Target execs granted share units one day before Canada retreat, Janet McFarland and Marina Strauss

Target Corp. granted thousands of share units to its executives and board members last month on the day before the company announced plans to close its Canadian stores, pushing the retailer’s share price higher as investors applauded the news.

The Globe and Mail
February 13, 2015

Target execs granted share units one day before Canada retreat
Janet McFarland and Marina Strauss


As closing sales are conducted in Target’s Canadian stores, executives appear to have benefited from questionable share-unit timing. MARK BLINCH/REUTERS

Target Corp. granted thousands of share units to its executives and board members last month on the day before the company announced plans to close its Canadian stores, pushing the retailer’s share price higher as investors applauded the news.

Regulatory filings of insider transactions show 10 of Target’s top executives – including chief executive officer Brian Cornell – and 10 members of Target’s board were granted a total of 113,298 performance share units on Jan. 14 as part of the company’s annual grant of equity under its compensation plan. Mr. Cornell alone received 22,749 share units.

On the same day the share units were granted, the Target board approved the decision to retreat from Canada. The U.S.-based discounter announced the next day on Jan. 15 that it was shutting its money-losing Canadian operations, saying it could not see a way to make the 133 stores profitable for at least five years. The news drove Target’s share price up 2 per cent to close at $75.67 (U.S.) on Jan. 15 from $74.33 the prior day. Since then, the share price has continued to increase, closing Friday at $76.12.
Target spokeswoman Molly Snyder said the retailer “has a long-standing practice of granting annual stock compensation awards on the day they are approved at Target’s board of directors. This approval historically takes place during the company’s regularly scheduled January meeting.”

However, corporate governance experts say Target’s board should have been more sensitive to the unusual circumstances when a major news release was pending the next day. York University associate law professor Richard Leblanc said the board’s decision to grant share units a day before the news release “does not pass the smell test from a governance point of view.” Even if the grant date for the share units was set in advance, Mr. Leblanc said the announcement of the Canadian division’s closing should have been done prior to it.

“From an optics point of view, informed people are going to say, ‘Listen, this just doesn’t make sense. You’re making an announcement right after you’ve issued stock to directors.’”

Share units are phantom shares that track the company’s share price over a period of time and are settled in cash based on the value of the company’s shares on the date they become payable.

Target’s performance-based restricted share units – called PBRSUs – are designed to track the value of the company’s shares over a three-year period starting on the date they are granted. They pay out if the company’s total shareholder return, which includes share-price gains and dividend payments, exceeds that of a selected peer group of retailers.

While it is unknown whether Target’s newest PBRSUs will ultimately pay out in three years, they have received a leg up by being priced a day before news was released that is expected to have a positive impact on the company’s earnings.

Neil Stern, senior partner at retail consultancy McMillanDoolittle in Chicago, said Target’s decision to close its stores in Canada “will relieve it of an enormous economic burden …. Removing this distraction should enable it to emerge as a stronger, more focused retailer.”

Target disclosed a new policy last year to grant all its annual share units in January, ensuring units are granted just once a year at a regular time.

Executive compensation experts said it is considered good practice to award equity under compensation plans at the same time each year so that the board of directors cannot be accused of picking a favourable time. But they argue the practice needs to be tempered with a practical view of other corporate events.

Toronto securities lawyer Carol Hansell, who specializes in providing corporate governance advice to boards of directors, said she believes it would have been prudent for the Target board to consider delaying the grant in this case, knowing such major news was going to be released the next day.

Ms. Hansell said there may have been no nefarious intention, but the grant date turned out to be favourable for the directors who approved the plan.

“If they had thought it through, they probably wouldn’t have done it that way,” Ms. Hansell said. “You might have said, ‘Let’s delay the option grant until this information has been fully absorbed by the marketplace. So we’ll do the grant, but the grants aren’t going to get priced until three days after that announcement.”

Compensation consultant Paul Gryglewicz of Global Governance Advisors in Toronto said Target now runs a risk of seeing some shareholders vote “no” in its say-on-pay advisory vote on executive compensation this year, and some may express their displeasure by withholding their votes for directors on Target’s board.

“Optically, it looks horrible,” Mr. Gryglewicz said.

He noted he works with many clients designing compensation awards, and they spend a lot of time determining an appropriate equity grant date that will not fall before major news is disclosed.

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