Public company boards have three major roles. First, they need to choose a chief executive. Second, they need to ensure that the chief executive is remunerated appropriately. Third, they need to agree to capital allocation decisions on behalf of absentee shareholders. For the first and third tasks, Australia’s directors club bumbles along, for the second, they are, in many cases, completely incompetent. Witness the stunning shareholder repudiations at serial offender Transurban and surf wear company Billabong yesterday.
Fewer than 46% of Transurban shareholders voted in favour of the company’s remuneration report — even worse, a mere 28% of Transurban shareholders supported a proposed grant of performance share awards to CEO Chris Lynch. This represents one of the highest “against” votes ever for a grant of share incentives by an Australian company (unlike the remuneration report, the options grant resolution was binding on the company). Shareholders also voted en masse to reject an increase in pay to the company’s non-executive directors.
The Transurban board has now seen its past three remuneration reports rejected by investors. In 2008, shareholders were furious after unpopular CEO Kim Edwards received a $16.6 million pay package, including a termination payment of $5.2 million and a short-term cash bonus of $9.2 million. (The payments came not long after the company rejected Edwards’ flawed model of paying distributions from borrowings). Last year, shareholders angrily rejected Transurban after it based 50% of its long-term incentives on EBITDA.
Indicating it is not a fast learner, Transurban again this year sought to award its CEO a long-term incentive based on proportional EBITDA. Not only that, the target set was 7% annual growth, which ASA boss John Curry noted, “rewards mediocrity”.
Transurban shareholder Peter Doherty (who is the founder of CP2) stated that Transurban’s remuneration “should be fair and aligned” rather than encouraging “growth for growth’s sake”.
New Transurban chairman Lindsay Maxsted proved that he will be an adept member of the directors club, with the former KPMG boss claiming that “there are no pay excesses at Transurban … we unashamedly pay market rates … you get what you pay for”. It appears, however, that Transurban shareholders aren’t getting great value for money. As Doherty pointed out, had Transurban focused solely on Melbourne’s CityLink toll road, its distributions to shareholders and share price would be higher than they are today. Transurban shareholders would have been better off had the company fired all of its senior executives a decade ago and shut down its head office.
Moreover, the major problem with Transurban’s remuneration isn’t necessarily the quantum of remuneration (although that is an issue), but rather, Transurban’s methodology does not properly align executives and shareholders. Shareholders receive returns after depreciation, amortisation, interest and tax (a business needs to pay interest on borrowings, and invest in assets to survive). Therefore, companies should pay executives in a similar manner, not based on an EBITDA fairytale (which creates the perverse incentives of encouraging executives to undertake risky debt fuelled growth).
The scene was even more bloodied at Billabong, with almost 60% of shareholders rejecting the company’s non-binding pay report. That figure is even higher when you consider that founder and director Gordon Merchant would have almost certainly voted his 14% shareholding in favour of the pay resolution.
Despite the company’s profit falling for the second year in a row (and sales dropping by almost 15% in the important American market), Billabong thought it appropriate to double the short-term bonus of CEO Derek O’Neill. O’Neill’s short-term incentives leapt from $578,000 in 2009 to $1.19 million this year. It appeared that Billabong paid O’Neill the increased bonus to compensate him for not his achieving performance targets under the company’s long-term incentive scheme. It is a good deal for O’Neill — if Billabong’s share price rises, he receives millions of dollars of long-term incentives, if it falls, the board gives him an arbitrary cash hand-out anyway.
The architect of this would be none other than the chairperson of Billabong’s remuneration committee, former Qantas chair Margaret Jackson. Jackson was in charge of Qantas when it made previous CEO Geoff Dixon the highest-paid aviation executive in the world (in cash terms), despite the company under-performing the MSCI Airline index during his tenure. Jackson would later depart Qantas under acrimonious circumstances, after accusing shareholders of having a “mental problem” and publicly embracing Dixon when he was trying to buy out the company from the very shareholders she was paid to represent.
Just in case you were worried that boards would start considering the views of shareholders after the calamity of the GFC, rest assured. Under-performing CEOs can be safe in the knowledge, it seems, that shareholder returns will remain very much a secondary consideration when it comes to executive pay.
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed and previously advised institutions on remuneration and corporate governance issues.