Directors' pay 'pathetic' says EVA crusader

By Nick Stride

Friday 20th September 2002

Executive pay structures got a slating at an Auckland conference this week but directors can take heart.

Warming to a well-rehearsed theme ANZ Bank regional investment banking head Joseph Healy argued far too many executive pay packages had a "loser-friendly" structure rather than one that rewarded performance.

But he also described directors' fees and compensation in general as "pathetic."

"If I see a director on $30,000 it's like a red rag to a bull. Are they working through compliance issues or really working for shareholders?"

"They could be paid $100,000 for one day a month. It doesn't matter as long as the board is creating shareholder value" a sentiment with which Bruce Sheppard of the Shareholders' Association agreed.

Addressing the Lexis Nexis Corporate governance masterclass Mr Healy argued managers should be paid according to the amount of value they added, without limit.

However, where bonuses and incentives were offered they were generally subject to a cap, a practice that made no sense.

Packages could be structured to discourage the sort of short-term behaviour evident at Enron, Worldcom, etc, by adopting, for instance, the "bonus bank" system used at ANZ.

Under that system only a portion of the bonus earned in each year is paid out while the remainder is carried over and is at risk if future performance flagged.

He said there was a lot of myth involved in boards' argument that they had to pay executives highly to be competitive in the marketplace.

If high remuneration really had to be paid to attract talent then it should be paid in equity, not in cash.

But it had to be recognised that there might be reasons outside managers' control for a company producing negative EV.

"If management are doing all the right things to manage risks and minimise the downside, that should be recognised in their compensation."

Mr Healy enlarged on his argument that a governance "crisis" has contributed to the destruction of $21 billion of economic value over the last decade by top 40 companies.

But he said more rules on what boards must and must not do were not the answer.

"Competency and compliance is a given, it doesn't get you a gold star," he said.

"We don't need a box-ticking, prescriptive approach."

Mr Healy is campaigning for boards, manager, and shareholders to embrace "real" performance indicators such as EVA (economic value added) rather than mere accounting measures such as net profit after tax.

His comments came as the New Zealand Stock Exchange gathers submissions on its proposed new corporate governance rules.

The rules include a requirement for boards of listed companies to have a prescribed number of independent directors and an audit committee.

Also proposed are the separation of the chief executive and chairman roles, minimum qualification standards for directors and a requirement that non-compliance with a "best corporate practice governance code" be reported to the exchange.

Fletcher Challenge Forests company secretary and general counsel Paul Gillard, another conference speaker, said he had no problem with the exchange's rules.

"At the end of the day the creation of all these rules will mean a lot more box-ticking but it's a cultural issue. Good boards and good management won't have any difficulty complying."

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