Chairman Fagernäs and CEO Lilius to leave energy utility Fortum

Ministry model would have given Fortum CEO significantly lower bonus

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Peter Fagernäs, the Chairman of the Board of the state-owned energy utility Fortum is stepping down.
      In a statement issued shortly before noon on Thursday Fagernäs said that he would not seek the post again at next week’s shareholders’ meeting. Fagernäs has been embroiled in a major controversy over generous bonuses paid to Fortum CEO Mikael Lilius.
     
Lilius himself announced on Thursday that he would retire at the end of this year.
      Helsingin Sanomat revealed last weekend, that Lilius had been given a share bonus worth EUR 2.2 million.
      Fagernäs had staunchly defended the size of the bonus. Politicians have sharply criticised the Fortum bonus system. Although it was said to be technically in line with government guidelines, the outcome was not what the state owners had intended.
      “In serving as Chairman of the Board of Fortum, I have sought to follow also those decisions and agreements that were made in the company before my own term as chairman. Since this is not enough, I feel that I am not bound by my agreement to continue as Chairman of the Board of the company after the shareholders’ meeting to be held on April 7th, 2009", Fagernäs wrote in a letter sent to Pekka Timonen, the chairman of the shareholders’ nominations committee.
      Timonen says that the committee will convene as soon as possible, and will put forward a proposal for a new chairman.
     
Lilius said in his statement that he had considered retiring for a long time. “Recent events surrounding Fortum made me announce my decision today”, Lilius notes in the statement.
     Mikael Lilius has served in managing roles in listed companies for 18 years, and the past nine years he has been the CEO of Fortum.
     
Meanwhile, Helsingin Sanomat calculates that the gross value of the first share bonus given to Fortum CEO Mikael Lilius, would have been less than half of what it was if the company had followed state guidelines on share-based incentives.
     Under the ministry guidelines, Lilius would have been entitled to EUR 924,000 in incentives, instead of the EUR 2.2 million that he was paid last year.
     The assessment by Helsingin Sanomat is based on calculations made under the guidelines of the State Ownership Steering Department, which looks after the interests of the state in companies in which the state has a holding.
     The calculations show that the expansion of the bonuses to nearly three times the ministry recommendations resulted from decisions made by the company’s management. The share bonus was approved by Fortum’s Board of Directors, where the state is represented by Erkki Virtanen, Chief of Staff of the Ministry of Employment and the Economy.
     The Fortum board wanted to use the share bonuses to replace the stock option system, whose yields were even greater. Under the state guidelines, the share bonus should not have exceeded the recipient’s basic annual salary, which in the case of Lilius was EUR 867,000 in 2008.
     
The calculation by Helsingin Sanomat was sent to Chairman of the Board Peter Fagernäs for comment. Fagernäs had staunchly defended the system used at Fortum on Tuesday. He had said that the final sum of the first share bonus would have been exactly the same under the ministry’s model and that of Fortum.
     According to Fagernäs, the only significant difference was that under the Fortum model, Lilius’s extra income would be taxed more heavily.
     Fortum Personnel Director Mikael Frisk also stated that the bottom line would be “exactly the same” in the models used by Fortum and the ministry.
     
Both Fagernäs and Frisk were asked to comment on figures. They passed the matter on to Fortum CFO Juha Laaksonen, who submitted his calculations to Helsingin Sanomat.
     Laaksonen’s calculations show that in his comments, Fagernäs had compared the post-tax income of Lilius in the different models.
      In addition, Laaksonen had made the assumption that Lilius would not have paid any capital gains tax in the ministry’s model. If the tax is taken into consideration, the calculations of Fortum and Helsingin Sanomat are very close to each other.
     “We have also commissioned an analysis by a neutral party of the methods”, Laaksonen said on Wednesday.
     
The Prime Minister’s Office named a working group on Wednesday to examine the incentive and pension arrangements of Fortum and other state-owned companies.


Previously in HS International Edition:
  Government to re-examine incentive programmes for state-owned companies (1.4.2009)

Helsingin Sanomat