A personal view: No Connection with OneArmed Bandits

Thursday, 01 April 2004


    A half century ago, someone told Len Ainsworth he'd have a better chance at making money if he moved out of dental equipment into making pokies. He began tinkering with poker machines in 1953, built his first machine in 1956 and started manufacturing at a factory in the Sydney suburb of Rosebery in 1961.

    By 1996 Aristocrat was producing the bulk of the nation's one-armed bandits. It publicly listed and by 2003, the company was valued at around $2.8 billion. Over the years, Aristocrat has had its bouts with controversy some deserved, some not. It is currently caught up in an excessive remuneration imbroglio involving one of its directors and a retirement payout of around $500,000.

    The media has predictably gone for the obvious story of greed and envy and has found yet another excuse to kick the executive and director remuneration can.

    But the issue at Aristocrat is not about a payout contract that seems to be rewarding someone for failure. The issue is about continuous disclosure and the fact that far too many companies still don't understand what disclosure of remuneration is all about.

    The result was that, in the absence of infor-mation beforehand shareholders were outraged when details of the remuneration package eventually surfaced. The Ainsworth family, which still holds a significant shareholding, threatened to pull out all stops to prevent the payout.

    On March 18, a joint Parliamentary Committee heard submissions from various groups including the AICD on aspects of the proposed CLERP 9 Bill. One of the provisions of the new corporate regulation is to provide shareholders with a non-binding vote on any executive and director remuneration plans. This is opposed quite rightly because it blurs the lines of responsibilities between boards, management and shareholders. However, the chances of the Government pulling back from this provision appear slim primarily because of situations such as Aristocrat and the level of community concern they generate.

    Remuneration policies are a risk management issue that need to be dealt with. This includes how the package is put together, its short, medium and long term implications and the manner in which this information is communicated.

    The argument, that there are commercial sensitivities at play in the manner in which the package has been framed, and that, if the remuneration is known to the market, this will create envy catch-up, are legitimate concerns.

    In reality the remuneration horse has already bolted. In the US, Europe and Australia, companies and boards are under pressure for remuneration practices of the past.

    It doesn't bode well when directors of some of these companies start saying publicly that they were unaware of some of the remuneration practices, legal or in some instances illegal.

    It sends a message to government that boards are not in control and therefore legislation is needed. The issue won't go away - and it is now a real risk that boards must manage. Keeping executive and director remuneration contracts a secret or disclosing only selected parts is becoming a dangerous option, not least because of the damage to personal reputations and the brand name of the company.

    The prudent approach is to take a very close look at all remuneration contracts entered into, establish bottom line implications and make a concerted effort to disclose this in full to shareholders.

    Companies such as BHP Billiton and Brambles have recognised that executive remuneration practices, if not transparent, can lead to problems down the track. This doesn't mean that the noise surrounding the remuneration issue will die down once disclosure practices are in place.

    What it will do is provide a safety valve for boards to explain to investors that, whatever remuneration payout is required now, is a consequence of transparent actions in the past. It may also mitigate some of the more strident comments from the media and perceptions from the public that boards have aided a system of one-armed bandits.


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