Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Director Fees : Wage Claim Outrageous

Posted by Dave Bath on 2007-11-09


The 2007-11-07 Financial Review headline about public company board directors wanting up to a 90% increase in remuneration because of the "burdens" of compliance is outrageous because it show many directors are aware they either don’t understood, are are failing to perform, existing duties to stakeholders.

It’s a bit like a restaurant doubling prices when told that the government is beefing up the corps of food inspectors.  It’s an implicit admission of current failure to perform.

There is no extra workload on directors as they should already be ensuring they are getting the same figures internally, information required for good business decisions that maximize stakeholder value.

Extra reports to authorities and shareholders should be, at most, a reformatting of existing reports.

Do the directors have to collect the data themselves, punch in the figures, write Excel macros?  No.

Do they need to pay more attention to the figures that they already should have been?  No.  If they have problems reading more, company-funded speed-reading courses would solve them.

We aren’t talking of SMEs, managed directly by the owners and not publically listed.  We are talking about large, listed companies.  Indeed, the costs (or more likely, the risks) to senior management of increased compliance regimes is the main reason why so many publically listed companies have moved to private (unlisted) owners since governments brought in SOX (US) or CLERP (Oz).

Directors have always had the responsibility to increase value, and have always needed the same type of data now required for external reporting.

Good governance, including close examination of data, ensuring a strong and independent internal audit division responsible to directors rather than senior management, and skepticism of the statements by senior management that "everything’s great so I want more money" have always been necessary to maximize value.

That closer examination of details achieves value by allowing better decisions, the decisions directors should have been making for decades, is shown by two things:

  1. When better external reports are required, internal reporting also improves, and better business decisions are made, inefficiencies are discovered and can be addressed, and value increases.
     
  2. Ethical investment companies, with restrictions on the sectors they can invest in, should theoretically make lower returns than the market.  However, because they show greater diligence before investing, their business decisions are better informed, and in general they outperform the market.

Why do directors feel the need for more money when they could easily achieve the demands of good governance by demanding a strong internal audit team and accountability from senior managers, because there is no demand for extra work on top of what they should already be doing?

It’s simply because their poor performance is more likely to be discovered by authorities and stakeholders, that prosecution is more likely, that penalties have increased, that exposure to legal costs is greater, and that, even without prosecution, discovery will make it less likely they will be invited into high-paying board positions in the future.

This is mirrored by the Telstra board defending the low-hurdles for senior executives like Sol Trujillo to get a bonus based on performance by saying that the critics are ignorant of the realities of remuneration packages.  Are they saying the major critic, David Morgan of the Future Fund (holding 16% of Telstra), former head of the Commonwealth Bank knows nothing?  If so, then they accuse the entire senior management and director class of Australian business of incompetence.

By the time the criterion for bonus monies to senior Telstra executives, (the transformation process), can be judged as successful or not, something that takes about 5 years rather than the time the systems are installed (one or two years), all of the senior executives will have moved on to other companies.

It’s a bit like assessing the work of orthopaedic surgeons based on how many patients they cut into and how many wake up after anaesthetic rather than how mobile the patients are a few months down the track.

This is just one example that highlights the major problem with remuneration packages for senior managers and executives.  Performance criteria are assessed in the short term, while the programs they put in place have no effect until a few years down the track.

By quarantining any bonus for a period of five years, and even instituting performance penalities, the actions of senior executives and board members could be judged properly, and you could bet that they’d put real effort into the long-term survivability of the company, more likely to improve company survivability by capital investment that creates new products and increasing production rather than merely cutting costs in the short term while gutting the long-term capacities to withstand market changes or expand activities.

The same short-termism hurts not just business, but the senior executives and managers in political domains, something the chairman of the Commonwealth Bank lamented on ABC Lateline Business 2007-11-07, while despairing of the chance of long term constitutional change because of the downside of longer terms.

More on this in a future post.

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2 Responses to “Director Fees : Wage Claim Outrageous”

  1. […] and Short-Termism : possible fix November 9th, 2007 — Dave Bath Previously I’ve discussed how to create long-termism of directors and senior executives in […]

  2. […] the climate out of controlPolitics and Short-Termism : possible fix « Balneus on Director Fees : Wage Claim OutrageousPolitics and Short-Termism : possible fix « Balneus on Ostracism: a return to […]

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