Builder wins damages case against Republic of Turkey

The Republic of Turkey has been forced to pay a Melbourne builder $693,824 after losing a damages claim over its consul’s palatial $4 million Toorak mansion.
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Builder Ralph Mackie, the sole director of the Mackie Group of Companies, won the damages after a 23-day hearing at the Victorian Civil and Administrative Tribunal ended a long-running and costly building dispute.

The spat between Mr Mackie and Turkey arose after the builder was contracted in 2009 to construct a new three-storey home on Toorak Road for the then-Turkish consul general Seyit Mehmet Apak and his wife and young children.

The palatial six-bedroom house had a large reception room on the ground floor, a 25-seat dining room and industrial-scale kitchens to serve eminent guests.

After the residence was finished in 2012, Mr Apak and Turkey alleged it had major defects and took Mr Mackie to both the Supreme and County Court.

The alleged major defects included a draughty roof access skylight, incorrectly installed windows, a defective hydronic heating system and cracked parquetry flooring, some of which were later fixed by Mr Mackie.

The dispute then went to VCAT where Mr Mackie launched a large claim against Turkey for variations and agreed variations to the building contract of $360,000, delay costs of $232,331 and $264,000 in liquidated damages.

Turkey denied liability and filed a counterclaim that joined to the proceedings the Melbourne architecture firm Tectura, who designed the consul’s home.

Tribunal member Robert Davis dismissed Turkey’s counterclaim and required Tectura to pay the Republic $119,664 to help cover Mr Mackie’s damages claim.

A decision on legal costs was reserved and the parties will make submissions on who gets to keep a further $123,641 lodged as security by Mr Mackie.

Mr Mackie told BusinessDay it was unfortunate the dispute had to go to court.

“These disputes are completely unnecessary. It’s important for people to sit down and work them out.”

“We’re lucky to have a judicial system as good as this. You take your grievances to court and get a fair hearing,” he said.

$5b investor’s plan to fix ‘cult’ of excessive executive pay

SYDNEY, NEW SOUTH WALES – JANUARY 06: Allan Gray CIO Simon Mawhinney poses for a photo on January 6, 2017 in Sydney, . Fundie (Photo by Brook Mitchell/Fairfax Media) Prime Minister Malcolm Turnbull during a division on the motion to suspend standing orders, at Parliament House in Canberra, on Wednesday 8 February 2017. fedpol Photo: Alex Ellinghausen
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The expression “heads I win – tails you lose” neatly sums up the pay experience of a large portion of corporate chief executives.

It’s more than just the quantum of their earnings – the broader community’s response to which has become fever-pitched outrage.

Calling out excessive pay is now the strategy de jour for the likes of politicians. But while Malcolm Turnbull’s reference to executive pay as a “cult” of excess is popular with the electorate, the fact remains that the system needs an overhaul.

But there is a more deeply enmeshed and complex reason that even underperforming executives are being rewarded with pay packets that can border on the obscene.

It’s all about the structure of how management is rewarded with performance-based financial incentives – short- and long-term incentives on top of what is often generous base pay.

Now one of ‘s most influential and outspoken investors, with more than $5 billion under management, Allan Gray, has not only called time on these remuneration practices but has devised an alternative structure.

And it is now pressuring the companies in which it invests to adopt it.

As Allan Gray’s managing director, Simon Mawhinney, sees it, bonuses should be rewarded for past performance. But this is not the case in many major n listed companies, which he says use complicated and opaque scorecards to determine both long and short-term incentives.

These are then paid to executives based on equally complex and often flawed vesting conditions, he believes.

While some more extreme examples of pay have been voted against by shareholders at annual meetings, there are plenty more that slip through because they are too difficult to understand.

Mawhinney says he regularly hears feedback that management places little value on the long-term incentive portion of their remuneration due to difficulties understanding the structure of the rewards and the risks associated with its vesting.

“This is staggering given the cost of these schemes to shareholders. It is quite possible that high base salaries and short-term incentives – often with large cash components – are now used to compensate executives for the risk that their long-term incentives do not vest.

“This results in executive remuneration pay-off profiles that are asymmetrical with little downside.”

In other words, bad outcomes are well remunerated because even if long-term incentives are not paid, the base salaries and short-term incentives are still generous. And if the executive does perform well, he or she will get paid long-term incentives and end up with a huge reward.

