Tabcorp’s Dwyer has it wrong on remuneration

I doubt Tabcorp shareholders will be too happy this morning. The chair of their board – you know that thing that is supposed to represent shareholders’ interests – is on the front page of the paper lambasting a shareholder vote against executive remuneration.

Her ire is misplaced. Dwyer thinks the message from shareholders is to avoid risk altogether:

“It is critical for the success of Australian businesses, the economy overall and in the interests of shareholders, that boards and management teams make considered investments to drive long-term growth and shareholder value.

“In fact, this is a key aspect of the board’s role. Not all these bets will pay off. However, it does not serve the interests of shareholders for boards and management to do nothing for fear of retribution.”

But that is not why there’s so much angst against executive remuneration. The problem is not that the board took a risk. It is that they don’t think there should be any consequences if that risk doesn’t pay off.

Two-sided risk and reward

Tabcorp’s board and management team decided to launch a business in the UK. It didn’t work. Shareholders lost $91m. Which is fine. It may well have been a risk worth taking. But that doesn’t mean management shouldn’t share in some of the pain.

Dwyer thinks the merger with Tatts Group is going to be different. “I think this transaction will prove to be a hugely important step for Tabcorp”. So much so that the board awarded the Managing Director $630,137 just for doing the deal.

Again, if the board think the Tatts transaction is going to be good for shareholders, they should do the deal. But no one should get paid until those benefits are proven. If they deliver the goods, pay the management team lots of money. If the deal doesn’t increase Tabcorp’s earnings per share, then suffer along with shareholders.

The message, Paula, is not to avoid all risk. Shareholders are just sick to death of one-sided payoffs. What you want is to pay a small fortune if the strategy fails and a large fortune if it doesn’t. That is not the way it is meant to be.

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Steve Johnson
Founder & Chief Investment Officer

Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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