Martin Flanagan: Cairn’s mea culpa is welcome – and refreshing
WHEN in a dry well, stop drilling. Cairn Energy is right to abandon the £2.5 million share option cascade for chairman and founder, Sir Bill Gammell.
The proposed award had found virtually no support among the oil and gas explorer’s institutional investors.
The Association of British Insurers (ABI) had issued a “red top” alert on the corporate largesse ahead of a vote by shareholders this coming Monday, signifying its clearcut disapproval rather than merely “concerns”.
It is easy to see why, and not merely because of the storm around corporate bonuses generally (the latter having received a massive tailwind from the parallel universe of banking remuneration – sorry, banking “compensation”, we really must get the twilight zone terminology right).
Sir Bill’s proposed bonus pay-out at Cairn was vulnerable in both substance and process. The shares windfall was retrospective, made to him for pulling off the sale of a majority stake in Cairn India to Vedanta Resources.
As such, there were no future performance criteria for the bonus or even a lock-in of the boss to Cairn’s future. And, although it is clearly far too late to shut this particular door as the boardroom horse bolted long ago, you could argue that chief executives are paid to decide and implement strategy. What is more strategic than an acquisition or sale?
Too many big companies pay chief executives very generous basic salaries and then bonuses on top for deciding the big future picture for their businesses, but then award major share bonuses when the big picture – partly through acquisitions or divestments – is implemented. It is like getting paid twice over for the same job.
It is true Gammell moved from chief executive to chairman, at the board’s request for good succession planning, while negotiations on the Cairn India sale were still continuing. But he remained the moving force, with the Indian connections, and he was bound to see the sale through.
Secondly, there was no transparency on the bonus, it was presented as a fait accompli. Investors were thus treated cavalierly, which is what irritated the ABI.
To be fair, Gammell quite clearly does not fall into the category of bosses being paid for failure. Under him, Cairn has been a stunning success, with a market value now of almost £4 billion against just £6.5m in 1992.
And many of the Edinburgh group’s shareholders have done very well out of his stewardship. But even big, well‑run companies can get a key call wrong, and it takes a big company to effectively admit it without fuss. Cairn has avoided the mistake of adopting a bunker‑like defiance mentality. The group’s reaction to the looming shareholder rebellion will also play into the wider debate on bonuses stimulated by Business Secretary Vince Cable’s comments over recent days.
Cable wants shareholders to have a binding, not advisory, vote on how large companies handle executive remuneration. This is overdue if a culture change is to be made in what has become a cosy club of chief executives and former chief executives on remuneration committees awarding ever-increasing salary and bonus packages bearing no relation to the travails of the outside world.
Latest news refines our idea of financial threat
WE ARE very used to retailers going into administration these days. It is almost an orderly queue. Manufacturers and some professional services companies, too. But oil refiners?
The oil industry generally had seemed to steer clear of the insolvency radar, but Swiss-based Petroplus changed that yesterday. The holding company for a number of European refineries, including Coryton in southern England, revealed it had filed for insolvency.
On reflection, however, it is not surprising. The refining industry has been under pressure for some time now.
Over-capacity and thin profit margins are endemic. Petroplus tried to break the cycle with an acquisition-based business model but that only built up unsustainable debt. Then the lenders applied the screws.
Now the administrative receivers have moved in, and output is being stopped or radically cut back at its factories from France and Switzerland to Germany and the UK.
It may not be the last oil refiner to go this route.
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