Comprehensive report on Wesfarmers Group, about the potential of effecting the two strike decision on the management

Author: Iloka Benneth Chiemelie
Published: 24th April 2017

Executive Summary,  

Over the past decades, Wesfarmers have been a profitable business ground for investors. However, recent corporate scandals have forced investors to be very cautious and no company can be guaranteed to be independent of such. Thus, understanding the management structure of a company is a necessity for investors.

In the case of Wesfarmers, there have been a significant drop in NAPT in 2016 when compared with the past 4 years and the attained NAPT is not up to 40% of the lowest attained in the past 4 years. This is a big issue of concern for any investor and this is what this report aims to address. The report presented a comprehensive review of the company’s performance and remuneration structure for its directors.

Findings from this reports indicate that the remuneration are performance based. That is to say, the more ROE the director are able to generate, the more their reward will be and vice versa. As such, any decision to effect the two strike rule is considered unnecessary. This is because the structure has been able to effect a competitive sphere in the company, forcing directors to focus more on the performance of the company rather than their own personal gains.

Background review

In the introductory sections of its 2016 annual report, Western Australian Farmers’ Cooperative (Wesfarmers) (2016) noted that its main objective is to deliver satisfactory reruns for the shareholders. Originating in 1914, the company has transformed into one of Australia’s major listed corporations, offering diverse businesses that cover hotels, liquor, supermarkets, office supplies, home improvement, departmental sores and industrial sector that is based in chemical businesses, fertilizer and energy and, other industrial safety products and coal. In Australia, the company is considered the largest private sector employers as it maintains a workforce of about 220,000 staffs with an approximated 530,000 shareholders base.

Approach to business

Figure 1: the Wesfarmers way

 Source as adapted from: Wesfarmers (2016)

From the above figure (1), the company’s core values features high level of business integrity, boldness, transparency (openness) and accountability. That is to say, it does not see any issue with people looking into how they undertake their business process, and the management are made accountable as necessary.

For its growth enablers, the company notes that it has outstanding people, commercial excellence, empowering culture, innovative system, social responsibility, and robust financial capabilities (highly understandable based on the fact that it is Australia’s largest private corporation). In any essence, these forces help push the company continually towards attaining set corporate objectives, year after year.

Its value creating strategies are: 1) strengthening the existing business through excellence in its operation and satisfaction of consumers’ needs; 2) ensuring sustainability by adopting responsible long-term business management; 3) securing growth opportunities through entrepreneurial initiatives; and 4) renewing its portfolio through transactions that add value to its business. All these values, growth enhancers and strategies help the company to attain its core objective: to provide satisfactory returns to the shareholders.

Corporate governance

The Board of Wesfarmers is strongly committed towards fulfilling its corporate governance obligations and responsibilities as it relates to the company’s best interests and the interest of its shareholders.

Roles and responsibilities of the board and management

The board is charged with the responsibility of approving the strategic direction of the company, guiding and monitoring the performance of its management and business in order to attain the desired strategic plans and ensures good governance practice in the company. The aim of the board is to provide protection and enhancement for the shareholders’ interests, while also putting into considerations the interests of its stakeholders (which include consumers, employees, suppliers and the wide community).

Structure and composition of the board

Wesfarmers expresses its commitment towards ensuring that the board is continually made up of directors that bring the right mix of experience, skill, diversity and expertise in its decision-making process.

Director independence

On a similar note, it is recorded that directors are expected to usher in views and judgment for the board to deliberate, which are independent of the management and is not interfered by any business, relationship or circumstances that can materially change the exercise of such objectives, leaving the outcome of the decision process unfettered and independent of any judgment, while focusing on the interest of the company as a whole (Wesfarmers, 2016). Essentially, the management can be held accountable for the outcome of their decisions in the business process.

Remuneration overview

In 2016, the fixed remuneration for the company’s managing director was not increased and in fact, it has remained the same since October 2011. The company’s current remuneration structure features fixed remuneration, annual bonus (which include deferred component) and annual grants for the long-term and these structure has been in place for numerous years (Wesfarmers, 2016).

Guiding principles

There are numerous principles that guide the way remuneration are structured in Wesfarmers and they are:

1.      Ownership alignment - the arrangement of its remuneration are designed to generally encourage the senior executives of Wesfarmers to act as if they are long-term owners. This is done by establishing a strong link between the remuneration that are earned and the attained level of sustainable performance that are geared towards effecting satisfactory returns for the shareholders.

2.      Focused on performance – the remuneration arrangement are made reward strategic, to ensure positive operational and financial performance of the business. A high proportion of the remuneration earned by each of the executives if influenced by the company’s success and the individual performance of such executive.

