Sunday, 14 June 2009

Where the buck stops: a reminder

From the The Sunday Star-Times, Auckland New Zealand 7 June '09
Directors have to take some of the blame when executive salaries soar, says an expat high-flyer. He's described by Britain's Sunday Times as "one of the most influential men in British industry", he's a New Zealander, and he has slammed the high salaries of many chief executives and described those who receive them as prima donnas.

Aucklander John Buchanan - former chief financial officer of BP, current chairman of Smith & Nephew and director of BHP Billiton, Vodafone and AstraZeneca and UK chairman of the International Chambers of Commerce - is also critical of company directors who have agreed to overly generous packages for executives, saying they have failed to do their jobs.

Shareholders around the world were "rightly irate" at the huge salaries paid to many executives, Buchanan told the Sunday Star-Times, particularly those in high-flying activities such as investment banking, when the capital of the companies they worked for had collapsed almost to the point of disappearing.

"So tell me how brilliant these people were at creating sustainable value," he said.

"The sort of stuff we get from the banks, that people like me find hard to understand, is when we are told, 'well, of course you have to reward talent'.

"My response to that is, 'look, I've worked in resources at BP and now at BHP Billiton. I've worked in telecommunications with Vodafone and in pharmaceuticals with AstraZeneca and I've worked with some seriously talented people and they don't expect those ginormous packages'.

"So what's going on? Have the banks got a disproportionate share of the talent? Well, not in my experience, and I met a lot of them when I was CFO at BP."

He believed recent events had exposed the executives who demanded and received those huge salary packages as emperors with no clothes.

But he also pointed the finger of blame at the directors of those companies for not standing up to the demands of their executives.

"These things are very challenging and it ends up as a poker game," Buchanan said.

"But you have to establish a policy and you have to see that policy through. And if you come across prima donnas that don't accept it, then you have to have a different sort of discussion.

"But if they think the money is more important than being part of the company and part of the team, then they have to make their choices and do what they have to do."

Buchanan believed some executives had acted as "quasi owners" of companies rather than as agents of the board.

"You can see that in the compensation issues.

"If the board is doing its job looking after shareholders, then you have to ask how these costs can be so high.

"I believe it's one of the board's jobs to keep some sort of balance. You are there to look after the owners' interests in terms of what is done and making them more prosperous, but also how it is done.

"And it requires robust independence to ensure it happens."

Buchanan himself takes (PndStlg)350,000 ($889,000) a year for chairing Smith & Nephew, the world No 4 hip and joint maker.

He described that salary as "modest". Others would say it's well rewarded for a two-day-a-week job.

His point is that he expects non- executive directors to work hard for the money. "It's about the shoe leather of getting out and about and making sure that all those sonorous noises you are hearing around the board table are reflected in the words and music you get when you visit the (company's) sites and locations and offices.

"I don't think New Zealand is any better or worse off than places like the UK.

"You can see a mix of companies, some that do it very well and some that do it much less well."
Although Buchanan lives in London, he maintains strong links with this country and its business scene.

He has an apartment in Auckland at St Heliers Bay and he and his wife, also a Kiwi, return here about four times a year. He is also on the advisory board of the University of Auckland Business School.

Buchanan said many New Zealanders had a mistrust of the business sector and he hoped the current government would be more business-friendly.

"If you look at the New Zealand economy, it's sort of been hollowed out. A lot of businesses have departed. It's not just individuals (heading overseas), whole businesses have redomiciled. I think smart nations realise you need to be business friendly."

Asian nations had been particularly adept at adopting business-friendly policies, he said.

"This is an internationally competitive market and if you are not user- friendly then people go elsewhere.

"That's really unhelpful for an economy because all those headquarters- type jobs and all those higher skills sets, as well as the tax base, evaporate. And that cannot be good for a nation because it's those taxes that pay for hospitals and education and roads and all those good things.

"So I think for New Zealand it's very important to be user-friendly towards business.

"It's about having stable tax regimes, it's about encouraging foreign direct investment, it's about not having penal rates of tax at high levels, it's about having tax breaks for research and development.

"It's also about being friendly to universities and not having caps on fees, so they can attract people from overseas," he said.

As far as having a more direct role in the New Zealand scene, Buchanan said he was open to the idea of becoming a director of a New Zealand company.

He already flies to Australia several times a year for BHP board meetings and says he spends so much time between the UK, Australia and New Zealand that he feels "almost stateless".

"If the right thing came along in New Zealand, I'd be delighted to be part of it."

* Born 1943, Auckland. Educated at Auckland Grammar School and University of Auckland where he earned a PhD in Chemistry, before undertaking further study at Wolfson College, Oxford and Harvard Business School.
* He was seconded to the UK Cabinet Office in 1976 and then began a 33-year career with BP.
* He was sent back to this country in the 1980s as head of marketing in NZ. He went on to become BP's group chief financial officer before retiring in 2002.
* Is currently chairman of medical devices manufacturer Smith & Nephew, deputy chairman of Vodafone Group, and a non-executive director of AstraZeneca and BHP Billiton.
* He chairs the UK International Chamber of Commerce.
* He was made an Honorary Fellow of the University of Auckland in 2008 and is a member of the advisory board of its Business School. Has homes in Mayfair in London, and St Heliers Bay, Auckland. -

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