In the last week, the blue-chip boards two of Australia’s leading companies have been exposed for allowing preposterous incentive schemes to executives and failing in their duties to shareholders.

First, Coles Myer had rejected a takeover offer from KKR on the grounds that it undervalued the company as current management would be able to increase earnings per share by 20% per year (which CEO John Fletcher himself claimed wasn’t a stretch target).

All the while Coles executives stood to receive performance based bonuses if EPS increased by only 12% annually.

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Instead of allowing its shareholders to receive an immediate cash payout, Coles directors are happy to spend shareholders money to pay executives to increase the share price by a lesser amount (further, even if EPS do increase to $1 in 2008, unless Coles can continue to grow earnings, the share price is unlikely to increase to the KKR bid level). While Coles are hastily amending the generous plan, it indicates how flippant the board were in setting performance targets.

Even worse was the recent news that Telstra executives stand to reap millions in performance rights if a cornerstone investor decides to buy a 15% stake in Telstra from the Future Fund, triggering a “change in control” provision.

Presumably, the original intention of the provision was to allow executives to receive ‘bonus’ payments in the event that Telstra is taken over – this in itself is not uncommon.

However, to allow the performance rights to vest at such a low threshold (a 15% cornerstone shareholder could hardly be deemed to be controlling Telstra) indicates that the board were either derelict in their duties, incompetent, or do not understand that their role is to represent shareholders, not to pander to executives.

The board agreeing to hand over millions of shareholder’s dollars to Telstra’s executives without any corresponding improvement in shareholder returns symbolises that to them, shareholders’ interests are of secondary relevance.

It is worth noting the differences between how Australian boards, such as Telstra and Coles Myer operate with how the word’s greatest investor, Warren Buffett acts. While Buffett is feted for creating Berkshire Hathaway into a US$162 billion giant (from a mere dying textile mill in 1967), what is even more impressive is his slavish devotion to his shareholders.

A perfect example was noted by Buffett’s biographer, Roger Lowenstein. Way back in 1981, Buffett instituted charity scheme at Berkshire in which the company would contribute $2 per share, each year, to charities of the shareholder’s choice. (For example, if someone owned 100 Berkshire shares, that shareholder could designate $200 in donations).

At other public companies, the choice of charity comes from the CEO and directors (of course, the money comes from shareholders). Buffett viewed this as “sheer hypocrisy” and noted that “many corporate managers deplore governmental allocation of the taxpayer’s dollar but embrace enthusiastically their own allocation of the shareholder’s dollar.”

Sadly, while in a slightly different setting (being executive remuneration rather that charitable donations), it seems that principle is still very apt in describing the actions of Coles Myer and Telstra directors.

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Peter Fray
Peter Fray
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