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David Coe’s mystifying board election

There has been an enormous level of angst from corporate Australia directed towards Productivity Commission’s proposed “two-strikes” rule. The rule suggested that any company that had its remuneration report resolution rejected by more than a quarter of voting shareholders face their entire board spilled, with all directors then placed for reelection at a general meeting. While the rule appears draconian, it is in reality quite absurd  — for the simple reason that it appears Australian shareholders would support Charles Ponzi or Bernie Madoff for election  — so long as they were board-endorsed candidates.

Last year, David Ryan managed to get himself re-elected onto the board of one of Australia’s oldest property developers, Lend Lease and as chairperson of Transurban. Shareholders appeared none too concerned  that  Ryan was chairman of ABC Learning Centre’s audit committee while the company was producing what appeared to have been fraudulent financial statements. ABC’s $437 million loss in 2008 (which easily exceeded all its previous reported “profits”) and the revelation that the company was reporting upfront payments from developers as ‘revenue’ were conveniently cast aside.

However, Ryan’s appointment pales in comparison to the re-election of David Coe to the board of RHG (the former RAMS Home Loans). Somehow, Coe managed to garner 135 million votes in favour of his appointment, compared with 61 million “against” (and a further 27 million abstentions). Admittedly, Coe’s good friend and RAMS founder John Kinghorn would presumably have voted his 72 million shares in favour, but that doesn’t account for the 60 million other votes to re-appoint Coe.

Coe, a former partner at Mallesons and doyen of Australia’s art scene was the founder and long-term chairman of Allco Finance Group. Allco collapsed under a sea of debt last year, with investors losing billions. A few months before its collapse, Coe (along with fellow Allco director Gordon Fell) sold their Rubicon property business to Allco few several hundred million in Allco shares and millions in cash. Coe personally collected $12 million cash from Allco’s acquisition of Rubicon (Fell took home $27 million and promptly purchased a harbour-side Point Piper property for almost that exact sum). At the time of the sale, Rubicon’s managed funds in Europe, Japan and the United States were allegedly insolvent or bordering on insolvency according to their auditor.

While RHG isn’t really much of a business any more (a month after it floated, the company collapsed when it was unable to raise wholesale funds overseas, leading to the New York Times dubbing it the “the worst initial public offering of the decade”) Coe’s election is mystifying.

With civil charges laid by ASIC at Centro and MFS, it is understood that Coe and his fellow directors and executives are being very closely looked at by the corporate regulator. Not only for the controversial sale of Rubicon, but also Allco’s incorrect classification of current liabilities in 2007. In its 2007 financial statements, Allco claimed its current liabilities were only $193 million. However, months later, the company confessed to shareholders that the real figure was actually $2 billion. Presumably, shareholders who bought (or held onto) Allco shares during that period were not overly impressed.

There is also the small matter of Allco lending $52 million to the Allco Principals Trust. The trust was the holding vehicle for Coe and his fellow Allco executives. The loan was not approved by Allco shareholders and was made to prevent the Allco Principals Trust from being “margin called” out of their stake in Allco Finance Group. The benefit to other Allco shareholders appears somewhat less clear.

Proving that Allco aren’t the only generous benefactors around, last year, Coe, and his fellow RHG directors (most of whom are business partners with John Kinghorn in other endeavors) authorised the early repayment of a $28.5 million loan to Kinghorn. The loan wasn’t due for another two years and its value was more than that of the entire company.

Perhaps completely unrelated was the generous gift by John Kinghorn to his friend David Coe of a $5 million super-yacht earlier this year.

The likes of the Business Council of Australia and Australian Institute of Company Directors need not be too concerned about the “two strikes” rule  — David Coe and RHG just proved as much.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, to be published by John Wiley & Sons in March 2010.

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