In his address to shareholders yesterday, Wesfarmers chief executive Richard Goyder said: ”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.”

Goyder will never have to apologise. Return on equity (ROE) has fallen from 25 per cent to 7.7 per cent thanks to Wesfarmers’ $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.

One day, we see the Commonwealth Bank board bestow a multimillion gift on its executives, using its “discretion” to tweak entitlements after management failed to meet their own benchmarks for customer service. The next, 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. The company’s success has been struck on accountability. The culture of accountability 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 record of shareholder returns.

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

At the top of the market in 2007, Chaney’s successor, 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 Coles boss Ian McLeod have turned the supermarket giant around.

Neither can Goyder and his board be unfairly criticised for their unfortunate timing. Their execution on Coles, under the circumstances, 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 to 1.2 billion.

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

This year, however, the ROE was 7.7 per cent, return on assets 4.8 per cent, earnings per share $1.67 and dividend per share $1.50.

While shareholders have lost, however, executives have gained.
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 Coles purchase, the Wesfarmers board has fashioned a set of long-term incentives, worth $6.7 million for their CEO but priced from the low, post-Coles ROE metrics.
For their part, shareholders are being asked to provide a reward they 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 board has gone back to ROE metrics – off a very low base.
Shareholders, thanks for coming.