3.      Market competition and consistency – a common set of remuneration practice are made applicable to all senior executive roles. The remuneration are also made competitive, providing the right opportunity for total remuneration that is highly competitive for superior performance; and

4.      Open and fit for purpose – the remuneration arrangement are open for necessary innovation in order to address business and operational needs. In any case, all the remuneration arrangement for KMP are made known to the key shareholders in an open and transparent way.

Company performance and remuneration outcomes

Despite the turbulent economic settings, Wesfarmers reported NPAT of $ 407 million for the financial years 2016. This report also include non-cash impairment of Curragh and Target that totaled $1,844 million (after tax), and also $102 million (after tax) for cost of restructuring and provision to reset target. Irrespective of the challenges faced in its environment, the company noted that Wesfarmers’ and its other businesses have continued to sower in positive performance against these measures when compared to other companies in the industry. A summary is presented I the table (1) below, of the company’s key financial measure performance over the past five financial years.

Table 1: Wesfarmers Key financial performance (2012 – 2016)

Source as adapted from: Wesfarmers (2016, b)

From the above table (1), it is always easy to see that the company did not do well in 2016. Although the management has been successful in returning $407 million as profit post-tax, it should be noted that the value significantly lower than those returned in the past four years (which are in excess of $2 billion NPAT). This also brought about decline in dividend (down to $186 million in 2016 as against $200 million recorded for the previous two years (2014-2015)). Also, earning per share declined significantly to $36.2 million for all shares (which is way lower than the second lowest value recorded in the past five year at $184.2 million in 201). It is not surprising from the figures to note that the ROE also declined down to $1.7 million, a value that is by far lower than the second lowest ($8.4 million in 2012). Thus, the performance is 2016 is definitely not something that any shareholder should smile home about as it was by far lower than the expected value when comparing the past five accounting periods.

Annual incentive overview

As discussed earlier, the Wesfarmers incentive plan is designed to reward performance against the measures that have been developed for each of the KMP in line with their areas of responsibility and how they executive major strategic objectives. For the managing director and financial director, this also include measures against the company’s NPAT and ROE. For the period of 2016 (which is basically the main year in review considering the recorded poor performance), the below table (2) illustrates the performance conditions for annual incentives and weighting between the measures highlighted for each of the company’s directors and divisional leaders. For instance, strong performance of Home Improvement, Coles, Kmart and Officeworks did bring about rewards that are above target for the directors of these divisions.

Table 2: weighted reward structure for directors based on agreed objectives

Source as adapted from: Wesfarmers (2016).

From the above table (2), it is clear that the company’s does not just fix unrealistic salaries for the top management, but instead remits pay based on the individual performance of the directors as it relates to their ability to deliver set targets within the accounting period in review.

Recommendation

If there is anything that have been revealed in the above analysis, it should be the fact that the remuneration of Wesfarmers’ directors are based on their performance. That is to say, the more returns they bring for shareholders, the higher their reward. This system is highly encouraging in the sense that it pushes a competitive spirit into the company’s management, encouraging them to deliver more value in order to get more rewards. Thus, they are more likely to focus on the company’s objectives, creating a mutually beneficial stream for both parties. This is an effective remuneration structure for a big company like Wesfarmers Limited.

Therefore, we recommend that you (Mr Gordon Melton) do no push for the two strike rule are the remuneration earned by these directors are based on fair justification of their performance. For the years they performed well they have earned well, and for the years they did not perform well, their earning has not been fantastic. Thus, it can actually be said that the two strike rule is already in application – although it might not be the basis for which the remuneration structure were developed.

Conclusion

Although one would naturally think that for every time a company is not performing well the directors are to blame, it is important to note that there are numerous other factors (both internally and externally) that can have direct influence on the performance of a company. Thus, when issues of poor performance arises, the focus should not be on blaming the management; rather it should be on understanding the cause of such issues and providing necessary measures to remedy them and this is exactly what Wesfarmers should focus on right now. The remuneration structure adopted has been strategic, thus, it would be hard to believe that the management have not been undertaking their job in the company’s best interest as the outcomes directly influences their pay.

References

Wesfarmers (2016). 2016 Annual report. Available at: http://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=8 [Accessed on: 8^th-10-2016].

Wesfarmers (2016, b). 2016 Shareholders review. Available at: http://www.wesfarmers.com.au/docs/default-source/reports/2016-shareholder-review.pdf?sfvrsn=6 [Accessed on: 8^th-10-2016].