Hegarty payout rolled, history is made

February 2, 2010

Dear Mayne Reporters,

it's a red letter day for shareholder rights in Australia as the outrageous $10.7 million payout to outgoing Oxiana CEO Owen Hegarty was comprehensively voted down this afternoon by the big institutional shareholders.

First things, first we've edited up all the audio into the following:

How much did the re-branding and merger cost in total?

Big spray against Peter Mansell for being over-committed and his WA News hypocrisy on board size

How much are the NEDs getting in 2008-09 and how much extra for Owen Hegarty?

Chairman Barry Cusack's cynical tactics in revealing the Hegarty payout defeat

Full audio

Despite 63% of all shareholders voting in favour, the big boys did not succumb to Oxiana's ring around and the final proxies saw just 575 million votes in favour and 776 million against, meaning 57.4% of the proxies agreed with the argument that Hegarty's golden goodbye was over the top.

Oxiana chairman Barry Cusack played a very cynical game in the way this was handled. At 2.29pm, just as the EGM was starting, Oxiana released these 33 pages to the ASX and the very last page revealed the proxy position on Hegarty's payout. However, the statement said nothing about the withdrawal of the resolution.

Whilst Cusack performed something of a mea culpa mid-meeting about not giving Oxiana shareholders a chance to vote on the $6.3 billion Zinifex merger, there was no mention of the coming bombshell on Hegarty's payout.

This meant that over the first 90 minutes of the EGM we changed Oxiana's name to OZ Minerals, appointed the five Zinifex directors to the board, re-appointed Hegarty to the board, lifted the maximum board fees from $1.5 million to $2.7 million and then finally got ready for the debate about the payout.

Cusack then thanked Hegarty profusely, encouraged a large round of applause for the man, declared the proxy position, withdrew the resolution and immediately closed the meeting.

One old fellow staggered towards the microphone and Cusack barked that he couldn't speak because the meeting was closed. The old guy then said that he wanted to commiserate with Owen who deserved his payout and Cusack encouraged him to do it privately because he'd shut the meeting.

This means that Oxiana shareholders have created history with this revolt but the payout has never once been discussed at the three shareholders meetings we've seen since the merger was announced in February.

I asked Cusack at the Oxiana AGM in May whether Owen was getting a big payout and he declined to answer the question. Zinifex shareholders then voted in favour of the deal in June and the details of the payout were cynically released a few hours after that meeting in the notice of meeting for today's gathering.

We then all sat through all this other debate in readiness to discuss this outrageous proposal and the chairman finally reveals something that had been announced to the ASX 90 minutes earlier at 2.30pm and promptly shut the meeting.

For mine, Barry Cusack has no idea about shareholder engagement and good corporate governance and should shuffle off into retirement.

Big protest against Peter Mansell

It was also good to see WA News chairman Peter Mansell cop another big protest vote. Whilst the four other Zinifex directors only had 85 million votes cast against them, Mansell was up at 158 million, meaning he joins that very small club of directors who were re-elected with less than 90% in favour.

Three other shareholders, including Tom Rados from the Australian Shareholders' Association, singled out Mansell for criticism over his workload based on the five public company board seats that were disclosed in the notice of meeting.

I then got up and pointed out he was also a director of European smelting company Nyrstar, which has vast related party dealings with Zinifex, and chairman of the WA winery Ferngrove and the big electricity utility Western Power.

And the busiest man in corporate Australia was also nailed for the hypocrisy of insisting that WA News retains just four non-executive directors, whilst participating in the doubling of the Oxiana board as part of a merger that sees huge corporate cuts in the respective head offices but not a single director retirement.

What happens to Hegarty's payout now?

The Hegarty payout had a number of components which broke down as follows:

* $2.29 million in cash for his base salary through until December 2009

* $1.5 million in cash in lieu of 18 months worth of short term cash bonuses

* $160,000 in cash as a retention payment for staying on the board

* 500,000 free shares worth $1 million as a retention payment for staying on the board

* $1.558 million in cash for giving up 2 million options to buy shares at $4.36 that were issued in May 2007 and were due to vest in June 2010.

* $1.71 million in cash for giving up 2 million options to buy shares at $4.36 that were issued in May 2007 and were due to vest in June 2011.

* $1.93 million in cash for giving up 2 million options that were to be issued in May 2009 and then vest in June 2012.

I've got no problems with paying out Hegarty's contract for his base salary but he shouldn't also be treated as if he satisfied every single component of his incentive schemes.

Besides, Oxiana shares have plunged by more than 60% in recent months and today closed at $1.95 so why on earth should he get $5.4 million in cash for surrendering 6 million options that are massively out of the money based on a strike price of $4.36. It was this element of the payout which caused the institutional revolt.

The solution here is very simple. Let Owen keep the options.

As for the rest of the package, s200E of the Corporations Act only requires payouts be approved if they amount to seven times the previous three years of salary. This means Oxiana can probably give Owen the $3.8 million in cash based on his base salary and short term incentive through until December 2009.

However, they will have to revisit the 500,000 free shares for staying on the board and won't be able to do anything about cancelling the options.

Personally, I'd have no problem if the board decided to flick Cusack and Mansell to create some headroom in the overall fee cap for non-executive directors and then agree to pay Hegarty a flat $1 million a year to be non-executive chairman of the company that he founded.

At one level, Hegarty will be outraged that institutions have denied him this huge payout and tempted to storm off.

However, there is the small matter of his $60 million worth of shares in the company. Hegarty has ample incentive to make this merger work and shareholders were right to create history today in denying him an utterly inappropriate payout. It was pure greed and utterly offensive.

And let's hope the Rudd Government is emboldened by today's revolt and changes the law to make any executive payout of more than $1 million subject to shareholder approval.

That's all for now.

Do ya best, Stephen Mayne

* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.