Wesfarmers chief executive Richard Goyder. Photo: Bloomberg

‘WE listen to criticism, and if it is fair and warranted, react to it. But I will never apologise for being successful, for creating wealth for all our stakeholders, particularly our shareholders,” said Wesfarmers chief executive Richard Goyder in his address to shareholders yesterday.

Goyder will never have to apologise. Return on equity has fallen from 25 per cent to 7.7 per cent, thanks to Wesfarmers’ leviathan $20 billion acquisition of Coles.

ROE is the purest measure of a chief executive’s success and under the reign of the present executives, ROE has been quartered.

This is the value which falls to shareholders. Unfortunately, the Wesfarmers board has deemed it appropriate to change the playing field on remuneration mid-game, to deliver the chief executive with $6.7 million in share incentives which he had not earned.

The value to executives rises.

One day, we see the Commonwealth Bank board bestow a multimillion dollar gift on its executive, using its ”discretion” to tweak the entitlements after management failed to meet its own customer service benchmarks.

The next day, we see Wesfarmers’ changing the rules on its executive remuneration, lowering the bar for its chief to meet new ROE targets.

Arguably, the Wesfarmers’ situation is of greater concern for shareholders. Wesfarmers’ brilliant success has been struck on accountability. The culture of accountability now seems threatened.

Under the former stewardship of CEO Michael Chaney and chairman Trevor Eastwood the one-time farming co-operative grew into a financial services, retailing and resources conglomerate unrivalled for its track record of shareholder returns.

Discipline was the trademark. Spurning investment bankers touting zany expansion schemes, ignoring the latest corporate vogues, management focused single-mindedly on shareholder returns. And shareholders shared equally in the company’s seemingly inexorable success.

At the top of the market in 2007, Michael Chaney’s successor Richard Goyder stepped up to the crease and opened his CEO’s innings with a haymaker, a $20 billion acquisition of the perennially poor-performing retailer, Coles.

His timing could hardly have been worse. First came the credit crisis, then the financial crisis. As Wesfarmers sought desperately to fund the deal, its shares tanked, and cost of funding blew out.

The acquisition of Coles is now considered a success in many quarters. Certainly, and nothing can be taken away from Goyder and his team on this count, he and his 2IC at Coles Ian McLeod have turned the supermarket giant around.

Neither can Goyder and his board be unfairly criticised – to borrow his own phrase – for their unfortunate timing. Their execution on Coles, under the circumstances of the financial maelstrom, was competent.

But timing is everything and their ”success” with Coles came at a heavy price. Wesfarmers had to strap on a mountain of debt and massively dilute its shareholders via a slew of share issues.

To the casual observer, the Wesfarmers share price is travelling nicely again, up above $32 a share. Yet the number of shares on issue has tripled since 2007 from 400,000 to 1.2 billion.

At its apogee in 2007 before the foray into Coles, Wesfarmers was returning 25 per cent on its equity of $3.5 billion. Along with the return on assets (ROA) of 8.1 per cent, EPS of $1.95 and its dividend of $2.25 per share, the performance was faultless.

Last year however, the ROE was 7.7 per cent, ROA 4.8 per cent, EPS $1.67 and dividend per share $1.50.

While shareholders have lost, executives have gained.

Richard Goyder’s fixed pay has risen from $2.475 million to $3.34 million and he has picked up almost $5 million in cash bonuses and 102,560 shares.

And now that ROE has been quartered by the acquisition of Coles, the Wesfarmers board has fashioned a new set of long-term incentives, worth $6.7 million for their CEO, but priced from the low, post-Coles return on equity metrics.

For their part, shareholders are being asked to provide a reward which they, themselves, did not enjoy as a result of their managers’ performance.

Apparently the last long-term incentive structure was not adequate. Goyder missed a bonus and now, with Wesfarmers’ return on equity at a fraction of what it was before the acquisition of Coles, the Wesfarmers board has gone back to ROE metrics – now off a very low base.

As protestors mill in city squares around the world, and as letters of disgust flood into the media, the big pay brigade are increasingly at odds with the rest of humanity.

They don’t ”get it” at Wesfarmers either. Are they oblivious to the public ire over indefensible pay schemes, over pay schemes which are at odds with society’s expectations? Or is this just unfair and unwarranted criticism?

Do they forget that they are the managers of capital, not the owners? This angle needs more investigation but there were reports yesterday – and the issue was put to the company’s chairman – that Wesfarmers would be paying dividends to executives on shares which had not even vested. Fully franked dividends that is, which surely is an issue for taxpayers as well as shareholders.

Let’s not forget that during the financial crisis this company was afforded special protection under the government’s short-trading ban.

Shareholders, taxpayers, thanks for coming.