Schadenfreude, that delicious word which describes the joy from someone’s misfortunes… – Straight Talking
Welcome again to our regular Straight Talking column – written by senior financial planner at ipac WA, Bob Miller
Schadenfreude, that delicious word which describes the joy from someone else’s misfortunes, takes hold of nearly all of us at some stage. Which Australia cricket lover, for example did not derive enormous satisfaction when India.s combative captain, Virat Kohli, shouldered arms and was clean bowled by Steve O’Keefe in the First Test?
Our economy is largely market-based and given the power of markets in determining rewards in modern societies, it should not surprise that schadenfreude can be seen on the economic front.
Exhibit one is Australia Post’s Chief Executive, Ahmed Fahour, he of the $5.6 million remuneration package. In the face of public uproar, Fahour recently gave notice of his intention to resign. Schadenfredue abounded. Both Australia Post and Fahour himself had unwisely decided not to publicly disclose the size of the salary package. Given that Australia Post is a government-owned enterprise, it was hardly surprising that a lot of people, most notably Labor Senator Sam Dastyari were livid about the refusal to disclose Fahour’s salary. At a Senate estimates, Dastyari famously (and unsuccessfully) asked the question 50 times!
Intensifying the degree of schadenfreude in the whole affair was the perception of Fahour himself. Like some other very smart individuals, Fahour reportedly tends to rub some people the wrong way. Consequently, there was considerable outrage in some quarters when the size of his package was made public… and various people, including the Prime Minister himself, weighed in to opposed the salary package.
While there was considerable glee when Fahour buckled, and announced his intention to resign in February 2017, it was most likely poor economic outcome. Furthermore, it may very well tun out to be a very bad development for Australia taxpayers. One prominent commentator, Robert Gottliebsen, went so far as to describe it as one of the great tragedies of modern Australian business.
Few observers doubt that Fahour achieved a digital transformation of Australia Post. Some critics can point to falling service levels, but Fahour supporters claim that comes with the territory: costs have been slashed by $1.5 billion since 2010.
The Chief Executive’s achievements in the parcels division, however, are hard to attack. In the face of severe competition from FedEx’s TNT, Japan Post’s Toll and Singapore Post, Australia Post’s share of the Australian parcel market rose from 70 per cent to 80 per cent over the past two years. The parcels division delivered a profit of $190 million in the 6 months to December 2016. According to Gottliebsen, Australia Post’s parcels division is now worth at least $5 billion, $4 billion more that it was worth in 2010 (when Fahour took the reins).
Australian taxpayers appear to be distinct beneficiaries of Fahour’s stewardship of Australia Post. Either significant profits should continue to flow to the coffers of the federal government or else Australia Post itself will be privatised and a very large sum will go to the same place.
We need to account for the state of play with the salary packages of Chief Executives of large businesses. You would think that in an economy largely dominated by the free forces of supply and demand, similar interaction of these forces would determine the market price for Chief Executives. No siree.
Supply is tightly managed by Chief Executives themselves. All appear to play the cartel-type game, even aspiring Chief Executives. By controlling supply (and not breaking ranks, as often happens with OPEC, the oil exporters’ cartel) the Chief Executives Club has driven salary packages to levels well above what is necessary to attract subtly qualified candidates to carry out the role. The Chief Executives have been brilliantly assisted by remuneration consultants, who have a distinct incentive to recommend above-average pay levels. You could be forgiven for thinking the whole thing has taken on the appearance of a racket.
In the private sector the Chief Executive of listed companies at least must be prepared for the scrutiny of shareholders at the AGM and, as far as executive salaries are concerned, shareholders are starting to strike back, as Woodside chief can attest.
But government business enterprises such as Australia Post, Defence Housing and NBN Co. Limited don’t have to report to shareholders. They simply report to the responsible Minister, the Communications Minister in the case of Australia Post. Given that the relevant minister is not necessarily an authority of the associated business, it should surprise no one that ministerial scrutiny on the business themselves is not necessarily of the highest order. Moreover, government business unlike listed businesses, are not subject to the prying eyes of fund managers who, on behalf of their own investors, can wield a lot of clout in their quest to ensure operational efficiency by listed companies.
In the case of Australia Post,$5.6 million is a lot of money to pay for the Chief Exective, but compared to the benefits accured under Fahour’s leadership, it looks a relative bargain for taxpayers. Despite the way Chief Executives salaries have ballooned and the apparent lack of external scrutiny on government businesses, it’s unwise to reject outright the salaries of each and every Chief Executive. Clearly each case should be judged on its merits.
Given the evident capability of its own Chief Executive, we could ask why the guardians of Australia Post were not able to cogently argue the case for his retention. You might expect that the Minister for Communications had the wherewithal to argue Fahour’s case to the public. However, you would definitely expect the Prime Minister to have the wherewhithal.
The Prime Minister’s business credentials are quite exceptional. And he can be a persuasive speaker. So why didn’t he clearly outline the case for both the salary and the Chief Executive himself? It is quite conceivable that Mr. Turnbull could have persuasively pointed out two things: first, Fahour had added significant value to Australia Post; second, sometimes you have to pay particularly well to get a particularly good result. It very much looks like the Prime Minister read the public mood and decided he would go with it rather than against it. At that stage Fahour himself must have known the game was up and his own resignation notice inevitable.
Surely one of the lessons of the Australia Post salary saga is that, with newshounds baying for blood leaders should think twice before adding fuel to the fire. Sometimes taxpayer welfare will be enhanced if, instead of echoing and thereby amplifying public outrage, leaders occasionally show real courage and risk short-term unpopularity, by pointing to the economic truth of the matter.