Feudal Versus Fairness
Debate over the draft legislation (CLERP 9) aimed at improving shareholder protection hotted up this week. The Business Council of Australia and other anti-CLERP lobbyists, in their cynical attempt to protect the huge salaries of their big end of town members, have been dubbed 'irrelevant dinosaurs'. Gladly, the real debate now lies with the legislators...Labor pushing for the more comprehensive changes that are needed, and the Libs, who by not going far enough with the proposed changes, are happy just to ease their rich executive mates out of the Dark Ages.
PICKS OF THE WEEK
Gloves off in board war
Bitter feuding over proposed new rules for Australian corporations intensified yesterday as a peak shareholder body slammed the Business Council of Australia for betraying investors, labelling it an "irrelevance" in the governance debate.
Full story:
http://www.theaustralian.news.com.au/common/story_page/0,5744,7495931%255E643,00.html
Less is more, in new lore of the jungle
As executive pay rises, company performance falls, analysis suggests - contrary to the long-touted defence for a gold-plated top end...Sometimes, even when the peanuts are dipped in gold, encrusted with jewels and wrapped in $100 notes, you still get monkeys.
Full story: http://www.theage.com.au/text/articles/2003/10/03/1064988405378.htm
ALP targets two-hatted chairmen
Some of Australia's most powerful company chairmen may be forced to justify to investors why they hold the same position with multiple companies, under amendments being pushed by the Federal Opposition to the Government's final corporate governance reforms due for release this week.
Full story: http://www.smh.com.au/text/articles/2003/10/05/1065292469609.htm
Workers unhappy with bosses and jobs
Australian workers hate their bosses and are largely unhappy in their jobs, a survey of the nation's workforce has found.
Full story: http://www.theage.com.au/articles/2003/10/07/1065292571619.html
The message is getting through
MANY of Australia's top executives took significant pay cuts in the 2003 fiscal year as pressure from shareholder groups and new stock exchange rules forced boards to become more accountable.
Full story: http://www.careerone.com.au/newsviews/story/0,8523,7437018-22562,00.html
At AustMag, directors don't feel the pain
It has been a miserable year for Australian Magnesium Corp shareholders but their outgoing chairman, Roland Williams, scored an 18 per cent pay rise and more "fat fees" as a consultant to the company's disastrous Stanwell project. While AustMag investors watched their shares slump more than 80 per cent in the 2003 financial year, the company's annual report reveals Dr Williams was one of the nation's better paid non-executive chairmen, pocketing $352,885.
Full story: http://www.smh.com.au/text/articles/2003/10/05/1065292470041.htm
Head man Wal King
Wal King's contract as chief executive of Australia's biggest construction company, Leighton Holdings, expires in 2005. Waiting for him, according to the Leighton annual report this week, is a fortune in retirement benefits - $22.8 million at last count, and growing by millions each year.
Full story: http://www.theaustralian.news.com.au/common/story_page/0,5744,7452136%255E643,00.html
ASA turns up heat on Lend Lease
Lend Lease came under renewed pressure yesterday amid fresh calls by the Australian Shareholders Association for greater board accountability after last year's disastrous $945 million in write-downs.
Full story: http://www.theage.com.au/text/articles/2003/10/03/1064988405976.htm
Governance net closes on Conrad Black
A board committee gets specialist help to check on a man who says the push for corporate rectitude is a fad, writes Erik Schatzker from Toronto.
Full story: http://www.theage.com.au/text/articles/2003/10/02/1064988342443.htm
Women taking over at the top
NEW YORK: Women are now more likely than men to work as managers in white-collar professions, a study has shown.
Full story: http://www.careerone.com.au/newsviews/story/0,8523,7475188-22562,00.html
Harvey Norman team set for 'wonderful' deal
Three months after institutional investors short-circuited Gerry Harvey's plan to cut the exercise price of Harvey Norman executive options, the chairman of the franchise retailer has formulated a new share plan to reward senior staff.
