Despite blowing up shareholder value with its $9.5 billion acquisition of Lihir Gold in 2010, Newcrest Mining (ASX: NCM) still paid bonuses to some executives for their role in the takeover.
And that illustrates how corporate Australia has lost touch with its shareholders. In its annual report released on Monday, Newcrest reported bonuses of $125,000 paid to three executives each in the 2013 financial year. That comes despite the miner writing down the value of Lihir by $3.7 billion this financial year.
According to the Sydney Morning Herald (SMH), the bonus payments were agreed to some years ago for their roles in the Lihir acquisition, and come on top of bonuses of $75,000 each in 2011 and $100,000 each in 2012. Newcrest reported in its 2012 annual report that it was concerned with retaining a number of key executives, and therefore agreed to the retention bonus payments.
The SMH also reports that the Australian Shareholders Association (ASA) has already been critical of the gold miner for the bonuses paid to former chief executive Ian Smith for landing the acquisition. Mr Smith was paid $750,000 in 2012 as a bonus, which along with his termination payment of $2.25 million and regular salary saw him walk away from the company $6.7 million dollars better off.
The ASA has threatened to vote against the remuneration report at the annual meeting next month. Newcrest is still under investigation by the corporate regulator over its disclosure regime, after several analysts were allegedly tipped off on production cuts before the news was made public.
One has to wonder what value Newcrest’s eight non-executive directors add, at an annual cost of more than $2 million in directors’ fees. Amongst other roles, non-executive directors are to scrutinise the performance of management, ensure that the company’s obligations to shareholders are met and determining appropriate levels of remuneration for the executive directors.
One factor that we like to look at when researching companies is ‘skin in the game’. In other words, does the management team hold a substantial number of shares. There is a weight of evidence that shows improved business performance as a direct result of insider ownership. Newcrest directors hold just 245,000 shares between them, out of a total of 765 million.
Of course Newcrest isn’t alone in destroying shareholder value. Plenty of other Australian companies have done it in the past, including Billabong International (ASX: BBG), Rio Tinto (ASX: RIO) and Treasury Wine Estates (ASX: TWE).
Newcrest has defended Lihir, saying it remained a world class asset, and that it contributes a similar amount of its total valuation as it did when acquired. I don’t know about that, but what I do know is that Newcrest overpaid for Lihir and apart from former CEO Ian Smith, no-one else appears to have been made to pay the piper for their roles in the acquisition. In fact, it seems quite the opposite.
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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.