The Corporate Raspberry Awards

Here are some awards I would like to hand out for some of the more ridiculous things I have seen in the corporate world during 2016. 

There are many more awards that I could have given, but these were some that I felt rather strongly about.

The “In case I go insane” award

This award was won by Hamish Douglass, co-founder and chief executive of the Magellan Financial Group.

He won this for an utterly ridiculous idea he thought up and tried to put to shareholders. Douglass tried to get a proposal up that would give him and (or) his family a $10 million payment (paid for by shareholders) in the event of his "unsound mind, incapacity or death"! Wow! 

The Australian Shareholders Association had this to say about the Douglass proposal:

"We feel it is ridiculous for the company to commit to the cost of the cover in circumstances where it will not receive any benefit in the event that the insured events materialise".

Douglass is apparently worth the astonishing (and somewhat unbelievable) amount of $505 million according to Business Review Weekly and it is appalling that he thought up such an idea and tried to get his shareholders to pay for it. And he calls himself a Warren Buffett fan – as if! 

Fortunately, the backlash was so severe, that Hamish had to scuttle the whole thing. But this little episode revealed an awful lot about Mr Douglass.

The “Why do financial targets matter?” award

This award was one by Ian Narev, chief executive of the Commonwealth Bank of Australia and his board of directors.

They won this award for trying to change the bank’s bonus plan in order to give a 50% weighting to non-financial targets which includes such things as: diversity, inclusion, sustainability and culture". None of these things should ever be tied to remuneration.

What this says to all shareholders is: We can’t achieve financial targets anymore but we would still like to be paid horrendous amounts of money (at your expense), so please can we change the targets so that we can still pocket millions in bonuses?

No, you can’t. We as shareholders (and as a society) are sick of this kind of thing. The election of Donald Trump as the next US President is testimony to how people are feeling on these sorts of issues and it’s a huge wake-up call for the corporate and political world.

Fortunately, the above proposal was given a “first strike” at the Commonwealth Bank AGM and the Narev proposal was withdrawn. 

Westpac, ANZ and National Australia Bank - take note.

The “Cheap Seats” award

Following on from the above award, I would like to give an honourable mention to John Brogden, managing director of the Australian Institute of Company Directors.

Brogden is a former leader of the NSW Liberal Party with a somewhat chequered past. Brogden made the following comments concerning proxy advisors:

"Sometimes I think these guys sit in the cheap seats and throw out criticism without really understanding what is needed for a successful corporation. It is more than just dollars, it's corporate culture, it's customer satisfaction, innovation, investment in the future, there are any number of different things and the risk of relying on the financial numbers alone is you drive a very short-term culture." 

Now on the face of it the above comment may seem fairly innocuous, but there is an underlying insidiousness about referring to “guys in the cheap seats”. 

Let me explain it to you John. Proxy advisors are there to assist shareholders, remember them? They are the guys for whom your members work. They are there to keep your guys honest, to advise us when Hamish Douglass wants to give himself $10 million or when Ian Narev wants to move away from financial targets for bonuses – things that generally hurt our financial interests as a group. 

Proxy advisors represent people who have many, many billions invested, they do not sit in the cheap seats, and you are displaying your ignorance by making such statements.

The “Masters of Insanity” award 

This award was won by Grant O’Brien, former chief executive of Woolworths. 

Grant’s insane adventure with the Masters hardware chain has probably cost Woolworths shareholders anywhere between $5-$10 billion in lost market capitalisation (representing the direct loss from Masters plus management taking its collective eye off the ball and allowing Coles and Aldi to grab market share).

In 2014, Grant O’Brien’s remuneration was just under $5.3 million. I want that, and all the other money paid to him (many millions) refunded to shareholders. 

When you are taking the sort of money that Grant O’Brien did take, mistakes of this magnitude are simply unforgivable. 