So why are short-term incentives paid when outcomes are bad?

One reason is that, all too often, the decisions made by an executive can look good at the time. It is only years later that the strategy blows up – by which time the executive has more often than not left the building, taking their big pay packet with them.

Another reason is that the payment of bonuses doesn’t seem to need a particularly high bar.

A recent report from the n Council of Superannuation Investors (ACSI) noted that even though bonuses should be for exceptional performance, the vast majority of the 83 ASX 100 chief executives included in the study received a bonus last year. The figures also showed that when a CEO was granted a bonus, they were typically paid almost 70 per cent of the maximum amount.

Allan Gray’s model amalgamates all executive bonus incentives into a single bonus scheme – which it calls an executive incentive plan – which among other things eliminates short-term cash bonuses and is easy for shareholders to understand.

The bonuses are made in shares, which are held by the company but not given to the executive for between three and five years.

So if the business performs well over that period, the executive will ultimately be rewarded.

But if the business has not done well and the shares have fallen, the executive will receive less when he/she finally gets access to the stock. In this way, Mawhinney says, the executive is far more closely aligned with the shareholders.

Bonanza continues for CEOs, despite some nips and tucks

DOMINOS AFR PHOTOGRAPH BY GLENN HUNT 3 NOVEMBER 2006. Don Meij-CEO- Domino s pizza. AFR FIRST USE ONLYOne of the big features of the latest corporate reporting season has been the increasing number of companies releasing their annual reports alongside their results, instead of waiting until September.
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It’s all in the name of good governance, and it means investors have been able to compare company earnings with the earnings of chief executives straight away.

It did not always go down well in an environment where even a former Goldman Sachs investment banker turned Prime Minister like Malcolm Turnbull has been forced to lash out at the “cult of excessive executive CEO remuneration”.

At that time, he was referring to Ahmed Fahour’s $5.6 million pay cheque from Post in 2016.

Fahour took the headlines again this reporting season when it was revealed he was paid a jaw-dropping $10.8 million for the year just ended, his last with the company.

But big pay was not the prevailing theme this year. It was the sight of corporate titans donning the sackcloth and ashes for their corporate sins, and sacrificing short-term bonuses. Giving up bonuses

The tone was set early with the release of the Commonwealth Bank’s annual results, less than a week after it was rocked by the Austrac allegations of breaching money laundering rules.

The bank’s chairman, Catherine Livingstone, announced that its CEO Ian Narev and his team would not receive any short-term bonuses.

And these bonuses would have been substantial, thanks to another record earnings result. The executive team are not the only ones suffering. The board has also cut its pay by 20 per cent for this year, all in the name of corporate atonement.

It obviously was not enough for some investors: Livingstone later announced Narev’s plans to retire.

Seven West boss Tim Worner also sacrificed what little bonus he would have received last year – which the board was planning to take anyway after what he discreetly described as “not a stellar year”. The not-so-stellar year included the legal fallout from his affair with former company employee Amber Harrison.

And yet another corporation with a tarnished reputation, Domino’s Pizza, followed this path with CEO, Don Meij, and three senior executives handing back their short-term incentive (STI) payments for last year, with an oblique reference to the pizza chain’s wages scandal.

“They each elected to forgo their incentive entitlement to acknowledge the negative effect of publicity in relation to the franchise network,” the annual report said.

But the real surprising news was that, despite the disappointing financial result, Meij was still expected to pocket $660,000 more than for the previous year.

Domino’s chief Don Meij gave up his short-term bonus – and still ended up $660,000 ahead. Photo: Glenn Hunt’Fixed pay dressed up’ as bonuses

This touches on an issue that the n Council of Superannuation Investors (ACSI) highlighted in a report last week: Why are so many CEOs getting bonuses in the first place?

While fixed pay for the CEOs of ‘s 100 biggest listed companies has remained broadly unchanged over the last decade, 86 per cent of ASX100 CEOs received a bonus in the 2016 financial year, according to the ACSI report.

Given that bonuses are commonly understood to be for “exceptional performance”, ACSI chief Louise Davidson says the finding begs the question, “are these amounts truly at risk?”

“It’s a positive sign for shareholders when boards step in and reduce bonuses to zero,” says ACSI’s head of Governance, Engagement and Policy, Edward John.

