Orica time servers should not get a big payout

By Stephen Mayne
January 17, 2008

Australia's biggest chemical company, Melbourne-based Orica, has been a disaster for investors since being cut loose from its parent ICI Plc four years ago but it looks like new CEO Malcolm Broomhead is finally knocking it into shape.

The Orica financials are a disaster and chairman Don Mercer softened shareholders up by firstly acknowledging the "exceptionally poor" performance last year which saw the bottom line loss hit $192 million after large write-offs.

The EBIT of $174.4 million and full year dividend payout of just 44.3c were both the worst result the company has posted in more than a decade so the board finally started firing the senior management over the past year.

Crikey gave the board both barrels for rewarding poor performance. How on earth could they justify giving former explosives boss Peter Clinch a $600,000 incentive payment and a $1.3 million termination payout in the same year? But the board should also take the blame for paying more than $400 million a couple of years back to buy the global explosives division of its former parent ICI Plc.

Similarly, sacked CEO Phil Weickardt should not have walked away with $3 million given he'd been in the job performing poorly for four years. Chairman Mercer pointed to his 35-plus years of service as part of the explanation for the payout.

And how ironic that the company is being rewarded for the new CEO axing 800 jobs and clamping down on costs when new Orica chairman Don Mercer was fired from ANZ in 1996-97 for being too soft on costs.

And Mercer has been on the board since October 1997 so he is just as culpable as all the other directors for what happened.

Mercer was talking up the new leadership team: "I think the combination of Malcolm and myself is going to be very good."

The Orica share price surge just goes to show how irrelevant boards are some times. Malcolm Broomhead did a good job at North Ltd, where he first worked directly with former non-executive director Don Mercer, and is generally well regarded such that since joining the company Orica shares have surged from a record low of $4.04 to a recent peak of $7.35.

The $6.75 million interest free Broomhead got from the company to fund the purchase of his 1.5 million shares at $4.50 has made him the company's 20th largest shareholder showing a $4 million capital gain after just two months on his $1.3 million annual salary.

The structure of the package is very similar to what Ross Wilson scored off the Kennett government to head up Tabcorp back in 1994. The dividends pay back the loan so you eventually end up with free shares if the dividend flow is strong. Chairman Mercer said the tax system was a contributor to the design of the package and it should be pointed out that the $6.75 million will be effectively tax free even if they are totally paid for by dividends over the next five years.

The board were also rewarded for poor performance under Orica's director retirement scheme that gives time-servers who clock up 5 years a 3-year cash payout irrespective of how the company performance.

The company's 30,000 shareholders will no doubt remember paying around $11 a share for ICI Plc's 62 per cent stake in 1997 and were furious that the board performed so poorly after it was cut loose from the parent.

One of Australia's worst performed directors, Tony Daniels, got the usual serve from Crikey and the chairman also had to be admonished for claiming none of the Orica directors were over-committed.

Daniels took over as acting CEO of perennial dog Pacific Dunlop for a few months this year but retained his directorship of Pasminco (collapsed owing $3 billion), Orica (share price halved since he joined the board), AGL (worst profit in 10 years) and the Commonwealth Bank.

There is absolutely no way he could do any of these jobs properly and his record speaks for itself. The former Tubemakers CEO is 66 and it is time he was punted from all his boards to give someone younger a go.

Hanging on to options

Another practice which Crikey deplores is executives being allowed to hang on to their options when they retire early or are sacked.

The NAB board capitulated to the demands of former CEO Don Argus three years back and allowed him to retain his final tranche of 750,000 options which were issued just two months before he retired on May 31, 1999, at the price of $28.23.

Given that he will have no input into the company's performance before the options can first be exercised on March 19, 2002, there is no way that Argus should have been allowed to keep them. But he was and is currently sitting on a paper profit on these options of $2.76 million, in addition to the $30 million he has made heading the most profitable member of the Australian banking cartel.

