Lend Lease is one company that has used loopholes to lift executive remuneration without fully disclosing it to shareholders.
Photo: Viki Lascaris
Companies are stretching the patience of shareholders – and even their lower level employees – by exploiting loopholes that allow them to boost executive staff remuneration without fully disclosing it, and in some cases losing shareholders’ money by buying shares that then fall in value.
A report by governance group Ownership Matters shows that some of Australia’s largest companies have used a loophole to avoid getting shareholder approval for – or even disclosing the purchase of – shares for executives as part of incentive schemes. Use of the loophole has exploded in the past four years from $600 million in 2009 to $1.5 billion in the past year, The Australian Financial Review reports.
In some cases, as with Telstra, Aristocrat, Qantas and Downer EDI, the companies bought shares that then fell in value. In Telstra’s case, in 2008 it spent $129 million of shareholders’ money buying shares at $4.60 that then fell to $3.50 and stayed at that level for almost four years, the report says.
The financial losses to shareholders are one thing. But the issue betrays a deeper cultural problem for the companies doing this – including Amcor, Computershare and Lend Lease.
“It doesn’t look good, does it?” says Melbourne Business School business strategy lecturer Geoff Martin. “The culture of ‘OK, I’ve got a loophole, I’m going to exploit it,’ particularly in the post-crisis world, is something to which shareholders are very sensitive. Exploiting loopholes in the realm of executive compensation is going to be come down upon by governance groups, shareholders and lower level employees, who say: ‘Is this a company I want to work for?’”
The report raises again the question of how companies should structure remuneration to encourage executives to work in the best interest of the strategy their company has adopted. Business travel company Corporate Travel Management’s share price has doubled over the past year and this has made chief executive Jamie Pherous – the largest shareholder with a 31 per cent stake – a rich man.
“From an alignment point of view, I’m more likely to be behind the line with shareholders as opposed to a CEO on a big package that may only be there for the short term,” Pherous tells BRW. “There [in the case of a short-term CEO] could be a stronger alignment to the personal game.”
Share prices don’t always move with the success of a company, however, and Pherous says incentives should be tied to things that make that business sustainable.
“The incentives of our senior guys are not just tied to profit growth, but to long-term client satisfaction and staff engagement,” he says. “We see that as our competitive advantage. We regard these soft measures to be critical to the long-term sustainability of CTM.”