A year on from the height of the financial crisis and our leading broadsheets have provided a neat wrap of one of the most turbulent periods encountered by modern free-market capitalism. Turbulence, of course, is a function of a free market — with booms (and the world experience a near 20-year expansion) come busts. You simply cannot have one without the other. Admittedly, there is such a thing as too much turbulence — which can lead to extraordinary events such as runs on banks.
Despite the claims of many, the recent crisis was not the fault of the free market — that is largely because problems were caused where the market was not free at all. This was most notable in the realms of executive remuneration, which is determined by a bunch of lazy and feeble independent directors based on advice from conflicted remuneration consultants. By rewarding incompetent executives with huge windfalls for taking excessive risks, company boards stoked the embers of what would become a full-blown crisis, with little comprehension of the consequences.
There are few better examples of the failure of the market for remuneration than that of struggling Queensland bank and insurer, Suncorp-Metway. After spending a decade as a market darling, Suncorp’s star rapidly faded last year as the financial crisis took hold. In fact, as Mark Hawthorne reported in The Age last week, regulators had such significant concerns about Suncorp’s survival that it was the Queensland bank that purportedly spurred the Government guarantee of deposits.
According to APRA: Suncorp-Metway was the bank under the most pressure. In September — the month in which Lehman Brothers collapsed — Suncorp-Metway had witnessed a 1.1% decline in retail deposits. Of all the listed Australian banks, it was the only one to record a fall.
Leading corporate undertaker Mark Korda held a similar view, noting that “it’s no secret that Suncorp-Metway was the bank that was under pressure. There was a fear of a run on one of the regional banks, and Suncorp was the one the Government and many others thought might be the most vulnerable”.
Such was failure of the Suncorp board to properly regulate its own executive remuneration, that despite the bank and insurer’s financial position being so perilous as to require government intervention and its prior year’s earnings-per-share falling by more than 60%, former CEO, John Mulcahy, was paid $6.1 million in 2008. This also included a short-term cash bonus of $1.2 million. That Mulcahy would receive any sort of bonus at the same time Suncorp was being effectively bailed out by taxpayers is an indictment on the Suncorp Board (which included luminaries such as Leo Tutt, who sold MIM for a song back in 2004 and John Story, head of the Australian Institute of Company Directors).
If that wasn’t bad enough, Mulcahy would resign in disgrace (he led the over-priced Promina acquisition and presided over billions in risky loans) in March 2009, not long after Suncorp was forced to undertake a discounted capital raising and slash its dividend. Despite Mulcahy’s tenure requiring a taxpayer-funded bailout, the executive received a $2.1 million golden handshake, effectively proving that no matter how much value an executive destroys, there will still be a generous farewell from shareholders, who of course, have absolutely no say in the matter.
In total, Mulcahy would be paid almost $20 million over six years while Suncorp managed to lose more than $12 billion in market value.
Don’t blame the free market for our woes, it did what it is meant to do. No free market would have allowed an incompetent, risk taking executive to be paid millions of dollars — that takes a cosy board and hand-pickled remuneration consultants.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.