The Australian‘s Strewth column and The AFR’s Rear Window
column both picked up the exchange from the SFE Corp AGM in Sydney yesterday
about whether the non-executive directors would be getting any sort of
pay rise or bonus out of the $2.2 billion agreed ASX takeover.

While we all had a good joke about the SFE directors being underpaid
and chairman Rick Holliday-Smith declaring they would get nothing extra
apart from a good dinner, there is a serious issue here that has never
been properly discussed in the mainstream media.

The famous advice from Mark “Deep Throat” Felt in Watergate was to
“follow the money” and that is something which should also happen in
takeovers. In the case of SFE, the non-executive directors are underpaid relative to its
peers, so I asked whether the NEDs would utilise the full $1 million cap
for the seven months of work they’ll do before ASX takes control. It seems not.

Given the value they have created, few shareholders would begrudge such
a move but it would never be disclosed to shareholders because there
won’t be a 2006 SFE Corp annual report.

The worst example of abuse that I’m aware of was the 2000 takeover
Australian Hospital Care by Mayne Nickless. Chairman Lawrie Willett
activated a director retirement scheme after the takeover was sealed
and this cost Mayne Nickless shareholders an extra $300,000, as each
director got an additional lump sum equivalent to three years’ pay. This was
never disclosed and I only know because a board insider fessed up a
couple of years ago.

Another interesting example was the 1996 creation of Rio Tinto as a
dual-listed company. Melbourne-based CRA ended up being subsumed into
London-based Rio but the old CRA chairman, John Uhrig, made almost $2
million out of the deal because his pay as co-chairman had to
match that of the Rio chairman and suddenly he was getting $500,000 a year.

Unlike Australian Hospital Care, at least the Rio Tinto
payments were publicly disclosed, although shareholders usually aren’t
told of the plan at the time they are voting on the deal.

Then you have the old consultant trick, something that was used by HIH
to pay Rodney Adler millions more after he signed off on the ill-fated
FAI takeover.

The other great board and management financial motivator in takeovers
is the “change of control” clause in option and equity incentive
schemes. In the case of SFE CEO Robert Elstone, he was issued 1
million options at $8.03 on 2 May last year but these were only valued
at $530,370 in the annual report, so claims that his package was only
worth $1.88 million in 2005 are clearly inaccurate.

Elstone presumably now won’t have to wait four years and leap all sorts
performance hurdles to exercise the options, thanks to the ASX
takeover. With SFE Corp shares
closing at $15.91 yesterday, he stands to make almost $7 million on his
four-year options in just 14 months. After six years as CEO and with
board seats such as NAB (not CBA as The AFR reported today) and the Future Fund, Elstone’s decision to retire with a windfall is perhaps easier to understand.

It’s a different story for the non-executive SFE Corp directors, who
collectively only own about 76,000 shares worth $1.2 million. Chairman
Rick Holliday-Smith is clearly underpaid with his $175,000 package,
especially when you compare it with the $287,500 that Alumina chairman
Don Morley will collect this year for leading a post-box company that
doesn’t do much.

However, he and two other SFE directors will continue to get fees from
their seats on the ASX board, while the rest of the underpaid directors
won’t get much more than that nice dinner.

Next time a board recommends a takeover, ask yourself whether the
directors will be better or worse off as a result. When Lend Lease
wanted to take over GPT in 2004-05, the GPT board stood to lose out. By
instead ditching Lend Lease and jumping into bed with Babcock &
Brown, chairman Peter Joseph has enjoyed a pay rise from $120,000 to
$300,000 a year. Nice.