But he cautions that it is too early to tell whether the rash of bonus forfeiture represents a new trend, or, if these examples are just outliers.

There is a counter-argument – recently supported by KPMG partner Stephen Walmsley – that the problem is investors believe bonuses should be given for outperformance, while executives regard it as “at risk pay” that you only lose for underperformance.

ACSI is not a fan of this explanation.

“It’s fixed pay dressed up” as bonuses, says John.

Cuts haven’t gone ‘far enough’

But the focus on bonuses is not enough for some. Well-respected investor Peter Morgan still has a problem with the size of the pay packets on offer.

“I don’t think it has gone far enough because it got so high,” says Morgan. Banks should slash their pay levels by 25 to 50 per cent more.

He cites Commbank’s highly-regarded former boss, David Murray, as an example.

Murray took home $2 million in pay and bonuses in 2000. Narev received remuneration totalling $12.3 million in 2016.

And it isn’t just the big banks which have been paying handsomely for their chiefs.

Energy company AGL received a first strike against its remuneration report last year in response to the $6.9 million worth of remuneration handed out to its CEO, Andy Vesey.

He has received the same amount of pay for the financial year just ended. Running oligopolies

Morgan’s main problem is that he thinks local companies are overpaying for CEOs who, for the main part, run entrenched oligopolies – like our energy providers – and cyclical companies where pay turns into a lottery payout for CEOs lucky enough to have caught the upside of a business cycle.

This was exacerbated by the steady flow of investment money from our $2 trillion superannuation savings and the local mindset that “the bigger the company, the more a CEO should be paid,” he says.

But the staid oligopoly mindset might not just be a problem for the companies. The market is not rewarding any CEO who actually tries to take even a moderate amount of risk to grow the business.

Perennial boss John Murray says “the market is brutal, if there is any doubt” – citing the experience of Grant Fenn’s Downer EDI, which had a hard time selling its investors on the merits of the company’s takeover for Spotless.

“This is a brutal market at the moment in terms of how investors are looking at CEOs.”

Rather ironically, Perennial is seeing positives from signs of an executive wage boom in one sector of the market – the mining industry in Perth – which is supporting its view that the miners and mining service providers’ fortunes are turning.

Rio Tinto’s reaps rich reward from Hunter coal sale

Rio Tinto officially handed over the key to its Hunter Valley coal business on Friday, prompting renewed speculation about what it will do with the proceeds from the $US2.69 billion ($3.5 billion) deal.
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The sale of the Coal and Allied business to Yancoal delivered $US2.45 billion in cash to Rio on Friday.

The mining giant also confirmed it received its first royalty payment, of $US10 million, on Friday. And it said a further $US100 million in royalty payments would be received by the end of this year, while “a further $US90 million is expected before the end of 2018”.

Completion of the deal, which happened relatively quickly given Rio shareholders backed the board’s decision to sell to Yancoal only as recently as the end of June, means the cashed-up miner has become even more flush with cash.

Rio pleased its shareholders and the wider market when it announced its half-year results in early August, as it reported underlying earnings of $US3.94 billion ($4.95 billion) for the half-year, and declared an interim dividend of $US1.10 (fully franked).

The signs of the miner’s healthy cash position were clear. The $US1.10 interim dividend was a record interim dividend for the company, which also announced a $US1 billion increase in its share buyback of its London-listed shares.

Asked what Rio would do with its large influx of cash from the Coal and Allied Sale, Morningstar resources analyst Mathew Hodge said: “That’s the $64 million question, isn’t it.”

More debt repayment, and some more money for shareholders, were the two most likely uses for the money, Mr Hodge said.

“I don’t think they’re going to decide to ramp up organic capital expenditure, that would be a bit of a surprise, and an acquisition would be a bit of a surprise too,” he said.

Mr Hodge said he did not expect an out-of-cycle dividend from Rio.

Macquarie analyst Hayden Bairstow said: “The Coal and Allied deal [would] underpin another big buyback through next year, and probably a better final divvy [dividend]. I don’t think it’s any more than that, and I don’t think you’ll get it early.”

In a statement on Friday Rio said the money would be used “for general corporate purposes and the group’s capital allocation framework will be applied”.

Rio didn’t respond to specific questions on Friday from Fairfax Media about how it would use the extra cash.