Corporate malfeasance or greed is often dogged by the use of precedents so when Argus took over as chairman of Brambles he was in no position to take John Fletcher's options off him when the two fell out and arguably Australia's best regarded CEO resigned to join Coles Myer after a stint on the golf course.

Fast forward to Orica and you have the situation where the option scheme allows executives to be entitled to their options for up to 24 months after they have left the company.

Fabulous Phil Weickardt was given the punt on July 6 so he didn't get to keep this year's tranche of options because they can't be exercised until January 1, 2004, and more than 24 months will have elapsed before this time.

But the same cannot be said for finance director Tony Larkin who joined the company in June 1998 and contributed to three of the worst years in the company's history. He helped halve the share price during his term as costs blew out and poor acquisitions were pursued.

But when the price got really low he was issued with a tidy 140,000 options over shares at $5.72. Malcolm Broomhead was naturally keen to bring in a new CFO and his name was announced at the AGM but for some reason Tony Larkin was still sitting up on stage.

You see the board have allowed Tony to retire in early January and isn't that nice of them because that means he can still exercise his 140,000 options on January 1, 2004 as less than 24 months will have elapsed.

By then Malcolm Broomhead will probably have got the share price up to $10 and Larkin will have contributed precisely nothing to this but he'll be able to exercise his options and pocket a gain of $207,000 based on the current share price of $7.20.

Costly industrial disputes

It didn't get the sort of coverage of Robe River, Burnie or the 1998 docks dispute but Orica's 4-month battle with its workforce over its plastics division has been a financial disaster for the company.

Crikey asked how much this dispute contributed to the financials of the plastics division which saw revenue plunge by 26 per cent from $329 million to $244.5 million last year whilst the 2000 EBIT of 13.3 million became an operating loss of $22.9 million in 2001.

Chairman Mercer conceded that "most" of that financial decline was attributable to "those difficulties" which suggests the strike cost about $70 million in revenue and a $35 million profit turnaround which is very expensive indeed.

Thankfully for shareholders it has been resolved now.

Payouts to non-executive directors

The number one reform Crikey will be pushing at AGMs this year is for changes to the way directors are paid. Orica is a classic example of the problem. Long-serving chairman Ben Lochtenberg presided over a terrible financial performance but when he retired on May 2 there was a lump sum of $518,800 waiting for him in "retirement benefits" on top of his normal monthly fees which came to $120,000 in 2001.

The only criteria for this payout is time served. Crikey suggested that the scheme be changed such that directors get an increase in monthly pay in return for giving up all retirement payouts but Don Mercer said he wasn't planning for Orica to become a corporate pathfinder on such matters.

Former Shell Australia CEO Peter Duncan is a welcome addition to the board but the NEDs (non-executive directors) need some more turnover to punish those responsible for the poor performance.

Tony Daniels has to go and so should the 67 year old Brian Healey as he's been on the board since 1996. Arguably Catherine Walter should also be shown the door given her poor performance on the NAB audit committee and three years of service to Orica.

The problem in Melbourne is that there are very few well-qualified professional directors without major skeletons in the closet. Catherine Walter is the designated corporate lawyer on the board but they could do with finding a good accountant and at least one more director with direct chemical industry experience.

Australia's gruffest shareholder activist

Crikey has had a good laugh at the last three Orica AGMs as this really rough looking bloke called "John Clancy from Albury" keeps turning up and accusing the board and senior management of all sorts of corruption and incompetence.

John apparently got fired from one of the Orica serviced mines in WA about 4 years ago for fighting with a supervisor and has been seeking retribution ever since by airing allegations ranging from managers using hookers to the sale of the Moomba gas pipeline for $120 million just 3 years after it was built for $200 million.

He is now working on a mine near Port Hedland but was on holidays in Albury so drove down to give the board his usual spray. We had a chat over a sanger and he was much more pleasant than his bearded, flano-wearing image at the microphone so I've asked him to write a piece for Crikey explaining why he is so upset. It will probably never materialise but he is without doubt the toughest, meanest looking bloke I've ever seen sticking it to a corporate board. There should be more of it.