Gambling regulators in Ontario are investigating executive compensation and governance practices at Woodbine Entertainment Group, the province’s largest racetrack and slot-machine operator.
The Alcohol and Gaming Commission of Ontario launched the probe in April, 2012, after receiving a complaint about lucrative pay for Woodbine’s top executives – money that many in the horse-racing industry say should have gone to improving promotion of breeding and attracting more spectators and bettors.
The probe is related to Woodbine’s status as a not-for-profit corporation, said Nick Eaves, the company’s chief executive officer.
The investigation into Woodbine Entertainment – which was not publicly known – sheds new light on the provincial government’s decision last year to scrap its slots-at-racetracks program.
The Globe and Mail has learned Woodbine’s executive incentives and employee profit-sharing plans were key factors in the McGuinty government’s move to kill the program, which delivered $4-billion of the revenue from slot machines in Ontario to 17 racetracks over the past 15 years. The government-owned machines generated just under $10-billion for provincial coffers.
Woodbine Entertainment paid $51-million in bonuses to employees over a 12-year period, The Globe has found through interviews and documents. In 2009, 79 management employees collected bonuses averaging $28,000. And the CEO is believed to have earned just over $1-million before his pay was rolled back this year.
The government’s sudden cancellation of the slots revenue-sharing program stunned the sector, financially crippling many horse breeders and jeopardizing thousands of jobs at racetracks and on farms. Facing a well-organized lobbying campaign by the racing industry and a backlash in rural Ontario, where the minority Liberals lost seven seats in the previous election, Premier Kathleen Wynne is developing a new deal for track operators.
While Woodbine was not the only track that faced questions over its handling of slot revenue, its sheer dominance in Canadian horse racing made it a flashpoint. No other racetracks are under investigation, said Ab Campion, the regulator’s spokesman.
Under a formula that remained in place until last spring, track operators received 20 per cent of gross slots revenues – half for race-day costs and capital improvements, and half for purses for horse races. For Woodbine Entertainment, which operates the Woodbine track in Toronto, and Mohawk, west of the city, this translated into about $1.7-billion in commissions from slot machines since 1999, including the share for purses.
The government started the revenue-sharing program in 1998, after it decided to allow slots at race tracks to boost gambling profits for the province and to bolster horse racing and the agricultural sector. The horse-racing industry was struggling to compete against other entertainment and gambling options. Woodbine Entertainment, for example, lost $14-million in 1996.
But in striking the deal, the government failed to set clear guidelines on how the money should be spent and how to measure improvements in the racing industry.
At Woodbine Entertainment, revenues began soaring after slot machines were installed at Mohawk in 1999 and at Woodbine in 2000. The not-for-profit company started a profit-sharing program in 2000 for union and non-union employees and one for management.
The Globe uncovered details about the bonus plans from Woodbine’s corporate social responsibility reports and interviews. Some managers were also eligible for further payouts under a long-term incentive plan. The cost of that is not known.
Union leaders said they were surprised by the offer of annual bonuses, which they had not sought in their contracts.
Rank-and-file employees divvied up 5 per cent of gross profits each year under their plan. A server in the track’s dining room recalled getting about $400 a year. A race-betting clerk received as much as $900 one year.
Managers had a separate plan, and also received 5 per cent of gross profits. In 2009, for example, Woodbine paid bonuses totalling $2.19-million to 79 managers and executives – an average of $28,000 each.
All told, about 2,000 employees participated in profit sharing.
Clay Horner, chairman of the board’s compensation committee, said Woodbine set up the profit-sharing plans to encourage employees to achieve the best possible financial results. The company also spent $430-million renovating and expanding its tracks, he said. In 2006, Woodbine became the second track in North America to install a synthetic racing surface. It also opened a new, 62,000-square-foot paddock for standardbred racing a few years ago.
“We didn’t have anything else to do with the money other than to reinvest it in our business,” Mr. Horner said. “Anyone who is a critic of the way we spend our money just has a different business judgment. It was always spent on improving Woodbine.”
The company cancelled its incentive plans on March 31. As a condition of receiving government transition funds to replace the cancelled slots revenue, Woodbine CEO Mr. Eaves said it had to discontinue pay-for-performance programs.
“We knew that was a requirement, and we accept it,” Mr. Eaves said. “But frankly, it’s a limitation in terms of being able to build the business.”
Woodbine’s executive salaries triggered concern within the Ontario government, sources said. Executive pay was never disclosed in Woodbine Entertainment’s annual reports. Three former Woodbine directors and one former vice-president told The Globe they did not know how much Mr. Eaves or his predecessor, David Willmot, were paid.
The compensation committee, rather than the entire board, approved executives’ pay. According to government and industry sources, Mr. Eaves, who became CEO in 2010, was paid just over $1-million before his compensation was rolled back this year at the urging of government. Mr. Eaves declined to confirm the figure.
Racetrack compensation has been exempt from the province’s annual Sunshine List because slots revenue did not come directly from the government. However, that will change next year for track operators such as Woodbine that receive transition funding.
Some former board members of Woodbine Entertainment also raised questions about executive compensation. Sources have told The Globe that the Ontario Lottery and Gaming Corp. filed a formal complaint with the province’s gambling regulator in April, 2012.
Richard Bonnycastle, a director of Woodbine when it was known as the Ontario Jockey Club and a founding member of the Jockey Club of Canada, which he left two years ago, said he was concerned Ontarians were not seeing enough benefits in jobs and tax revenues from their investment in horse racing. He suggested to Paul Godfrey, then chairman of the OLG, that he investigate management compensation at Woodbine.
A spokesman for the OLG said the agency does not comment on matters before the regulator.
Mr. Horner, the Woodbine director, said the board is reviewing its governance measures to ensure the organization is following best practices. Along with two other directors, Mr. Willmot stepped down from the board this month after more than 30 years at the company, including 15 years as CEO. He is an honorary director.
The changes were prompted, Mr. Horner said, by a recognition that “we were in a different time and that we needed to recruit some new skill sets to the board.”
The questions about Woodbine come at a pivotal time for the horse-racing industry. In response to intense anger in rural Ontario over the cancellation of the slots-at-racetracks program, the Premier asked a panel of former cabinet ministers in May to develop a new deal for the industry. A comprehensive five-year plan is expected in October.
Many horse owners and breeders began raising questions about how track operators were spending slot revenues a few years after the program began.
Their concerns prompted the province to appoint a review panel in 2007. Led by former Ontario Racing Commission chairman Stanley Sadinsky, it called for an overhaul of the slots program, concluding it lacked direction, oversight and accountability.
But Woodbine Entertainment and other track operators opposed the proposed reforms, and the government never acted on them.
Mr. Eaves said the entire horse-racing industry benefited significantly from slots-at-racetracks funding.
“The quality of our racing programs got better and better,” he said.
by Karen Howlett and Renata D'Aliesio of the Globe And Mail
(reprinted with permission by www.theglobeandmail.com)