The “Keep doing what you’ve always done and expect different results” award

This award was won by the Reserve Bank of Australia (RBA). The bank has continued to lower interest rates (to stupid levels) in order to stimulate economic growth and inflation, none of which has worked. What it has done is inflate an almighty residential property bubble that (as I’ve said before) has the potential to destabilize the entire Australian banking system. 

Our banks are heavily dependent on foreign borrowings to finance their mortgage books and with the increase in foreign bond rates in recent times, the banks are going to start having to lift rates independent of the RBA in order to continue a viable existence. 

There are an awful lot of people in Sydney and Melbourne who are potentially going to be foreclosed on in the next few years. Watch this space.

The “Lights are off, but everyone is at home” award

This award was won by Jay Weatherill, Premier of South Australia and his Energy Minister, come Treasurer (and former cab driver), Tom Koutsantonis.

South Australia has suffered through three major blackouts in the last six months. The entire state was blacked out in late September, causing many millions of dollars in costs to Olympic Dam (BHP), Prominent Hill (Oz Minerals), Nyrstar and Arrium (to mention just a few, as well as the chaos that was caused for the entire population of the state).

Jay and “Kouts” blamed everyone except the policies of their own government for these blackouts (which everyone knows has been caused by SA’s unfortunate “experiment” with renewable power). 

This experiment has made traditional coal generation basically uneconomic due to the customer paid subsidies of renewables (yes, you the customer are paying for all of it) and it has led to the shut-down of a plant in Port Augusta. It has also completely destabilised the pricing of electricity in South Australia with wild fluctuations now a regular occurrence. And guess what? When an entire state is blacked out, you can’t restart without base load power from non-renewables!

The end result of all this is that no major companies are going to want to operate a business in South Australia if they can possibly avoid it, and who could blame them?  

Despite all this, we have the Victorians wanting to replicate the South Australian experience. Hey, maybe if all states follow South Australia’s lead, we might have a day when the entire nation is blacked out! Black Friday anyone? Never put anything past our dim witted politicians.

Should you buy shares in the Inghams IPO?

The Inghams IPO is being marketed as an opportunity to get into a growth stock at a reasonable price, but is that actually true?

Inghams is being sold by TPG (a US private equity group) that should rightly have a poor reputation in Australia after the disastrous results for those who naively bought shares from TPG in Myer a few years back.

While there have been a few examples of successful companies listing on the ASX after being floated by private equity groups, there are also plenty of examples of private equity groups simply using inexperienced retail shareholders as cannon fodder. Dick Smith was a recent (and very well publicized) example of this.

Now, I’m not saying that Inghams is going to be like Dick Smith, I think the company will be ok, but should you pay the price being asked?

Inghams is a very low profit margin business that relies on selling ever more product to increase profit. It is a classic “commodity” style business that has very little pricing power. It also doesn’t help things when the major supermarkets decide to engage in price wars on items like barbeque chickens.

Consumption of chicken in Australia is already at a very high level and there are of course limits on how high it can go. Further to this point, Inghams already has a large share of the Australian market, and as such, opportunities to grow further are necessarily limited. 

The marketers of the IPO do of course mention the potential to increase profit through expansion of the business into new markets and so on, but you should never pay up-front for things that may or may not occur.

For me, the price being asked is a bit too high, I’m not prepared to pay the kinds of multiples being quoted in the IPO documents and that’s a fairly easy decision for me to make.

Platinum Asset Management’s buy back won’t protect it from short sellers

Terry McCrann wrote an amusing article in the Herald Sun on 14 September which likened Kerr Neilson and his planned buy back of up to 10% of Platinum’s shares (PTM.AX) to the sort of move the great Kerry Packer would have undertaken.

Earlier in the week Platinum made a completely vague announcement to the ASX that it intended to buy back up to 10% of its shares if it believed they were undervalued! 

This announcement was made largely in response to Morphic Asset Management and other short sellers who were pushing Platinum’s share price downwards and much closer to its true value (in the parlance of the industry it’s termed “price discovery”).

