ANZ CEO Proposed Remuneration Increase

Voting item 4 for ANZ’s upcoming annual general meeting asks for shareholder approval for the granting of 700,000 options to ANZ Chief Executive Officer Michael Smith. This amounts to approximately $2 million in extra remuneration although some restrictions do apply. According to the Notice of Meeting 2008 Annual General Meeting page 5:

“The grant of options recognises Mr. Smith’s strong performance in the current difficult times. He has provided strong leadership to the company and established the foundations for future growth;”

The board gives two reasons for granting these share options. First, it seeks to reward Mr. Smith for his “strong performance” during these “difficult times.” Later in the document shareholders are told this increase is necessary to keep Mr. Smiths remuneration in line with the market for people in his position.

As a shareholder, I cannot but wonder whether the Board hired Mary Poppins as a consultant to review Mr. Smith’s performance. In my view, there are two very basic and easy to measure metrics for evaluating the performance of a CEO: the share price, and the net profit.

There is no doubt we are living through difficult economic times so one would expect a fall in the share price. I thought, however, it would be interesting to compare ANZ’s share price with that of the other Big Four banks, to see whether ANZ’s share price performance is at least average when compared to the other big banks.

Mr. Smith took over ANZ on 1 October 2007. Comparing the share price from that date to the opening price on Friday 21 November 2008 yields some very interesting results.

Table 1 Big Four Share Price Comparison During Michael Smith's Reign as CEO of ANZ

Bank Open 1 October 2007 Open 21 November 2008 Dollar difference % gain or loss Commonwealth 56.36 29.35 -27.01 -47.92 National Australia 39.62 18.25 -21.37 -53.94 Westpac 28.50 15.02 -13.48 -47.30 ANZ 29.76 12.50 -17.26 -58.00 AVERAGE     -19.78 -51.30

The Big Four all suffered large falls in their share price with ANZ suffering the largest percentage of loss. While the Commonwealth Bank experience a greater loss in actual share price, the fall in the share price represented a 47.92% loss in value, compared to ANZ’s 58% loss in value. With respect to worse percentage loss in value, ANZ was by far the worst performing of the Big Four.

What about net profit? The following is a comparison of Net profit between the Big Four for the past two financial years. Mr. Smith started as CEO at the beginning of ANZ’s financial year, so this comparison is straightforward.

Table 2 Net profit comparison of the Big Four for the last two financial years. Financial years here are those of the banks themselves and not necessarily Australia's financial year.

06-07 net profit ($m) 07-08 net profit ($m) Dif. In $m % Change Commonwealth 4,415 4,743 328 7.43 National Australia 4,295 4,224 -71 -1.65 Westpac 3,451 3,859 408 11.82 ANZ 4,143 3,273 -870 -21.00 AVERAGE     -51 -1.26

Here we see that ANZ had the worst net loss in terms of both dollars and percentage. ANZ’s net profit was down a whopping 21% from the 2006-2007 financial year to the 2007-2008 financial year. Two of the Big Four actually increased their net profit. Mr. Smith’s publicly stated goal for ANZ is to “double profits.” So far, he is off to a very poor start.

In these times, I would expect a “strong performance” to mean that the decline in share price at least be below the average decline within the same sector. I would also expect net profit to decline only slightly, if at all. I think these are reasonable expectations for measuring a “strong performance” as opposed to an average or subpar performance. Instead, we see that ANZ’s performance is far below average in both share price and net profit. Why are shareholders led to believe Smith’s performance is strong? What metrics did the board employ to arrive at this conclusion?

Shareholders are also told the 700,000 additional options are needed to keep Smith’s remuneration in line with the market. Surely the market salary for a CEO of a major bank should be in decline, not on the rise. During these “difficult times” there is ever increasing pressure to lower executive remuneration, not raise it. Exactly what market is the board looking at? At any rate, thanks to lying Wall Street Investment firms, there are plenty of experienced and unemployed bank executives in Iceland, Norway and Hungary whom the board can turn to, along with executives from numerous banks everywhere which are shedding staff as fast as they can open the doors to let them out.

Rather than raise profits through innovation, ANZ now plans to ship more jobs offshore. People with jobs take out loans to purchase property. They use their salary to pay back those loans. When people lose their jobs, the risk of their loans defaulting increases dramatically. Considering that high loan default rates are the core cause of our current economic crisis, I find it puzzling that supposedly savvy executives wish to further accelerate the problem rather than finding solutions for it.

One might argue that ANZ only plans to shed a few jobs and this will not have a noticeable effect on loans. But because ANZ is one of Australia’s largest companies, the issue is broader than simply a few hundred loans which have a higher risk of defaulting. The issue is that of confidence.

Even though ANZ’s profit was significantly down for this financial year, it was still over $3.2 billion. Despite this, ANZ still seeks to shed jobs. What kind of a message does this send to the rest of Australia? If ANZ were a small company barely scraping by, I could understand the need to shed jobs. But ANZ is not such a company. It can afford to keep jobs in Australia. When large companies such as Telstra, ANZ, NAB and others shed jobs despite large profits, consumer confidence is significantly eroded. The average person becomes far less certain of his own job and cuts back on spending. This reduces the number of new loans. This stagnates the economy even further.

ANZ’s board tells us we live in “difficult times.” This is about the only thing the board has right. During such times we definitely need strong leadership. The companies who can afford to do so must keep jobs in Australia. This is better for shareholders in the long run and definitely better for the market. If the type of leadership which has been shown so far is considered “strong leadership” then Mary Poppins is indeed a secret consultant to the ANZ board, and Australia is the worse for it. The world of Mary Poppins is a wonderful make-believe world in which people fly using umbrellas and everything turns out right in the end. Sadly, only ANZ’s board lives in that world. The rest of us live in the real world, and in our world, leaders should be measured accurately and held accountable.