Call it another case of celebrity CEO syndrome, where the symptoms appear to be excessive payments for poor performance. This time, the beneficiary is Paul Little, already one of Australia’s richest men, who, despite presiding over a dramatic collapse in Toll’s share price, continues to be handsomely rewarded by the company’s bumbling board.
Had he retired in 2006, Little would be justifiably remembered as one of Australia’s most successful chief executives. Together with former partner Peter Rowsthorn, Little undertook a $1.6 million management buyout of Toll from mining company Peko Wallsend (which would later become part of Rio Tinto). By 2006, Little has transformed Toll into Australia’s 23rd largest company, with a market capitalisation of more than $13 billion and revenues of almost $9 billion.
Little was able to grow Toll through a series of more than 45 acquisitions but eventually came unstuck when Toll completed what would become a bitter takeover of Patrick Corporation. While Toll would eventually succeed in its bid, it would prove a pyrrhic victory. Little would soon fall out with Rowsthorn (the son of Peter) and the company would spin off virtually all of Patrick’s former assets into the publicly listed Asciano (which itself would prove to be a disaster).
After a golden run, Toll shareholders felt the ill winds of Little’s hubris. From a peak of $23.99 in June 2007, combined, Toll and Asciano shares are now worth about $5 — a drop of almost 80%. The company this week posted a 76% fall in full-year profit.
While loyal shareholders have seen almost all their investment evaporate, Little (and Rowsthorn), made out very well indeed.
Little was paid $3.9 million in remuneration in 2007 (and a further $5.3 million in 2008) while Toll reported a $690 million loss, but that wasn’t the worst of it. Little’s real windfall occurred in 2008, and had it not been for some forensic work from Dean Paatsch and Martin Lawrence at RiskMetrics (now Ownership Matters), no one would have been the wiser.
A few years earlier, the Toll board proposed that Little (and other executives) be granted a large number of options. Shareholders approved of the grant as the options contained fairly challenging “earnings per share” hurdles. However, before the options were able to be granted, Toll had decided to spin off Asciano into a separate company. Instead of letting the options lapse, the Toll board undertook a remarkable act of generosity towards Little.
It determined to pay Little (and other senior executives) a cash sum for the options that hadn’t yet been granted and were a long way from vesting. Even more bizarrely, it based the payout on Toll having a share price of $18.30 (even though at the time, Toll shares were trading at about $6). Moreover, the Toll board completely ignored the hurdles (Toll’s EPS had slumped from $2.03 in 2007 to negative $1.07 in 2008). In summary, despite the options being completely worthless (the never would have vested), Toll shareholders ended paying Little $8.8 million for them.
It didn’t stop there — even as Toll shares continued to slump, the board persisted in paying Little (who at the time was also busy building up a separate property empire) a fortune. In 2009, Little received remuneration of $5.1 million, followed by $5.7 million in 2010 and $6 million in 2011. During 2011 the Toll board even felt is appropriate to award Little a cash bonus of $2.3 million despite Toll’s earnings per share actually dropping during the year. One shudders to think how much Little would have been paid had he actually managed to increase shareholder value.
After overseeing Toll’s shares drop by more than 80%, Little finally retired on January 1 this year to manage his fortune (estimated to be $920 million, according to BRW). But despite the poor performance of Toll and his own burgeoning wealth, the Toll board, led by Ray Horsburgh, thought it appropriate that Little take away even more shareholder monies.
Despite Toll’s net profit slumping by 77% during the year, Little was farewelled with a remuneration of $1.5 million for only six months’ work in 2011. Little also collected leave entitlements of $1.9 million and “termination benefits” of $1.5 million (which included a $250,000 non-compete agreement). Toll shareholders would be forgiven for wondering why a non-compete payment would still be needed for a 64-year-old former CEO who oversaw a share price collapse and owns more than $150 million worth of shares in the company anyway.
But when it comes to minority shareholders, frankly, it appears the Toll board doesn’t give a damn.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed