Greg Sorbara might rue the day Ontario Premier Dalton McGuinty rewarded his loyalty with the most important cabinet post in the new Liberal government.
If Mr. Sorbara had been named, say, minister of tourism, or agriculture, he could survive the unfolding scandal at Royal Group Technologies. He might anyway. But as Finance Minister, the man responsible for a $70-billion budget and the care and feeding of the province's capital markets, he needs to be credible to be effective.
Late yesterday, Mr. Sorbara said he had asked the Premier to remove the Ontario Securities Commission from his portfolio because of the regulator's investigation into Royal Group, where the minister was a director for nine years. Management board chairman Gerry Phillips will take over. It's an elegant way to sidestep an embarrassing turn of events. But the Royal Group saga still makes you question Mr. Sorbara's fitness for the finance job. People are right to ask whether someone who did so little to protect the shareholders' interests should be entrusted with the taxpayers' money.
The facts are as follows: Mr. Sorbara was a Royal Group director from the company's initial public offering in 1994 until he resigned last fall. During that period, the building products company did tens of millions of dollars in business with company insiders, including most or all of the $32-million in sales to the controversial St. Kitts resort controlled by chairman Vic De Zen. Those deals touched off the criminal and regulatory probes the company confessed to Wednesday evening.
The OSC is also investigating the company's financial disclosure, an area that fell under Mr. Sorbara's watch as a member of Royal Group's audit committee. In many ways, the OSC's probe has greater potential to damage him than the RCMP's, because it's more likely to expose lax oversight by the company's directors.
Giving Mr. Sorbara the benefit of the doubt, you have to assume he was unaware of any criminal activity, if there was any (no charges have been laid, and the investigation continues). The more pertinent question is, what should he have known?
Warning signs were plentiful, even to outsiders. More than four years ago, a Toronto research firm first raised questions about the company's accounting policies. "Royal has managed remarkably consistent earnings patterns in net sales, net earnings and cash flows over the past five years," its analysts wrote. "The pessimist might say they look too perfect."
The profit figures didn't stay perfect, and before long Royal Group's sinking fortunes had wiped out more than $2-billion in market capitalization. The critics grew louder. In May, 2002, analyst Anthony Scilipoti of Veritas Investment Research hammered the company, complaining that it failed to properly disclose the St. Kitts deals. Mr. De Zen's connection to the St. Kitts project became known to the public only because of the media, it appears.
There were plenty of other questionable matters, like the board's policy (since abandoned) of letting Mr. De Zen determine the size of his own bonus, and the founder's use of a backdoor financing scheme to monetize part of his stake in the company. It's not for nothing that Royal Group is thought to have one of the weakest boards of any S&P/TSX 60 firm.
Perhaps, behind the boardroom doors, Mr. Sorbara raised objections to all of these things and lost the arguments. He is, by all accounts, a smart guy and an experienced businessman -- and financially fluent, too, a necessary quality for an audit committee of a public company.
But if he was suspicious of Mr. De Zen's inside dealings, why stay on the board, especially as it became obvious the Liberals were destined to win power? Why take the risk of a scandal, all for a few stock options and a lousy $10,000 annual retainer? And if he wasn't suspicious, well, why not?
No one is accusing Mr. Sorbara of anything worse than being a weak director (in the fine tradition of his former boss, ex-Liberal premier David Peterson). In the circumstances, it hardly matters. At best, Mr. Sorbara was ignorant of what was going on at Royal Group; at worst, he was negligent in his defence of its shareholders. Either way, it's pretty clear he's damaged goods as finance email@example.com