Don Argus has only been on the Brambles board for two years but Crikey remains to be convinced as to whether he has been a force for good after the merger with London-based GKN and management turmoil.
Conor Lally from AFR.com summed up yesterday’s Brambles meeting as follows, but no other newspaper reported much detail of the arguments:
“There were a few dissenting voices at the meeting, most notably from shareholder activist Mr Stephen Mayne, who was critical of Brambles for not having commissioned an independent expert review of the merger. He also said Mr Chow’s salary of $3.5 million with $1 million in bonuses along with an $8 million “golden parachute” pay-off should he be sacked without 24 months notice as excessive.”
Apart from erratic shareholder activist Jack Tilburn – who Brambles have been sucking up to for years and even got Jack to move a tribute to the retiring company secretary at the meeting last Thursday – and one offering from the Australian Shareholders’ Association’s Ray Wagner, Crikey was the only contributor to the meeting. And despite out best efforts, the $19 billion dual listed structure with London-based GKN has been approved in a landslide of institutional complicity.
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There are some striking parallels between the BHP-Billiton merger than Don Argus railroaded through in May and last week’s deal.
DON’T ARGUE, JUST SHOW US THE PROXIES
To start with, Don’t Argue tried very hard not to reveal the proxies and this is probably because it wasn’t quite the landslide victory he was looking for. He successfully kept BHP shareholders in the dark and still has not properly disclosed how many undirected proxies he had in his back pocket at that meeting. So the first thing I did was ask him to reveal the Brambles proxies and specifically to disclose what he would be doing with the undirected proxies in his control. I said that if some shareholders did not want to see them they should close their eyes and this issue was like a poll, it only takes one shareholder to ask for them to be shown as this is a requirement of the Corporations Law.
Don’t tried to stop this by suggesting shareholders might not like the proxies “in your face” but the meeting voted in favour so Don’t quickly flashed them up for a couple of minutes and then took them down. The request was actually that they be revealed after the debate but before the vote but this was obviously too much to ask for. We’ll get back to the voting outcome a bit later but it makes for very interesting reading.
THE SUCCESSION PROBLEM
Don’t Argue is the chairman of both BHP and Brambles. In both cases he was facing a CEO succession question. Who would run BHP after Paul Anderson went back to Texas with his $40 million and who would replace outstanding Brambles CEO John Fletcher who announced he’d be quitting not long after Don’t Argue took over as chairman?
Don’t Argue interrupted my comments about management succession problems saying it was not right and repeated his line at BHP that I “used to be a pretty good analyst”. Brambles, a company known for its management stability pre-Argus, also lost their finance director Michael Brown showing just how easy Don’t Argue is to get along with. How ironic it is that the man who ran NAB with an iron fist and countenanced no boardroom dissent from his chairman is now one of Australia’s most dictatorial chairmen churning through the CEOs and bulldozing mergers through passive institutions and weak boards.
ALLENS LOVE THESE COSY DEALS
Another BHP-Brambles parallel is the presence of Allen, Allen & Hemsley as legal adviser on the deal and the lack of an independent expert’s report to reassure shareholders that this was good deal. Don’t Argue reckoned this would be a waste of money and we should trust him.
Given that Brambles spent $45 million packaging this deal, another $1 million on an independent expert’s report was chicken feed and it would have provided some impartial balance from all the overpaid advisers and pay-rise receiving directors who had a vested interest in the outcome.
TWO HEAVY HITTERS LEAVE LONDON FOR OZ
BHP-Billiton and Brambles-GKN also both involved bringing a London-based executive to Australia to run the combined business after getting a huge pay rise from Don to ensure they are appropriately incentivated.
Legendary former Brambles CEOs Gary Pemberton and John Fletcher must be looking on in envy at CK’s great deal which I pointed out to the meeting included a base salary of about $3 million, an annual cash bonus of up to $1.5 million, a $5 million gift of Brambles shares if the earnings per share grows by more than 15 per cent and a cash payout of $8 million if CK is sacked for poor performance without being given a massive two years notice.
