The truth will normally do + IMPORTANT UPDATE

Update Monday May 28, 2012 at 8:30 am


The Directors of the Company and the relevant subsidiaries resolved to place Hastie Group Limited and 44 of its Australian subsidiary companies into voluntary administration.  See here.


This makes this posting important reading for PaperlinX investors as lack of confidence is contagious.


Posted Sunday May 27, 2012                                              Twitter: @PaperlinXsuX

or ... no more weasel words from people who should know better.

"The truth will normally do" was ready to publish when a bombshell hit late Friday. It's been held over to include Harry Boon's now long overdue "mea culpa". Expect more to follow.

Harry Boon has resigned as a non-executive director of the beleaguered Hastie Group (HST) because of "accounting irregularities" amounting to circa $20 million announced earlier in the day on Friday, see here. 

For those unaware, Hastie of late has been in more strife than the early settlers having been suspended from trading on the ASX for six long weeks. 

A share price collapse from $40 to zilch is not good on one's CV, see here, and Harry Boon has been a director for seven years since the initial listing in early 2005! 

Even worse is that he was continuously a member of the Audit and Risk Management Committee for at least 2008-2011. Apparently the "irregularity" has remained undetected since 2009. Not good.

"These irregularities date from the financial year 2009 and appear to have resulted from the deliberate actions of a current employee (on suspension)," the company said last week.

Accounting irregularities totalling $3 million were discovered during the audit process for the first half of the year and were taken as a net loss. But "fresh information" prompted a new investigation". This will invite furher inquiry and resultant finger pointing. 

With a Friday night announcement of resignation little appeared in Saturday's press other than this from the AFR which trots out the usual excuses. 

Expect much more next week as the Hastie saga is far from over. Lindsay Phillips, also a member of the Audit Committee, see above, also resigned yesterday. 

"Mr Phillips, managing director at Lazard Australia Private Equity, which took a cornerstone stake in Hastie last year after leading a $170 million recapitalisation, said he was “unhappy” with the board and was “not prepared to continue as a director in these circumstances”. 

To quote Lyndon B Johnston, he wants to be outside the tent pissing in. 

Then there is not inconsequential matter of the influential Pratt family's 9% investment, announced here in July 2011 concurrent with the recapitalisation announced here.  The Pratt family is the 5th wealthiest in Australia.

It's OK for little boys to swim naked

When people like Lazard and Pratt lose their money cold in less that 12 months there are serious repercussions as reputations and money are at stake. 

Hastily debunking Harry Boon's Hastie excuses in advance

"I lost money too"

Investors in PaperlinX wouldn't wish the pain of financial loss on anyone else, and yes Harry Boon has most certainly now lost circa $422,700 see here, but that isn't material in the scheme of things now. The Board and Audit & Risk Management Committee have apparently failed in their professional duties for an extended period of time. 

Harry Boon director has different obligations to Harry Boon investor. 

"Hastie failed because of ..."

PaperlinX investors know by heart the litany of excuses given why PaperlinX has been a dud investment for many years. 

Those who attended the EGM will recall that Harry Boon was asked about the poor performance of Hastie Group. 

His reply was that it essentially arose from bad debts incurred in the Middle East. The clear implication was “not my fault” – i.e. the problems at Hastie are external because debtors in the Middle East won’t pay. 

This is wrongful abrogation of board responsibility. Hastie Group imprudently or recklessly granted credit that is now unrecoverable. It’s that simple. 

To paraphrase Bill Clinton; It's the management, stupid. This was first raised by suX in mid April, 2012 - here.

"This resignation has reduced my directorship workload"

Nonesense. SuX has long complained that Harry Boon's holding six directorship equivalents was excessive and in breach of prudential guidelines, see here, but he persisted with false arguments of capacity and ability. 

The reality is that until the mess of Hastie is finally resolved, his residual workload will most probably increase, and be more stressful, and he won't be paid. 

Things for PaperlinX investors to consider about Hastie

Harry Boon obviously thought Hastie was a better investment than PaperlinX having invested $422,700 and $59,400 respectively. This needs an explanation.

Hastie grew rapidly throgh international acquisitions after listing in 2005. PaperlinX grew rapidly throgh international acquisitions after listing in 2000. Harry, couldn't you see the pattern being repeated?

Does anyone clearly recall what Harry Boon said about Hastie at the PaperlinX EGM on March 23, 2012? Could it be a comment on the public record about Hastie that may interest ASIC and other potentially parties? Harry Boon made comments about Hastie at a meeting secretly recorded by PaperlinX and where all other attendees were prohibited from recording the proceedings. Hope that tape doen't get lost or damaged.

Does the corporate recidivist deserve a second chance?

No, because this was all totally predictable, and predicted here, which casts serious doubt over Harry Boon's judgement. 

“You never know who's swimming naked until the tide goes out.” 

Warren Buffett

... or anyone can look good in a bull market. Friday's humiliation for Harry Boon wasn't a matter of "if" by "when".

The extract below is from the 2008 Annual Report of Hastie Group. Seven directorship equivalents is considered excessive by any standard. 

This is why the Australian Shareholders' Association (ASA) goes to some length to explain its strongly held view on limited directorships and directors' workload. 

See here for an explanation based on average days work required for each non-executive directorship based on ASA survey results. 

Using ASA guidelines and with seven directorship equivalents in 2008, Harry Boon was working 37 x 7 = 259 days per annum, before crises, which the ASA estimates require an extra time commitment of 50-100%.

