusing Capital on the Long Term, a non-profit organization committed to cultivating long-term behaviour in business and investment circles. As corporate outlooks become increasingly skewed toward the short-term, pension plan members face a situation where those entrusted with a fiduciary responsibility to administer funds also face powerful financial incentives to direct cash flow away from them.

Regulatory intervention to limit shareholder payouts while significant pension solvency issues exist would be consistent with past government action and help mitigate these impulses. Facing a $3.5-billion 2012 pension funding shortfall, Air Canada was given relief from the federal government so long as executive pay hikes were capped at inflation and shareholder payouts stopped until plans were made solvent. Air Canada opted out of the arrangement in 2015 with a pension surplus of more than $1-billion.

In addition to strengthening the retirement security of more than a million Canadians with private-sector defined-benefit pensions, such a policy adopted by regulators on a general basis would solve immediate funding concerns while contributing to broader economic well being by increasing the stock of patient capital held by pension funds and limiting capital market volatility.

Strengthening members’ claims to their pension and post-retirement benefits would force companies to think twice before compromising plans’ future viability in the pursuit of short-term gain. Placing benefits ahead of creditors’ claims would go a long way to ensuring workers can retire with dignity and security.

As Canada’s largest listed companies direct cash to shareholders though dividends and share buybacks, their defined-benefit pension plan obligations continue to exceed the assets necessary to fulfill promises made to employees. Government action is necessary to ensure the obligations to generations of workers are fulfilled in good faith and that the Canadian economy can grow in a manner beneficial to all stakeholders.

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