CHOW’S GOLDEN PARACHUTE
We had a ding dong argument over this one with Don’t Argue disputing the use of the phrase “golden parachute” to describe the $8 million CK Chow will get if sacked for poor performance. If these CEOs are any good they shouldn’t need to build in huge protection on their employment. GE CEO Jack Welch had a one-page contract whilst running the world’s biggest company and it said he could be sacked any time for no reason and with no compensation. This all sounded good until Don’t Argue pointed out that Jack Welch got a $US80 million Golden Goodbye payment, although my response was that the board chose to do this as a reward for wonderful performance over 25 years and were not compelled by some prescriptive contract as CK Chow has secured from Don’t Argue.
Imagine if Brambles had to give a dud Cleanaway truck driver 24 months notice. Don’t Argue claimed that CK needed this protection because he was leaving London and bringing his family out. I suggested he should be promised a first class airfare back home and reimbursement of his relocation costs if things don’t work out, rather than an $8 million golden parachute. And extending this deal both ways should see CK Chow paying Brambles $8 million if he goes somewhere else without giving the company 24 months notice. This produced yet another scoff from Don’t Argue.
DIFFERENCES WITH BHP
There are a couple of key differences in the merger also, one of which independent director Graham Kraehe, Rupert’s newest independent director on the News Corp board, pointed out after the meeting. Because 80 per cent of the business will be the Chep and Cleanaway 50-50 joint ventures which have performed magnificently over 27 years for Brambles and GKN, the two companies know what the other is bringing. BHP did not know much about Billiton’s high risk assets in far-flung places such as Colombia and Mozambique.
Another vital difference was that BHP’s management had destroyed $10 billion in 10 years and were discredited whereas Brambles have a great track record.
And the other key differences were that Brambles-GKN did not build in a $100 million break-fee like BHP-Billiton did and Brambles is not paying a premium like the cool $5.5 billion that Don’t Argue and his mates handed over from BHP to the hard heads at Billiton.
WHERE IS THE INDEPENDENT REPORT
Despite the lack of a premium, it would have been nice to read an independent expert’s report just to get some comfort on the Brambles merger. GKN are not exactly bringing quality assets to the equation. There is a chain of muffler stores in the US and a pallet stacking business which both look pretty crappy. Contrast this with the wonderful records management Recall that Brambles is pumping in and you’ve got to ask yourself whether Brambles shareholders should have got more than 57 per cent of the combined group, especially with the deal being earnings dilutive for Brambles in 2001-02.
IS MANAGEMENT STABLE?
Don’t Argue started getting really cranky about the BHP comparisons towards the end. When I started talking about management stability he tried to cut me off. Eventually I was able to frame the question by saying that Don’t had told BHP shareholders the company would wither on the vine without merging and would also fail to attract top managers. Sure enough, a few weeks after the meeting Billiton’s highly regarded chief financial officer Mick Davis jumped ship and went to some small Swiss company. I asked Don if he was aware of any top Brambles managers looking to follow this lead and he said “not that I am aware”.
THE LOSS OF JOHN CLONEY
QBE chairman John Cloney is one of the few legends in the professional director circles. There are no skeletons in his closet yet he is quitting the Brambles board after the merger. When asked why, Don said the travel was going to be too much for Cloney. So why is Brambles adopting a new structure that one of its best directors can’t accommodate when the old structure was working beautifully for 27 years? And why weren’t the institutions asking this question?
PROBLEMS WITH THE NEW BOARD
The big problem with these DLCs are that they become so big they are ungovernable. Rio Tinto is now dominated by management and affiliated directors. The independents have lost control and because you’d need to run campaigns in London and Australia to change anything, it just gets all too difficult to hold them accountable. The same can be said for Brambles-GKN. With Cloney and one other Dutch-based independent Brambles director bailing out, there will not be a majority of independent directors on the board. Merchant banker Mark Burrows, who sports one of the biggest egos in corporate Australia, gets a pay rise and is regarded as an independent director, but the fact remains he is the long-time corporate adviser to Brambles and should be classified as affiliated. Ron Milne is pitched as independent but he’s a former finance director. The same goes for joint deputy chairman from the GKN side, Sir David Lees, because he was CK Chow’s predecessor as CEO. That only leaves 5 independents – Don’t Argue, Allan McDonald, Graham Kraehe, Roy Brown and Sir John Parker – up against 5 affiliated directors when you include CK Chow and current finance director David Turner.
HOW BIG IS THE MACQUARIE FEE?
Voluble Jack Tilburn indulged himself with a few questions at the beginning of the meeting and his best one was asking for a break-down of the $45 million transactions costs, including the size of the success fee being paid to our friends at Macquarie Bank, the Brambles adviser.
