Note to Board: Please do a Reality Check

Manulife is going to pay its retiring CEO $12.5 million in 2009. Dominic D'Alessandro's pay cheque for 5 months work will be made up of cash ($2.5 million) and restricted shares ($10 million). To quote chairwoman Gail Cook-Bennett, the compensation should reflect his contributions building franchises over the previous 15 years.

Mr. D'Alessandro has been one of Canada's leading executives for many years. His company ranks among the world's best insurance firms. Unfortunately, Mr. D'Alessandro and his team made a risk management error regarding variable annuity products, which significantly impacted results. They chose not to hedge market risk attached to these products. Combined with sharp market declines, this affected Manulife's capital ratios and market perception. The stock (MFC - $15) now trades at barely one-third of its 2007 high, reaching levels unseen since 2000.

This announcement raises interesting governance questions, particularly given Manulife's consistent recognition as a top Canadian company for corporate governance in annual Globe and Mail surveys.

The following imagines what a governance consultant's quarterly report might contain:

Notes to Board

• D'Alessandro's 2009 compensation was based on 2007 levels. Directors should recognize that nobody in the financial services industry currently earns 2007 salaries, particularly those with recent performance issues.

• Shareholders are significantly underwater. A $10 million severance appears completely disconnected from their circumstances and broader economic reality.

• D'Alessandro has been well-compensated over 15 years. He held share units and options worth $48 million at year-end 2008, down from $177 million previously — still indicating substantial wealth accumulation.

• The board should discourage D'Alessandro from media commentary on this matter. His recent Globe and Mail quote about losing $130 million in stock value, while sympathetic, may backfire by highlighting his total compensation history relative to shareholder losses.

• As corporate governance advisor, effective May 1st, the consultant will increase hourly rates, noting the job has become considerably more challenging.

Three words for the Manulife Board: "ARE YOU NUTS?"