Not so fast, easyhome!

The pre-Christmas week is a quiet one on Bay Street. Stocks barely trade. Client lunches last until mid-afternoon; if you can actually get a reservation anywhere half-decent. The underground network of stores try to squeeze as much as they can out of their patrons — all at full price.

It is not normally a time for high-stakes Boardroom poker, but that’s exactly what happened at TSX-listed easyhome (EH:TSX), a provider of leased household furnishings, appliances and home electronic products via 240 stores and outlets across North America. At least I assume that some Boardroom poker took place, since a majority of the easyhome Board of Directors resigned simultaneously, including one Director (Rod Adams) that had been there for merely eight weeks. According to the press release announcing their departures, five of the nine directors just up-and-left, leaving two independents, a 29% shareholder Chairman and a CEO/Director to manage the affairs of the company. The Board’s governance committee is now down to a single member; how ironic.

What happened, you might ask? We have no idea. One assumes there was a disagreement about the future direction of the business. But that seems a trite assumption since each Board member signed on with a certain corporate trajectory already set. Whatever the reason, shareholders certainly hope that the $40 million bank facility doesn’t include a “change of control” provision as an Event of Default; a C-O-C definition often includes an aggregate change in more than 50% of the Board. You don’t want your bank line suddenly coming due when you’re in the leasing business.

According to the Equity Research department at Paradigm Capital, the “resignations are unfortunate, but no reason to panic. It is an unfortunate setback in terms of sentiment after the company had made solid progress addressing the fraud and normalizing fundamentals.” I suppose it’s possible that there’s no reason to panic, but how does anyone really know? Particularly if there’s a checkered history at the company in question. It’s not as though the press release advising of the Board resignations gave any colour regarding the success of the business post the last quarter-end.

As Director resignations go, it is hard to top former HP Director Tom Perkins’ departure. But the beauty of his experience, painful as it was for him and HP shareholders, was that he was able to share his reasons with the world. Unfortunately, for all the papers you read about good corporate governance, there are still no useful rules in place that address such situations. Shareholders are left to speculate when the majority of a TSX board resigns. If you sell your shares on the news, you could be missing good things on the horizon; if you don’t, you’re down 15% along the the rest of the easyhome shareholders who rode out the first day of trading post-announcement. Paradigm cut their target from $13 to $11 on the news, but the stock was already at $5.75 at that point.

The lineage of some of the “departing directors” is uniquely interesting, too. Jamie Bowland comes from Mega Brands (a 2010 CCAA event) and Sino-Forest (see prior post “Sino piece demonstrates DTM’s careless approach to reputations” Nov 7-11). Wesley Voorheis counts Coventree (which was ordered by the OSC to wind up its operations in November for failing to disclose a material change in its business), Atlas Cold Storage (2004 OSC cease-trade order), and Hollinger Inc. (CCAA, OSC cease-trade order, etc.) as prior Directorships. Simply put, these guys have seen a lot of ugliness over the past few years. Did that experience and insight have any relevance to what ultimately led to their voluntary departure from easyhome? How are shareholders to know, either way?

As the OSC and Toronto Stock Exchange vie for leadership over corporate governance, the easyhome situation serves as a case study. The corporate director “schools” at McMaster and the Rotman School of Business can teach legions of Directors what to do when their own “easyhome moment” comes to pass within the privacy of a corporate boadroom. The ultimate weapon of an individual Director is to resign immediately, of course, as a display of their own displeasure. But, without context, it really isn’t all that helpful to the rest of the company’s stakeholders.

Shareholders actually need that information. And the regulators should institute a rule that requires better disclosure when the majority of a public company Board resigns en masse.

MRM
(disclosure – this post, like all blogs, is an Opinion piece)