Tim Wood
American Notes
The air around corporate South Africa has been blue with indignation since Business Report’s Ann Crotty muckraked Nedcor’s annual report to turn up a dubious share option scheme. The ire is understandable, but suggestions that this sort of gratuitous executive self-enrichment wouldn’t happen in the United States or United Kingdom are not.
Don’t get me wrong. Several South African management teams, from flim-flam IT companies to pinstripe banks, have treated investors shabbily and will continue to do so.
ITI-Tech was supposedly a Didata in waiting and then it evaporated along with a large pile of cash. Bryant was going to revolutionise network computing until the books were fiddled. Metcash assured us of its success. Pity about the profit warning. Datatec’s Jens Montanana was hailed for buying his own shares. If only it had been in faith rather than shrewdness since he insulated his wealth with a monstrous put option.
In truth, Johnnic’s BDFM probably gave Nedcor the idea after incentivising its executives via the performance of companies they had no control over. The rewards were handsome. The difference is that Nedcor has pulled out all the stops to make it risk free.
So it goes. But not just in South Africa as some commentators would have us believe.
Take London-listed South African resources expatriate Billiton. Its pending merger with BHP will result in its executive performance arrangement vesting early and on remarkably favourable terms. By demanding that the scheme be terminated using the price of Billiton shares after the deal was announced, the executives, already pampered with some amazing perks, ensure that they will take home nearly everything they envisioned.
London shareholders are annoyed that a moving average of the price prior to the deal hasn’t been applied. There’s also grumbling about fully vesting the arrangement when it could be modified to run to full term, taking into account the enlarged circumstances of the merged companies. Likewise, the rent-free accommodation in wonderful neighbourhoods and sundry benefits has got everyone exercised about the company’s priorities.
London’s sound and fury will amount to little, just like Johannesburg’s. The Billiton execs will get their cake and eat it, and so will Nedcor’s. Across the Atlantic, the abuses can be even more extreme. While US shareholders are vigilant and generally unforgiving, that hasn’t stopped executives from walking away with the family silver even when they’re departing in disgrace or guilty of mismanagement.
Executive incentives are intended to align a company’s interests with those of its individual managers. The water has been muddied by much bleeding-heart wailing about the size of incentives. The only concern should be whether compensation matches shareholder performance. There are very few cases where it does.
Even Jack Welch, regarded as the greatest working CEO, has found a way to beat the system. Last year Neutron Jack scooped a pay packet worth $136-million. That may or may not be a great price for having the world’s best manager running your business, but the problem is that it was 80% more than he earned in 1999 even as total GE shareholder returns slumped six per cent.
Renowned executive compensation analyst Graef Crystal criticises Welch for scoring big when his company didn’t even if it did better relative to its peers or broad equity indices. Crystal says executives looking for relative compensation should accept options indexed to the S&P 500 or similar indices. They never do.
Welch also gets roasted for accepting options a year ahead of retirement. GE justified its decision as a reward for long service. The problem is that Welch hardly wanted in his previous 20 years. He consistently out-earned his mates and he will pick up $8-million each year until his death, courtesy of the GE pension fund.
Some reward, but Welch will get it with adulation while Crystal will be a lonely voice of dissension.
Outright abuse takes place at entertainment behemoth Viacom, where self-appointed 77-year-old CEO Sumner Redstone, worth $14-billion, sees no conflict of interest in having his son and daughter sit on the firm’s compensation committee. Redstone earned $81-million last year, even as the company’s total shareholder returns turned seriously negative.
All across corporate America there are executives happily bilking shareholders and there’s not too much done about it. Happily, there are cases where compensation is tightly matched to performance, such as at Colgate Palmolive, where an ingenious compensation arrangement has delivered for the CEO and his shareholders.
By my observation South African executives are no more or less dishonorable than their peers in the US and UK. They’re just individuals prone to the oldest temptation greed. Investors need to accept that finding executives who subordinate greed are one in a million and compensation schemes must be structured accordingly.