It’s time for Australian boards to review the remuneration of underperforming chief executives and their direct reports.
Two detailed global surveys this week tell the same alarming story: Australian CEOs are not performing up to their overseas counterparts. This is a disturbing development for the future of the country although it shows that with better management Australian companies, and their share prices, have room for big improvement.
But although the current (and expected) stock market rally provides some relief, Australian shareholders, including superannuation funds, have been copping it in the neck because of the underperformance of our companies.
The first survey comes from Boston Consulting, which shows that Australia’s top 200 companies achieved shareholder returns of just 2.5% over the last two years. This compares with 8.3% in the UK and 14.5% in the US in the same two years. Yet Australia’s GDP growth was twice that of the US and UK. Australian companies therefore had the potential to do much better but did not deliver. And Boston calculates that the market is anticipating no change in the poor performance of Australian CEOs.
The second survey comes in a fascinating video interview and commentary by Productivity Spectator editor, Jackson Hewett, which unveils a survey of over 5,000 workers by Right Management – a division of the global staffing giant Manpower Group. Right management surveyed 38,000 employers in 41 countries and found Australia is the fourth worst performing country in terms of filling jobs with skilled workers. Right says companies who failed to properly address staff engagement were generally less profitable and more likely to lose top talent – a critical issue given the shortage of skilled labour in Australia. (Only two-thirds of Australians engaged in their work, July 17)
In other words Right Management and Boston have discovered the same thing – Australian management is not measuring up to its global counterparts.
As Boston points out, the Australian market is dominated by miners and banks and both these sectors have specific challenges that are not problems across the corporate board.
But as we have pointed out many times, the 2012 Telstra Productivity Survey showed that while productivity was seen as important by most Australian companies only around 20% of the companies could be bothered measuring it. But in fairness to the managers there are wider forces. (Waking up to productivity, March 28)
Boston say that in mining, materials and energy, while Australian fundamental financial performance has been strong, profitability appears to have peaked, and investors’ expectations on future growth have fallen sharply.
The main reasons are declining commodity prices as Chinese construction growth slows and, on the supply side, some very significant investment that is yet to produce an adequate return on capital. Boston says resources companies must find ways to improve the financial performance of new projects if they are to return to the high valuations they enjoyed last year.
In banking, Boston says sustained return on equity (ROE) improvement has led to strong earnings growth, but the market is concerned that rising funding costs (due to the eurozone sovereign debt crisis), slowing credit growth (now households are no longer leveraging), regulatory pressure on fee transparency and higher equity requirements will significantly restrain future growth and profitability in this environment,
Nevertheless it is very clear that while boards spend hours preparing the remuneration pages in the annual reports, they are not being tough enough with their CEOs and are paying top dollars for second-grade performances when measured against global counterparts.
This article first appeared on Business Spectator.