Don’t Argue continued the fine Brambles record of secrecy by refusing to disclose it. I’d like to know how much Allen, Allen & Hemsley were getting, especially given that Macquarie Bank non-executive director Kevin McCann just happens to be the national chairman of Allens.
It seems odd that two companies who have been living defacto for 27 years in adjoining apartments called Chep and Cleanaway have to pay $45 million to get married.
And if $45 million was to be spent, The Don could surely have set aside $1 million for an independent expert’s report just to provide a bit of balance to all those with a vested interest in the deal going ahead.
CK had a huge vested interest and even Don’t Argue cops a handy pay rise although finding out about it was like pulling teeth. The Don made about $40 million out of his NAB shares and has a wonderfully renovated mansion in Malvern as a result. But he still needs more and he’ll be paid 180,000 pounds sterling a year for his efforts in chairing the enlarged group, a handy pay rise but not as bad as the deal that CRA chairman John Uhrig cut for himself in 1996 when he sold out Australia and signed up for the Rio Tinto DLC which is now run out of London. Uhrig’s annual pay made him the highest paid non-executive chairman in Australia on more than $500,000. Estimates put his total personal benefit from shepherding that merger through at about $2 million.
HOW DID BRAMBLES SHAREHOLDERS VOTE?
The Brambles merger vote was identical to BHP in that if you wanted to vote the merger down then the resolution to oppose was number two, which dealt with changes to the constitution that required a 75 per cent majority.
The mainstream media have completely ignored this fact but on resolution two only 88 per cent of the shares voted by way of proxy before the meeting approved the deal. Given that a company sponsored resolution on anything other than executive pay rarely gets a yes vote less than 95 per cent, there was clearly quite a body of resistance against this merger.
The splits on resolution two were as follows:
Yes: 108.89 million
No: 3.52 million
Abstain: 8.579 million
Proxy’s discretion: 2.682 million.
The total proxy vote was only 123.67 million of the total ordinary Brambles shares on issue of 231.05 million. So when Don’t Argue railroaded this through the meeting, there were still 53.54 per cent of the voting shares that were not accounted for. A couple of big institutions could still have turned up and derailed this deal but of course they didn’t because Australia has no culture of challenging company-sponsored resolutions. I’ve heard rumors that some of the experts on proxy voting in Australia have concerns with this Brambles deal but you can never expect our lemming like instos to actually take a stand on something.
Even their protest vote was typically without conviction. Why would you protest by abstaining as was done with 8.579 million Brambles shares worth $400 million on resolution two.
STRONGLY AGAINST THE FREEBIE SHARES
Brambles shareholders may have tepidly protested on the overall deal, but they were strong in their objection to issuing all these freebie shares to incoming CEO CK Chow and finance director David Turner.
CK Chow will be issued a free 107,300 shares worth $5 million if he can deliver EPS growth of 15 per cent within two years. If he fails at this hurdle then he’ll still them if he delivers it on his third, fourth or fifth anniversary in the job.
David Turner has the same deal but over a smaller 54,700 shares worth $2.55 million at current prices. Shareholders were clearly unimpressed as a heavy 14.22 million shares worth $662 million were voted against resolutions 14 and 15 which dealt with these earnings diluting freebie share issues. The no vote by proxies was a heavy 12.4 per cent but as an ordinary resolution it needed 50 per cent to be defeated.
The votes against the more controversial resolutions only rose fractionally at the meeting suggesting that just a handful of small shareholders took issue with the merger. However, virtually the entire open proxies – which averaged 2.85 million shares – were voted in favour of every resolution and this reflected the undirected proxies that Don’t Argue had in his back pocket from the start. It must be comforting as a chairman to know you’ve got 5 per cent of the shares voted at your discretion. Why shareholders bother to sign over their vote to a chairman is beyond Crikey’s comprehension.
The coverage of all these issues in the mainstream press was pretty lame so we hope this helps to illuminate readers about the pathetic voting habits of Australia’s major institutions. None of them bothered to speak out at the meeting and they’ve all signed on to a merger structure that will be difficult to govern and has questionable advantages given the stellar perfomance of Brambles under the old structure before Don’t Argue came along and caused all this upheaval in senior management and now a resulting far-reaching corporate merger.
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