Let CEOs get on with the job

Before I launch into my next diatribe, it would be remiss of me - not to mention cathartic - to lay the ghosts of the Grand Final to rest. Unlike many caught in the great ticketing bungle, I was fortunate enough to get to the game and to the impartial observer, it must have been a titanic struggle. To a success-starved St Kilda supporter, however, it was two and a half hours of pure gut-wrenching, spine-tingling torture. The disappointing thing is that we know as a club we were good enough however as is so often the case in close games, the team that took better advantage of their scoring opportunities prevailed on the day. If I were Ross Lyon though I would be spending less of my time in the off-season deliberately trying to get up Luke Ball's nose and more of it teaching Schneider, Milne and the rest of those rotten small forwards how to kick straight.

Anyway, what's done is done. The Cats can go off satisfied on their end of season trip and leave us other Melburnians enjoying the other delights the city has to offer. Which if this godawful weather keeps up, doesn't give us a whole lot to work with. Unless of course Makybe Diva comes out of retirement in a few weeks.

Apart from grieving about the football I have been following with some interest the story in the press about dissatisfaction with executive pay levels in Australia. According to the papers, some mysterious government organisation called the "Productivity Commission" is looking at the issue and has come up with a suggestion that shareholders in public companies should effectively have the power to vote down the remuneration arrangements of any CEOs or other directors that they consider excessive. The suggestions of this body were supported in the major papers a fortnight or so ago by an investment advisor organisation called "RiskMetrics" whose spokesperson huffed and puffed about how Australian executives were grossly overpaid and what a great idea it would be for shareholders to have the power to put a stop to this excess.

Unfortunately, as far as this whole idea is concerned, never has the expression "The road to Hell is paved with good intentions" ever seemed so apt. There is no doubt that in the wake of the Global Financial Crisis (or GFC as it has become in the vernacular), the government has been put under intense political pressure to act on executive pay. The logic giving rise to this pressure goes something like this:

• The average person has been hit hard financially by the GFC;


• The average person is also (whether directly or indirectly through their superannuation fund) a shareholder in ASX listed companies whose share prices have fallen, thereby generating further wealth destruction;


• The CEOs and senior executives of these companies tend to be remunerated relatively well compared to the average person, even in years of poor profit and share price performance;


• The average person looks at their circumstances relative to the executives of the companies they have invested in, perceives an injustice and wants to bring the executives down a peg or two.

I don't think anyone could argue with the proposition that underperforming CEOs shouldn't have their pay arrangements scrutinised and criticised. However granting shareholders the power to effectively set executive pay levels is ultimately going to lead to the shareholder's investment performing more poorly than it otherwise would. I am about to go to some pains to explain why, so bear with me.

Simply put, people who decide on a career in business and rise to the level of CEO are all motivated to some degree by the financial rewards involved. Sure, there are other drivers involved but anyone who suggests a CEO of a major company is undertaking the role purely for the intellectual challenge or other non-financial factors is kidding themselves. In the course of my job I have had dealings with a fair number of CEOs and senior executives of both listed companies and large unlisted organisations, and it is not a job for the faint hearted or feeble of mind. You are answerable to a whole host of different interest groups including customers, employees/unions, shareholders, financiers and a board of directors. As with most high profile jobs, the hours are invariably long, family life suffers and as many of them comment, being the person at the top of the tree can be incredibly lonely. It's hard enough running an organisation when times are good, but when a 1 in 70 year financial catastrophe like the GFC happens, things get even harder and the scrutiny intensifies as everyone expects you to lead the company safely through troubled waters - sometimes against insurmountable odds and appalling market conditions.

This is not to say anyone should feel pity for a CEO as it's a life they ultimately choose. However equally people need to recognise that it isn't all beer and skittles as the papers would sometimes have you believe, which is why it is important for companies to remunerate their CEOs well in order to attract and retain the best people for the job.

Generally, the system in Australia seems to work. Certainly the CEOs I have come across, while being a fairly eclectic bunch, all have been highly intelligent, articulate and diligent individuals - qualities you would typically want in someone who you have entrusted your investment to. Unfortunately, none of these qualities seem to be apparent in those who are formulating recommendations to the Productivity Commission or advising investors on the question of executive pay.

Granting these sorts of powers to shareholders is a daft idea for four main reasons. First, it will encourage executives across the board to leave ASX-listed companies and go find employment elsewhere where they can earn what they want to earn with about 20% of the hassle. Dealing with all the grief that goes with running an ASX-listed company only to have your pay arrangements voted down by capricious shareholders at the annual general meeting is hardly going to appeal to a high flying executive.

Secondly, giving powers like this to shareholders dangerously blurs the previously clear distinction between a company's management and its investors. Clearly, investors play a very important role as they provide the capital which allows the company to operate and make a profit. However, most investors lack the knowledge and operational expertise necessary to run the company successfully and allowing shareholders the power to second-guess management decisions sets a dangerous precedent. What's next? Forcing the board to put an investment decision or the prospect of hiring a new CEO to an extraordinary meeting of unitholders? The mind boggles. I read in Marcus Padley's column on the weekend about some research that says that if you spend 1 hour researching a company before investing, you are likely to know more about that company than 99% of other investors. If that's remotely true then shareholders should recognise their relative ignorance and realise they have no valid basis to second guess management decisions.

Thirdly, the performance of a company for good or ill often has little to do with the performance of the executives and everything to do with external factors, such as market conditions. It's often the case that in a downturn, executives do their best work and lay the foundations for a return to profit growth. Unfortunately, all shareholders and advisors like RiskMetrics see is the scoreboard in terms of profit and dividends and if given the power, will likely vote down pay arrangements in a bad year and alienate executives. This is in spite of the fact that as a result of the executive's work, the next year is likely to be a very good one for investors. One only need look at the fracas raised by RiskMetrics and others the other day at Qantas's AGM. An inordinate amount of time was given over to hurling abuse at the board over Geoff Dixon's departure package, while conveniently ignoring the fact that because of measures Dixon took when he was in charge, Qantas is in very good financial health relative to other airlines and its share price is up approximately 100% off its low point earlier this year.

Finally, shareholders already have sufficient power to adequately protect themselves such as lodging a protest vote against the pay arrangements, kicking out the board, or, if they think the company has really lost the plot, by selling their shares. Granting them further powers which they do not grasp the potential consequences of using or which are exercised from a position of ignorance does neither them or the company concerned any good whatsoever.

For all their faults, governments usually act sensibly when confronted with these sorts of suggestions and I think it will exercise common sense and reject this latest suggestion of the Productivity Commission.

While the government is at it, I hope they also take the 22 page diatribe written by RiskMetrics to the Commission and put it to good use by starting a bonfire with it. I took some pains to read it, so I don't see why I shouldn't inflict it on everyone else as well. Here is the link. http://www.pc.gov.au/__data/assets/pdf_file/0010/89524/sub058-part1.pdf.

After about 15 pages of preaching and proselytising I did however get bored so I thought I would instead go look at the SEC filings of said RiskMetrics to try and determine if they practised all they preached about it being essential that executive remuneration be tied to company performance.

Given RiskMetrics platitudes, imagine my surprise when I discovered that over the course of the past 3 years while RiskMetrics profit fell from $16M in 2006 to $4M in 2007 and then sunk to a whopping $137M loss in 2008, total operating costs (which includes executive salaries) rose from $79M in 2006 to $396M in 2008.

Dudes, you are hypocrites of the highest order. Butt out of the debate, and let executives get on with their jobs.