But in August, in a conference call with analysts, Rio CEO Jean-Sebastien Jacques said that while “shareholders should expect good returns”, Rio would not declare anything until the cash was on the balance sheet and proper process had been followed.

Pressed further on whether Rio would consider “out of cycle returns” and pay a special dividend outside the normal interim and final dividend framework, he said: “The only thing I can say is, clearly, we will have a chat to the board when we get the cash on balance sheet, but I can’t give you any indication about the timetable on this one. But I can tell you for a fact that by February, when we have the board meeting to review the final results, we will have an answer to your question.”

Shares in Rio climbed 44?? on Friday, to close at $68.28.

Power companies could remotely turn down your appliances in exchange for cash

Power companies would remotely turn down home airconditioners and swimming pool pumps to cut power use on hot summer days in exchange for cash rewards for consumers, under a plan by ‘s energy watchdog.
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The n Energy Regulator wants power utilities to increase electricity supply by helping consumers use less, rather than building expensive new poles, wires and other infrastructure and passing the cost on to customers.

Amid soaring power bills, rising greenhouse gas emissions and the risk of blackouts, the regulator this week released a draft plan to give incentives to electricity distributors who manage the power use of consumers.

As well as saving customers money, experts say so-called “demand management” could deliver far more capacity than the Turnbull government’s proposed $2 billion Snowy Hydro expansion.

Chief Scientist Alan Finkel’s review of the national electricity market said “more attention should be paid” to how consumers were rewarded for managing their power demand.

Regulator board member Jim Cox said the plan encouraged power utilities and consumers to “try new and different things”.

“One of the purposes of the scheme is to get some ideas happening, because in the past the networks have simply wanted to build lines rather than manage demand,” he said.

One such idea is “direct load control”, in which consumers give their power utility permission to control their airconditioner at times of peak demand, in exchange for payment.

“[Power companies] may turn down your airconditioner just a little bit, but that does help to reduce the load across the network or in a particular part of the network,” Mr Cox said.

“People might feel that a small change in temperature at peak times is not something that they’d particularly notice, but if done on a large scale would help control demand and might lead to less investment and lower bills.”

Mr Cox said power-hungry swimming pool pumps could also be turned down remotely. Specially enabled appliances that communicate with power companies would be required.

Power companies already exploring such interventions include Queensland’s Energex, which offers cash rewards of up to $400 to homes and businesses that allow remote control of their airconditioners. When the network is under pressure, the appliance drops to a lower performance mode.

Research commissioned by the n Energy Market Commission in 2012 found peak demand reduction could save up to $11.8 billion in national electricity market costs over a decade, potentially cutting up to $500 off an annual household power bill.

UTS Institute for Sustainable Futures research director Chris Dunstan said while off-peak hot water tariffs had long been offered in , nations such as the US had been quicker in adopting other demand-management tools.

He said if matched the US average for managing peak electricity demand, it would deliver about 3000 megawatts of power into the national grid.

The Turnbull government’s Snowy 2.0 scheme will deliver an estimated 2000MW, while Victoria’s recently retired Hazelwood coal fired power station had a 1600MW capacity.

Mr Dunstan said demand management could also involve calling on consumers to run dishwashers and other appliances later at night, when power demand was lower, and encouraging the use of energy efficient devices.

“We’re seeing rising electricity charges, a shift away from coal-fired electricity to renewables, which means we need flexible resources, plus concern about climate change,” he said.

“Without doubt the cheapest, biggest and quickest flexible energy resource is demand management.”

Energy Consumers chief executive Rosemary Sinclair said in the long term, effective demand management could reduce energy system costs, lower prices and “allow consumers to be equal participants in a much more dynamic and responsive market”.

A spokeswoman for Energy Networks , the electricity and gas transmission peak body, said demand management was already in use, and the regulator’s draft scheme would help “promote innovation to benefit customers”. Power by the numbers$11.8 billion – the estimated cost savings to the national electricity market of reducing peak power demand, over the decade to 2022$500 – the maximum potential reduction that would flow to annual household power bills3000MW – the amount of power that could be delivered to the national grid if matched the US average for managing peak electricity demand2000MW – the energy potentially added to the Snowy Hydro scheme under the federal government’s proposed expansion

Sources: n Energy Regulator, n Energy Market Commission, UTS Institute for Sustainable Futures, federal government