Finland shoots itself in foot over Fortum

Fortum has been feeling the brunt of some political-risk in recent days. First, Finance Minister Jyrki Katainen announced he wanted a windfall profit tax on electricity generation. He estimated the State could gain between €30 and €300 million a year.

Of course, every current and potential investor (including myself) immediately subtracted an average amount from Fortum’s future cash flows and concluded that the energy giant was now worth about €2 billion less. Predictably, about €2 billion disappeared from Fortum’s market cap as its share price plummeted.

Since Finland owns half of Fortum it just lost about one billion euros. If the government can make another €165 million in these new windfall taxes on average, and we ignore any possible changes (up or down) in the share price, it will take them about six years to make back the money it lost in six days. Great job, guys.

Then the government became outraged that Fortum CEO Mikael Lilius got paid more than they wanted last year. One thing led to another, and Fortum ended up losing the Chairman of the Board Peter Fagernäs as well as CEO Lilius.

So was Lilius really overpaid? I made a quick and completely random check of a couple of companies I follow. I checked CEO pay versus reported earnings for ten companies such as Alfa Laval, Finnair, Marimekko, Nokia and Outokumpu. I used statements from the last five years where available.

I found that, on average, CEOs were paid €1 for every €431 earned by a company over this time frame. In Fortum, Lilius was only paid €1 for every €642 made by the corporation. So Mikael Lilius was paid about a third less than the average but he was still publicly vilified. Maybe Fortum did skirt the rules; maybe not. I don’t know. What I do know is that he wasn’t making as much as the average CEO in my sample based upon earnings.

Don’t get me wrong. One thing nice about public ownership of corporations is that government officials have the power to keep executive pay in check, looking after shareholder interests. In this case, though, Finland not only caused itself a huge market loss, but it also lost itself two very capable businessmen. Finland was not the only one hurt. All those shareholders who were partners with the government as Fortum owners have been hurt as well.