Full story: http://www.theage.com.au/articles/2003/10/07/1065292591058.html
Blundstone threatens to stop local manufacture
Blundstone Boots has said it might have to stop manufacturing its famous boots in Australia because of competition from lower cost imports.
Full story: http://www.smh.com.au/text/articles/2003/10/05/1065292471122.htm
Foxtel's upgrade faces ACCC
Pay-TV group Foxtel's $600 million digital upgrade is in jeopardy unless it agrees to significant changes to its business plan after the competition regulator yesterday raised new concerns.
Full story: http://www.theaustralian.news.com.au/common/story_page/0,5744,7451222%255E643,00.html
LEGISLATION NEWS
Lobby attacks CLERP vote plan
The capacity of listed companies to generate profits could be undermined by the latest wave of financial services law reforms, which are set to give shareholders a say in executive remuneration, a key lobby group has claimed.
Full story: http://www.theage.com.au/text/articles/2003/10/06/1065292525938.htm
Labor unveils CLERP wishlist
Some of Australia's most powerful company chairmen may be forced to justify to investors why they hold the same position with multiple companies, under amendments being pushed by the Federal Opposition to the Government's final corporate governance reforms due in Parliament this week.
Full story: http://www.theage.com.au/text/articles/2003/10/05/1065292468724.htm
Labor's blitz on greedy bosses
Labor has challenged the federal Government to beef up its corporate governance reforms by rejecting business self-regulation, making many of the current guidelines mandatory and doubling jail terms for serious white-collar criminals.
Full story: http://www.theaustralian.news.com.au/common/story_page/0,5744,7470279%255E643,00.html
Rainy-day accounts spark a dry argument
Policy-makers are split on a plan to match the savings of poor people to give them a leg-up.
Full story: http://www.smh.com.au/text/articles/2003/10/03/1064988404295.htm
The fix is out: cartels probed
Cartel behaviour such as price-fixing is one step closer to being made a criminal offence, with jail sentences for offenders, after the creation of a government working party to investigate the issue.
Full story: http://www.theaustralian.news.com.au/common/story_page/0,5744,7451867%255E643,00.html
NEWS HIGHLIGHT
A survey of June 30 annual reports shows that Australia's top chief executives earn an average of $3.2 million a year, a figure sure to re-ignite the corporate payout debate.
Story by Malcolm Maiden
The Age, 4/10/2003
Ground zero for the Australian CEO pay debate is a report produced in May this year for the Labor Council of NSW by three academics: John Shields (Sydney University) Michael O'Donnell (University of Canberra) and John O'Brien (University of NSW).
Its findings include:
§ That executive remuneration levels in Australia grew from 22 times average weekly earnings (AWE) in 1992 to 74 times average AWE in 2002.
§ The claimed link between CEO pay and company performance does not exist. Very high CEO pay is in fact more often associated with below-par company performance.
§ The portion of CEO pay accounted for by shares and options has risen from 6.3 per cent to 35.2 per cent in the 10 years to 2002.
§ The average cash payment to CEO's grew twice as fast as the share prices of the top 200 listed companies in the decade to 2002, and increased despite falling shareholders returns: after-tax returns on shareholders' funds for the top 1000 companies halved to 6.7 per cent in the 15 years to 2002.
The Age has surveyed the latest pay disclosures, for 50 of the largest companies, and the talent isn't getting any cheaper: the average CEO pay packet is now almost $3.9 million.
But the way Don Argus sees it, that's largely evidence of the market at work. Comparisons of executive pay against Australian average weekly earnings "might be relevant in a local market, but it is an international market that is setting the rate", says Argus, chairman of BHP Billiton, the world's biggest mining group, and Brambles.
Australian CEO's are highly valued in that global market "because they deliver", Argus says. And for companies everywhere, "once you step out of the confines of a local economy, it becomes very difficult not only to employ talented people, but to hold on to them".
He acknowledges concerns about executive pay, and says there have been instances of overpayment. "But the real failure in incentive-based remuneration is in setting key performance indicators (KPI's)," Argus contends. "That is invariably where it falls down.
