At struggling infrastructure operator Asciano it appears the more things change, the more they stay the same. Despite its share price being 86% less than its June 2007 peak, amid billions of dollars of losses, the Asciano board has decided to not only extend the contract of CEO Mark Rowsthorn but also pay him a “one off” signing and retention bonus of $900,000.

Asciano investors may have hoped the replacement of former chairman Tim Poole (the one-time Financial Review “Young Director of the Year”) with respected former Orica chief Malcolm Broomhead would correct some of the obvious governance deficiencies and agency costs that had surrounded Asciano. It hasn’t.

To understand the full absurdity of the $900,000 payment to Rowsthorn requires a brief review of Asciano tumultuous three-year life.

Asciano was spun-off from Toll Holdings in June 2007. The reason for the spin-off was twofold: Toll had acquired stevedoring company Patrick in a bruising takeover battle and the ACCC demanded it sell part of its rail and shipping assets; Toll CEO Paul Little reportedly had a falling out with Rowsthorn (Little had purchased Toll in 1986 from mining company Peko-Wallsend with Rowsthorn’s father, Peter). Relations between the two reached a nadir when Rowsthorn allegedly claimed that Little (a renowned corporate hard man) had cried when the ACCC initially rejected Toll’s bid for Patrick.

The “new” Toll Holdings would be a relatively pure logistics company (plus its stake in Virgin Blue) while the infrastructure assets (which were largely picked up in the Patrick purchase) and almost five billion dollars worth of debt would be spun-off as Asciano (“old” Toll shareholders would receive shares in “new” Toll and also Asciano). Shortly after listing, the combined share price of “new” Toll and Asciano surpassed $26.

Both “new” Toll and Asciano would struggle as the global financial crisis struck, but Asciano, with its mountains of debt, was especially vulnerable. Asciano’s plight was worsened when Rowsthorn undertook a foolhardy frolic and tried to take over the far larger pallet company, Brambles (Brambles’ market value of $18 billion was almost three times as large as Asciano). The move (which occurred shortly after Toll acquired a small stake in Brambles) would end up costing Asciano more than $109 million.

The Brambles debacle, and Asciano’s poor operating results, led to its share price falling from $11.64 to only $3.33 in less than a year. Although the board did not appear too concerned — a few months later, it rejected a generous $4.50 per share takeover bid from private equity companies TPG and GIP.

Not long after, Asciano announced a net loss of $200 million (caused by Brambles, demerger costs and a large interest bill). Despite the terrible result, the Asciano board elected to pay Rowsthorn a base salary of $1.8 million and a short-term bonus of $1.3 million (70% of the maximum allowable). In determining bonuses, the Asciano board did not consider “significant” losses such as Brambles — which worked out well for Rowsthorn.

In early 2009, things got even worse as the company become increasingly crippled by its debt burden and its share price slumped to 36 cents. Having spent almost a year unsuccessfully trying to sell assets, the Asciano board belatedly decided to enter into a $2.35 billion capital raising at only $1.10 per share. This was a quarter of the value of the private equity bid for Asciano months before and about 90% less than its value in 2007.

In another piece of good fortune for Rowsthorn, the investment bank managing the capital raising, UBS, entered into a side deal with Asciano’s CEO, which allowed him to sell part of his holding in a book-build for $1.25 per security — this enabled him to fully participate in the discounted raising. While UBS denied it entered into a “cosy” deal with Rowsthorn, some alleged that the Swiss bankers’ generosity did it little harm in collecting $50 million in fees. (In an example of C-suite silver lining, Rowsthorn was able to collect a paper profit of more than $36 million.)

Two months after the highly dilutive capital raising, the Asciano board again passed around the hat for Rowsthorn — this time, the scion was paid a bonus of $741,678. This bonus, however, had already been reduced by $750,000 (in a pre-determined move to appease investors). Technically, Rowsthorn’s bonus actually increased last year, despite the company announcing a record $244 million loss and almost slipping into insolvency.

Since then, investor sentiment appears to have temporarily returned to Asciano, partially due to the appointment of Broomhead (as well as Bob Edgar and Geoff Kleeman). But it appears such confidence in a return to any sort of corporate governance standards was misplaced.

The “sign on” bonus also came a month after Asciano announced a (non-cash) write-down of $1.1 billion (related to its container business) and the departure of the company’s CFO.

Fairfax reported “the ports and rail operator has justified the ‘one off signing and retention bonus’ by saying Mr Rowsthorn would be giving up the rights to claim a termination payment of $8 million”. But such a termination payment would require approval from Asciano’s shareholders, which, given Rowsthorn’s performance, would seem unlikely.

*Adam Schwab’s Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed features a more detailed history of Mark Rowsthorn’s lucrative tenure at Asciano. The author has a ‘short’ position on AIO.

Peter Fray

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