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The aftershocks of the global financial crisis of 2008 are evident in the ongoing fragility of the global financial system, the latest iteration of which is the crisis in the eurozone.
Less noticed is the seminal change to management practice and thinking. As Tom Boyle, managing director of board consulting firm Blackhall & Pearl observes, for boards and senior management there were “two worlds: a pre-GFC world and a post-GFC world”.
An indication that the impact of the GFC is yet to fade away can be seen in a report by the Australian Council of Superannuation Investors (ACSI) on chief executive pay in Australia’s top 100 public companies. It found that average pay for chief executives fell last year from $4.99 million to $4.72 million. Average bonuses fell from $1.58 million to $1.25 million and average cash pay (bonuses plus fixed pay) fell by 8.9%. The era when senior management had rewards linked to higher share prices or revenue growth, typically fuelled by high levels of debt, has come to an end, at least for now.
“You are seeing the impact of the post-GFC era on pay increases,” says Martin Lawrence, research director for governance consultancy Ownership Matters, which wrote the ACSI report. “It is the end of the extremely large remuneration outcomes for financial services companies: the Macquarie Groups and the Babcock & Browns.”
Lawrence observes that between 2001-2011, the median fixed pay rises of chief executives of the top 100 companies rose by 9.4% a year. In the last five years, however, the rises in pay were only 3.9%. “One surprise is that bonuses have declined, and not just to the levels prior to the GFC,” he says.
It is scarcely surprising that the party is over. Banks are more reluctant to lend, share prices are weak and the economy is patchy and uneven. There have also been many changes in the way institutional investors approach their investment practices. According to David Elia, chief executive of industry superannuation fund Host Plus, the 2008 financial crisis led to a profound rethink about investment protection, which has in turn affected the way companies are funded.
He says when the GFC hit, the fund found was that there was “nowhere to hide”, even though it had to some extent anticipated the problems. Virtually all asset classes suffered from liquidity problems. “We weren’t able to liquidate even the fixed-interest securities without taking a substantial hit,” Elia says. “The funds had to simply wear the consequences of what was happening.”
Host Plus, like many funds, set about changing its thinking about risk and exposure. “We are much more concerned with issues around liquidity and being able to prop up a company or asset that is in need of additional cash,” says Elia. “There is a much broader premium on your own initial ability to support investments beyond the initial investment. We need to be able to make further investments.”
Institutional investors now pay more attention to other investors in the company or asset. Host Plus has a process for assessing if other investors are “like-minded” and have the ability to inject extra capital in if needed. “(During the GFC) some of our co-investors didn’t have the ability to make pro-rata contributions,” says Elia. “We are much more sensitive about who is investing alongside us.”
Such changes of investment attitude inevitably spill over into the way managers are held accountable. “There is a much greater effort to ensure that there is proper alignment between us as an investor and the management, and those whose job it is to deliver an investment outcome,” says Elia.
Performance hurdles, remuneration structures and dismissal policies have all come under scrutiny. “There is now a greater emphasis on negotiating investment deals and arrangements that allow us to sack the manager, remove them if they have underperformed. In the (pre-GFC) heyday there was less emphasis on that. You have to have the capacity to remove the manager and just as importantly replace them with someone else who will perform better.”
Not all managers have been adversely impacted by the GFC. Some companies have found that the crisis changed their competitive positioning. Simone Tilley, head of business execution, global agribusiness, for the Australian and New Zealand Banking Group, says that the crisis, especially in Europe, opened up market opportunities. She says the global agribusiness firms, which have up to 170 banks supplying them with services, find the ANZ’s credit rating appealing.
“Our AA rating is now scarce in the global marketplace and it is becoming increasingly attractive given the European banks are retreating,” says Tilley. “Many global agribusiness companies are recalibrating their exposure to European financial institutions, which is providing an Australian bank like ANZ with its super-regional footprint with an absolutely unique opportunity.”
Tilley says her clients are saying that the big European banks no longer have the appetite to do business in Asia. “They are saying: ‘You guys have a AA credit rating, you are well capitalised, do you want to take some of this business?’”
Companies that were more conservatively managed before the GFC have found that opportunities opened up. Wesley Ballantine, general manager of investor relations for Transurban, says a number of toll road operators prior to the GFC used overly optimistic forecasts, which he believes Transurban avoided. Now, the tables have turned. “There are not a lot of companies that will take traffic risk (invest on the basis of optimistic forecasts) in the current environment. We are one.”
For most corporations, the GFC changed the way management is held to account. Regulators and boards, tending – as ever – to solve the last problem, not the next, are far less tolerant of risk. Blackhall & Pearl’s Boyle says in the post-GFC era there is a much greater concentration on regulation and detail.
At board level, there is much greater scrutiny on the collective skills of directors. “For those not at the edge of creating performance it was a big wake-up call.”
Boyle observes that the post-GFC environment has led to boards concentrating more on compliance than performance. But the post-GFC trend towards extra scrutiny is unlikely to change.
“Capital is still very tight and banks are not as keen to lend as before,” says Boyle.
“It is leading to a greater focus on the basics and the numbers. It has highlighted the need to understand the accounts. You need people on boards who have a greater understanding of complexity, especially debt-to-equity structures. If you can find all that in a woman, you have hit the jackpot.”