Directors and their conduits like the Institute of Company Directors and Business Council of Australia spend a great deal of time complaining about the horrendous obligations placed upon them. Perhaps that would be less necessary if directors actually acted in the best interests of the company (and its shareholders) rather than spending most of their time appearing to devise new ways to pay executives more.
Ownership Matters has outlined the gruesome truth, in an extensive report entitled While You Were Sleeping. The governance firm laid bare the billions of dollars paid by Australian companies to buy back shares, almost entirely for the benefit of senior executives.
Paying executives in share (or option) awards is not a new phenomenon, but the trend became more popular in the 2000s as the share market roared to record highs. The benefits of awarding shares to executives are clear: it provides a clear alignment between the interests of shareholders and those of executives and can be cheaper than paying cash. In theory, it should encourage long-term thinking and avoid overly risky activities. Moreover, as shareholder approval is required where a company issues shares to directors (in almost all cases, the CEO is also a director), directors are largely prevented from overly generous share awards.
But theory and practice are often strange bedfellows.
Due to an egregious loophole in the ASX listing rules, companies are permitted to buy back their own shares without shareholder approval (as would usually be needed for share buy-backs or if companies were to issue new shares to directors). Nor is there any requirement for public companies to even disclose these share purchases.
To compile their report, Ownership Matters spent months analysing detailed financial statements to work out the actual quantum of share purchases (and in many cases, were unable to determine the exact magnitude of purchases). There is virtually no disclosure or restrictions on the nefarious activity, which is going on under the noses of the market regulator.
Australia’s biggest company, BHP Billiton, spent more than $410 million in 2012 (and $1.3 billion in the past four years) purchasing shares on market, largely to reward its embattled management team (CEO Marius Kloppers recently announced his resignation after a series of failed acquisitions). Macquarie Group shareholders — who have seen their share price crumble from $98 to only $36 — had the further ignominy of having their directors order the purchase of $403 million for shares for wealthy executives without needing shareholder approval.
“That the ASX has allowed this rort to perpetuate serves to show that the private enterprise is itself ill-suited to regulate Australia’s largest capital market.”
Even more egregious are the actions of the Qantas board, which spent hundreds of millions purchasing shares for executives in recent years. The share purchases came after the company stopped paying dividends to shareholders in 2009. Since 2008, Qantas has spent more than $120 million acquiring its own shares, without seeking shareholder approval (or even disclosing the purchases to shareholders as they were occurring), while at the same time telling shareholders it doesn’t have the cash to pay dividends.
It appears the Qantas board believes its primary obligations lay towards fattening their executives’ bank balances, rather than improving shareholder returns.
Ownership Matters also detailed instances of plain incompetence. Fairfax Media, Telstra, Aristocrat and Downer EDI purchased shares on-market shortly before their share price collapsed. Telstra spent more than $100 million purchasing shares on market in 2007/08, shortly before its share price halved. Not only did Telstra shareholders have to pay an inflated price for the purchase of shares which they never approved, but they also needed to pay dividends on those shares.
UGL shareholders not only witnessed a share price fall of more than 50% in the past six years, but its board — led by colourful Brisbconnections chairman Trevor Rowe (himself a former director of the ASX) — has paid controversial CEO Richard Leupen more than $30 million since 2007. Even worse, Ownership Matters reveals the UGL board decided to spend $18 million during 2012 purchasing its own shares, more than 16% of the entire company’s operating cash flow. UGL announced last month first-half profit had slumped by more than 53% due to restructuring costs (these costs were due to a business acquisition led by the highly paid Leupen).
Another struggling business, QBE Insurance, in 2012 spent more than US$30 million acquiring shares to satisfy incentive plans for employees. In February of that year, QBE was forced to raise $600 million from shareholders to satisfy APRA capital requirements. Since 2009, QBE’s share price has slumped by almost 50%.
Directors of public companies have a fiduciary obligation to act in the best interests of the company and a moral responsibility to protect the interests of minority shareholders. That directors of more than 20 companies have seen fit to exploit a loophole to allow for the effective payment of shares to executives at the expense of shareholders is little short of a disgrace.
That the ASX has allowed this rort to perpetuate serves to show that the private enterprise is itself ill-suited to regulate Australia’s largest capital market.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, published by John Wiley & Sons in 2010