But was it a smart move by Platinum? I think not. The only real way that Kerr Neilson can dissuade the short sellers from his company is by performing well. Short sellers (like wolves) are attuned to the weaknesses inherent in their prey, and in Platinum they have found plenty of these weaknesses that they can potentially profit from.

Platinum’s announcement of a buy-back initially saw the share price rise quite a bit, but within 24 hours the share price once again tanked. Terry McCrann wrote his article far too soon. The irony being of course that the temporary spike in price was another opportunity for more short sellers to pile into Platinum.

Worse still, the publicity that Kerr Neilson gave Platinum by announcing this buy back is actually likely to attract more short sellers to Platinum, because it smacks of a rather desperate move on Platinum’s part, focusing further attention on both the flaws in Platinum’s model and its poor performance. Trust me when I say that these things cannot be overcome by a 10% buy back.

The actual announcement by Platinum was almost a joke. There was no price mentioned for the buy back and it was also immediately pointed out that Platinum doesn’t have enough cash to buy back 10% of its shares (borrowing money to buy back these shares would be insane).

It’s actually an indictment on the ASX and ASIC that they allow such announcements to be made. How is a company allowed to make an “announcement” that they may (or may not) buy back their shares at a secret price? That’s crazy. It’s yet another example of the nonsense our regulators allow.

I should state that I have no position in Platinum (either short or long) and as such am just an interested onlooker.

Mohnish Pabrai is still performing badly

A comment was made recently on this site asking how Mohnish Pabrai of Pabrai Investment Funds was doing.

The answer is, he is still grossly underperforming the S&P 500. As Mohnish himself stated in his annual letter to investors for 2015 (page 6):

“All three funds were down 15-19% for the year, while the bench mark indices were in positive territory.”

A comparison of Pabrai’s Investment Fund 2 (PIF 2)* with the S&P 500, using the figures published by Pabrai himself (on page 3 of his 2015 letter) shows that from 1 July 2008 to 31 December 2015, this fund had returned 1.63% compound per annum against the S&P 500’s 6.55%. 

In other words, $100,000 invested in PIF 2 on 1 July 2008 was worth $112,910 on

31 December 2015. If you had instead invested in the S&P 500, your $100,000 would have been worth $160,950 (using Pabrai’s figures).

It’s quite clear to me that Pabrai’s early performances (pre-GFC) were hugely assisted by the raging bull market that was then in place. Post GFC, Pabrai has struggled, he has not even been able to get anywhere close to the S&P 500.

As I’ve said on this site before, people using investing techniques espoused by Warren Buffett who do not have his incredible analytical abilities will fail – guaranteed. 

One of the primary reasons for this is the emulation of Berkshire Hathaway’s concentrated portfolio (although it’s not that concentrated these days). If you concentrate a portfolio and you are wrong in your assessment, you will pay a high price.

Back in 2009 when I noticed Pabrai buying into mining companies, I made the following observation on this site:

“I also wonder what skills Pabrai brings to the valuation of iron ore mines, zinc miners, molybdenum producers and the like? How does he know he’s buying them at low cost? Valuing these types of assets requires very specialist knowledge and skills and I’m not convinced that someone with no background in the industry has those skills.”

During 2015, Pabrai lost over $95 million in one company – Horsehead Holdings, a zinc producer. For Pabrai Investment Funds, $95 million is a very significant amount of funds under management.

Australians have a particular wariness of zinc producers as we have had some spectacular collapses of zinc companies – and believe me, we know mining! I too observed what looked like some very cheap zinc producers back in 2008-09, but knowing what I know, I didn’t touch them. It’s just as well, it all ended in tears.

Whenever you invest your money, you should think of the stock market as being very much like a pro golfer. A decent amateur may genuinely believe that they can beat the pro and they may even beat him or her on a few early holes, but over the journey of 18 holes, there is no way they will beat the pro and the longer the game goes on, the more this will become apparent.

* I could have selected any of his funds, this one wasn’t selected because it performed any worse than the other funds.