"If you get your KPI's right, and weight the incentives to the long term so that the executive still has skin in the game after he has left, you will get proper decisions made. If not, you are not going to have a long-term strategy, and you would query whether you are going to get long-term value."
The fact that executive pay rates have soared throughout the developed world supports Argus's theory. Average CEO pay in the United States rose from 42 times the average blue-collar wage in 1980 to 531 times in 2000, before retreating to 200 times by 2002, for example.
But do statistics such as these justify the increases, or merely help explain them?
"There is the notion of a celebrity chief executive, the idea that the wellbeing of an organisation is wrapped up in getting some sort of superman to run it. That's nonsense," says Charles Macek, a director of Telstra and Wesfarmers. "An organisation's success depends on the totality of all of the people who work for it and with it, how effectively they work, not just the guy at the top."
The superman myth persists, he says, because big institutional shareholders in companies operate under just such a system: funds managers are rewarded richly on the evidence of their ability - improved fund returns.
"But if you are the head of, say, a large financial institution that has got to where it is over 100 years or more, which has a natural franchise and an established brand, how much of the value of the enterprise going forward can legitimately be attributed to the application of intellectual capital of one individual, the CEO?" asks Macek.
He also believes that the introduction of incentive-based payments in the past decade was mishandled by boards, which instead of asking for a cut in base pay "gave CEO's their base pay, a CPI bump of about 4 or 5 per cent a year, and then added the incentive on. That more than anything else has driven the rise in executive pay relative to AWE."
"Business needs to recognise that it is part of the community," says Macek. "It needs to engage with the community, and reflect community attitudes. It's a cop-out to justify the process by which we have got here, however logical and rational it might be. It (the process) is delivering outcomes that clearly are unacceptable to the community."
CEO base pay in Australia's top 100 companies rose by only 1.9 per cent to $1.03 million between 2001 and 2002, according to the Australian Council of Super Investors, which represents public sector and industry super funds with assets of over $60 billion, slower than the rise in average weekly earnings. But the average cash bonus rose by 7.6 per cent, from $871,000 to $937,000, and total remuneration including the value of shares and options was up 22 per cent, from $2.64 million to $3.23 million. That figure will rise again this year when the pay packets are collated and counted.
"Is $3 million too much? I think the answer is yes," says Michael O'Sullivan, president of the ACSI. "It is completely out of proportion with the value being added by the chief executive. And it is vesting the work of others in the rewards of one person".
There have been examples of restraint. Total pay received by Leighton's chief executive, Wal King, fell from $9.04 million to $6.13 million in the year to June after his bonus and deferred incentives were cut to reflect a profit dip.
Perth-based Wesfarmers group clipped chief executive Michael Chaney's package from $7.9 million to $5.79 million. Chaney's pay is still high, reflecting his superstar status in Australia's corporate community: Wesfarmers' share price has increased more than five-fold since he took over in 1992. But his pay deal was revised to head off a huge bonus that would have been triggered by the expansion of Wesfarmer's balance sheet following the $2.7 billion takeover of Howard Smith in 2001.
Overseas, in Europe and Britain in particular, corporate payouts are being trimmed and even shelved in the wake of the write-downs, retreats and losses that have accompanied the collapse of the nineties boom, and regulators are moving to monitor and regulate corporate remuneration more closely.
The rules are changing in Australia, too. Earlier this year the ASX Corporate Governance Council produced guidelines recommending that listed companies disclose full pay details for directors and the five top executives. Companies do not have to comply, but if they decide not to, they must explain the decision to shareholders.
A draft version of the Federal Government's next package of corporate law reform, CLERP 9, is expected to be released next week, and will also propose that shareholders be allowed to cast non-binding votes on director and senior executive pay deals.
If the voting system covers directors and top executives as speculated, it will be more extensive than Britain's "advisory vote" on directors pay, which was spectacularly used last May when a slim majority of shareholders in the drug giant GlaxoSmithKline opposed a £22 million ($A53.6 million) pay deal for chief executive Jean-Pierre Garnier. Glaxo shelved the deal.
