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Don't underestimate ordinary folks

From Saturday's Globe and Mail

Somehow, I have managed to reach a shockingly advanced age without ever reading a company annual report.

The reasons: Never been a business reporter; never pay any real attention to money until I have to and then only until the immediate crisis (lack of money) is over; rarely even care about business stories until they grow big enough to spill out of the financial section and onto the front page.

But the fraud trial of Conrad Black, which I am periodically covering in Chicago, has inspired me.

Lord Black and three former Hollinger executives are accused of looting their company and its shareholders through individual “non-compete payments” that were allegedly superfluous to those that were negotiated with the firm, and in Lord Black's case, by billing some of his and his wife's lavish social and personal expenses to the firm.

As background to the allegations is the notion — prominent in the controversial Breeden Report presented to the Hollinger board in 2004 and which set all the dominos tumbling — that Lord Black and his former right-hand-man-turned-government-witness David Radler managed all this by lying to, misleading or manipulating their board of directors and deliberately creating such a complex and opaque corporate structure and paper trail that it was near-to-impossible to determine what anyone was really earning, even if the directors had asked more (viz., any) questions.

But as background to that is the public suspicion that all big corporate wheels and companies probably play fast and loose with the rules (a perception fed by the fact that many regular folks do the selfsame thing at income tax time) and that all companies are probably less than transparent in their disclosures to shareholders.

This perception is somewhat further fuelled by the fact that Lord Black's defence team seems poised to argue on the one hand that he did nothing criminal (in the words of one witness this week, it was “clever but not illegal”) and on the other, that if anything criminal happened, it was on Mr. Radler's watch.

Happily, just as I was mulling all this over, what came in the mail but a package from EnCana Corp., Canada's largest energy company and which for 2006 earned the largest profit in Canadian corporate history. With the company's annual meeting set for Calgary later this month, the package contained a proxy form for voting, the 2006 annual report and another 36-page information circular that is mostly salary and compensation disclosure.

Until this week, I wasn't sure how it was that I even came to be an EnCana shareholder.

It was never a pressing issue since I own so few shares — fewer than five, I think, though that part of my package I left at home in Toronto and didn't bring with me to Chicago, where I'm writing this — that my dividend cheques usually are for less than $1. Many of these, the 26-cent ones, I never even cashed.

I got the first clue in the annual report how I came to be a shareholder.

As it turns out, EnCana was formed in 2002 by the merger of Alberta Energy Company and PanCanadian Energy. PanCanadian's parent was Canadian Pacific, and when CP split into five in 2001, every shareholder got some shares of PanCanadian Energy. Then, when PanCanadian and AEC merged into EnCana, every PanCanadian share effectively became an EnCana share.

I owned a few CP shares, bought for me decades ago by my late father, who invested, as he did in everything else, by leading with his heart: He loved CP's railway-and-nation-building history.

In any case, when I first started to plow through the material, it seemed as I'd feared.

Given that as a leading North American natural gas producer, EnCana is in a business that has a language all its own (gas sales volumes, proved and probable reserves, etc.), and coupled with the business lexicon with which I have such fleeting familiarity, the annual report was intimidating at first blush.

And I remain at a loss to know what the following sentence actually means: “The effect is to record purchases and sales of inventory that are entered into in contemplation of each other with the same counterparty on a net basis in the Consolidated Statement of Earnings.” Surely there is a way of saying this in plain English.

But that was one sentence. Damned if the rest of the report wasn't a whole lot better, with various footnotes for dopes like me who don't naturally know that MMcfe/d means Liquids Converted to Thousand Cubic Feet Equivalent at 1 barrel=6 thousand cubic feet.

(I confess, though, I had to look up the U.S. Gulf Coast Crack Spread, which is nowhere near as fun or funny as it sounds, but rather an intercommodity spread or the difference between two related markets, in this instance between the extraction of natural gas and sale of the finished product. I think.) Certainly, it seems that EnCana, unlike Hollinger, it is alleged, inevitably errs on the side of full disclosure.

Both in the information circular and on the EnCana website, the company lays out in reasonably simple language and in fine detail what its senior executives are paid (salary, bonuses, and their holdings in various stock incentive plans, the same compensation program that applies to almost all EnCana employees) and who its directors are, what their expertise is, what they're paid and whether they are independent or not, that is have no material relationship with the company. The independent directors have majority control of the board and meet in camera, without the others, at every board meeting.

There's even a section noting the directors' attendance at board and committee meetings: Almost all have perfect records, with only one director missing any, and only one of each.

Where Hollinger's board was famous for the glittering members favoured by Lord Black (the likes of Henry Kissinger, former U.S. secretary of state, and Richard Burt, former U.S. ambassador in Germany) who had little visible background in the newspaper and publishing business, EnCana's is mostly made up of chemical, petroleum, geological or mechanical engineers who presumably know their MMcfe/ds and Crack Spreads inside-out. They might be a serious lot, less fun at a party, but they appear to know their stuff.

It's curious, you know. There is surrounding the Black trial the fear that the very ordinary folks who make up the jury could convict simply out of envy, the sums of money being tossed around are so huge.

I don't know about that.

I can't imagine there are many shareholders smaller than me, with my 26-cent dividend cheques. But having put my mind to it, and for once actually read what EnCana sends its investors, I have the sense I'm in pretty good hands and that these people are worth what we pay them.

The cynicism that holds that all big business is bad is too easy, as is the one that says the little guy is always jealous of the man at the top.

cblatchford@globeandmail.com

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