By Tom Bradley

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 be seen in the context of his contribution in the building of these franchises over [the last 15 years].”

Mr. D’Alessandro has been one of Canada’s leading executives for many years.  His company is one of the best insurance companies in the world.  Unfortunately, Mr. D’Alessandro and his team made a risk management error on their variable annuity business, which has cost them dearly.  They made the decision not to hedge the market risk attached to these products, which in combination with the sharp market decline, has impacted Manulife’s capital ratios and significantly changed the market’s perception of the company.  At the end of the day, the variable annuities may not actually cost Manulife much in terms of real dollars, but the stock (MFC - $15) now trades at barely a third of its 2007 high, which is a level not seen since 2000.

This announcement is interesting for all kinds of reasons, one of which is that Manulife has consistently been rated as one of Canada’s top companies in terms of corporate governance in the annual Globe and Mail survey.

I can’t help but wonder what their governance consultant would put in his/her quarterly report to the board in the coming weeks.  It might look something like this.

Notes to Board:

1. I see that Mr. D’Alessandro’s 2009 compensation was based on his 2007 total compensation. The directors should be aware that NOBODY is making what they made in 2007. Nobody in the financial services industry. And certainly nobody who had serious performance issues over the last couple of years.

2. Our shareholders are seriously underwater right now. A $10 million ‘going away’ gift in the current circumstance is highly offensive to them and will appear to be totally out of touch with reality.  In truth, a $10 million ‘going away’ gift in any economic environment is out of touch.

3. We have paid Mr. D’Alessandro very well over the last 15 years. If we want a reminder of that, we need look no further than our release to the press which indicated that he held share units and stock options worth $48 million at the end of 2008, down from $177 million at the end of 2007. Both of those numbers indicate that Mr. D’Alessandro has done well by us.

4. I would strongly urge the board to prevent Mr. D’Alessandro from speaking to the press on this issue. In case any of the directors missed it, he was recently quoted in the Globe and Mail as saying:

"Last year wasn’t a good year for me. The only shares I’ve ever sold in this company I haven’t even sold – I’ve given to charity. I’ve reinvested 15 years of incentives in stock, and the decrement last year was $130 million."

We all appreciate how committed to Manulife and the community Mr. D’Alessandro has been, but when he talks about how hard done by he is, the media and shareholders may take it the wrong way. They may focus on how much we have actually paid him over the last 15 years. They may also notice that his loses due to our risk management errors were roughly proportional to those of our public shareholders.

5. As your advisor on corporate governance matters, I am serving notice that as of May 1st I will be increasing my hourly rate. I’m sure the directors will agree, my job just got a lot harder.

I can only think of three words to add to the consultant’s note to the Manulife Board – ARE YOU NUTS?