Big business's main lobby group and think tank, the Business Council of Australia, strongly opposes the non-binding vote concept, which BCA president John Schubert said could undermine the mandate that boards have from shareholders to make decisions on their behalf.
Michael O'Sullivan says, however, that non-binding votes should be included in CLERP 9 "as the next step in reining in boards, and not necessarily the last one. How can a non-binding resolution create a legal obligation to comply with it? Non-binding votes will give shareholders an opportunity to engage".
O'Sullivan says people deserve to be paid well for what they do, and should have a portion of their pay at risk, and subject to direct performance hurdles and measures of relative performance, usually against an industry peer group.
Such structures are becoming standard, says Argus, "but in this corporate governance debate, the real test is how well you articulate to the market how you are creating value".
Argus, Macek and O'Sullivan all agree that termination payments - "often payments for failure" in O'Sullivan's opinion- are a concern.
A $33 million resignation payment by Commonwealth Bank to departed funds management star Chris Cuffe and BHP Billiton's payment of $12 million plus a $1.5 million a year pension to Brian Gilbertson, who was removed as chief executive after only 18 months in the saddle, were at least defensible.
Cuffe had built up a giant funds management business at the Colonial group, and had been deferring payments while he did so. The dormant bill crossed over to CBA when it took over Colonial in 2000.
Gilbertson left BHP Billiton two years early after his relationship with the board broke down. But BHP Billiton was a financial success while he was there, and a large part of his payout (including the $1.5 million a year superannuation stipend) was locked in by the time he crossed over from British-based Billiton in the first half of 2002, when Billiton and BHP merged.
"The major component of his exit was in his super fund, which attributed about 33 years of service in various companies," Argus says.
More difficult to understand or explain have been payouts to chief executives who presided over the destruction of shareholder value, including a $4.4 million payout to the ousted Southcorp CEO, Keith Lambert, and payments totalling more than $8 million to departing chief executive of Lend Lease, David Higgins.
Argus won't discuss companies that he is not associated with, but says some payments have caused him to wonder what the performance hurdles were. "You've got to get the KPI's right, and be able to show they are right - that if the person is terminated, there is not . . . excessive remuneration for non-performance."
For his part, O'Sullivan worries that the period of peak focus on corporate pay is over. Governance issues tend to be ignored in booming markets, and rediscovered after crashes, he says, "and the window of opportunity opened up by events from Enron to HIH is starting to close as markets recover. It will be interesting to see what CLERP 9 delivers."
SATIRE
Care of our friends at The Chaser..."striving for mediocrity in a world of excellence"
www.chaser.com.au
Woolworths CEO denied bonus after company posts profit
SYDNEY, Thursday: Woolworths chief executive Roger Corbett was devastated today to report an 18.3% rise in profit under his management over the last year. The result means that, in line with long-established industry policy of only rewarding failure, Corbett and his board are unlikely to receive any financial incentives this year.
"This is a superb result for Woolworths shareholders and a horrendous result for me," Corbett announced.
"I can assure everyone that I was genuinely trying to post a multi-billion dollar loss in search of an ill-deserved payout like AMP's Paul Batchelor and Stan Wallis. But despite my mismanagement the vagaries of market forces have seen us post a modest profit."
"I offer my personal pledge, however, that this success is simply a temporary correction and we shall return to massive losses in the near future, striving towards a projected twelve-figure loss by the year 2004-05."
Corbett had already bought himself a yacht in anticipation of this year's bonus after embarking on a string of foolhardy ventures. But after today's result he is now in line for a hefty fine from the Woolworths board, who can't afford to tolerate achievement in the current market environment.
"The sad thing is that since Woolworths won't pay me my exorbitant incompetence bonus, next year's bottom line is already looking better," said Corbett, "Which will reduce my chance of getting a bonus next year as well."
Woolworths shares went up 8c, compounding Corbett's problems.
For further information
Contact: Chris Owen
Email: c.owen@labor.org.au
WWW: www.bosswatch.labor.net.au
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