Harry Boon was already committed to 51.8 weeks per annum, before public holidays and before corporate crises such as Hastie and PaperlinX. And this was in 2008 which was the year for financial crises.

Guidelines are set for sound reasons. Is this fair to any shareholder of PaperlinX, Hastie, Toll or Tatts Group?

It's not my fault

Which brings me back to the original theme for this post "The truth will normally do". 

Truth, like beauty, subjectively lies in the eyes of the beholder; however when it comes to elected office then truth become objective and is rightly subject to rigorous scrutiny.

This post considers PaperlinX’s non-executive directors (NEDs) and their lack of tangible commitment to shareholder alignment. 

Before getting into the nitty gritty details of individual’s abuse of process, and there have been many, some observations are necessary to set the tone. 

Politics and big business today have an authenticity problem and it stems from their responses to the most basic questions. 

Australian Politics 2012

The ruling Australian Labor Party is suffering a crisis of confidence at present. Last week its industrial arm, the Australian Council of Trade Unions (ACTU) held its triennial Congress. For 17 years to 2000, Bill Kelty AC was Secretary of the ACTU. He also served as a director of the Reserve Bank (1987-1996). 

His video address to the party faithful, here, is worth a few minutes of your time.

As Kelty so eloquently said in his address, don't blame the media and don't blame the Opposition; as they are doing their jobs: "the truth will normally do". What about individuals?  If suX’s concerns about non-executive directors’ abuse of process seem unreasonable, and I submit they are all guilty by permitting their co-directors to abuse process, consider the consequences for one man who certainly knew right from wrong. An eminent Australian citizen, a retired judge, fell from exalted status to prisoner over a $77 speeding fine while driving his Lexus in leafy suburban Mosman, Sydney. It started in January 2006. In March 2009, three years after this minor traffic breach, he was sentenced to three years in prison for knowingly making a false statement under oath and for attempting to pervert the course of justice, with a non-parole period of two years. How does a minor misdemeanour and persistent reluctance to pay a valid fine of $77 lead to imprisonment? The bizarre story is well documented elsewhere by credible sources.  Marcus Einfeld (born 1938) is a retired justice of the Federal Court of Australia. In 1977 he was appointed a Queen's Counsel which commission was revoked 31 years later in 2008. In 1998 he was awarded an Order of Australia for service to international affairs and the promotion of human rights. The Order was rescinded in 2009. In 1997 he was voted one of Australia’s Living National Treasures then struck off in 2004. He was the founding President of the Human Rights and Equal Opportunity Commission; a UNICEF Ambassador for Children and received a host of other awards for service to the community. History will also remember him as a convicted perjurer. Marcus Einfeld was stripped of his life’s public achievements and endured three years of humiliation during court appearances followed by two years prison then 12 months parole. All this over a $77 fine incurred while driving a Lexus! The moral of the story?  Overweening pride was his nemesis.   But that couldn't happen at PaperlinX because it has Core Operating Principles just like Hastie Group and every other listed company too. SuX believes the Board is guilty of abuse of process. Inconvenient truths are exposed in detail in this and subsequent postings.

This post is in eight parts:

1. the truth about Harry Boon's shareholding;
     
2. the truth about PaperlinX changes to NED Remuneration and NED share purchases during 2008-2011;
     
3. correlation between changes to NED remuneration and the share price of PPX during 2008-2011;  
      
4. examples of what comparable ASX companies did during 2008-2011;
     
5. why directors must abide by Core Operating Principles;
     
6. a Proposed Non-executive Directors' Equity Plan
    
7. a "what if" Excel user tool see here for the Plan tailored for Harry Boon showing his present shortfall on the proposed Plan of $171,945; and
     
8. research for those who want to know the truth about NEDs equity alignment and company performance.

Regrettably, this posting relates solely to Harry Boon because he:

• is the longest serving director;
    
• is Chairman of the Company and thus automatically Chairman of the Governance Committee;
     
• has been a member of the Governance Committee for nearly four years;
     
• was a director of Ansell Ltd which has an excellent long term policy of NED shareholder alignment which is examined here later; and
     
• holds an LLB (Hons) and thus is more than capable of understanding the issues that will be raised in this series.

 The latter point is important because it won't be necessary for PaperlinX to rush off to lawyers to challenge or defend any claims made here. I undertake to personally engage with Harry Boon on this topic if he wishes.

I intend addressing PaperlinX's other NEDs and their shareholder alignment in subsequent postings.

(1) the truth about Harry Boon's shareholding

Put simply, Harry Boon's shareholding makes a farce of Board policy, the Governance Committee since 2008 and by extension, him. 

Section 7 below provides a downloadable "what if" Excel user tool see here showing why suX believes Harry Boon has a shortfall under the proposed Plan of $171,945 as at June 30, 2012.

Notes:

1. The above figures have been extracted from Annual Reports and ASX filings of Director's Interest Notices (Appendix 3X and Appendix 3Y);
     
2. The income for 2012 has been estimated based on two months as a Director and 10 months as Chairman;
      
3. The figure of $32,500 in 2008 is the only 'voluntary' purchase. The value is based on comments by Harry Boon that his total investment was $40,000 before April 2012, however it is uncertain when these shares were purchased by him, see Appendix 3X here;
        
4. The purchase of 6,000 shares in October 2008 was anything but 'voluntary'. Desperate for cash, PaperlinX announced an accelerated non-renounceable entitlement offer of 2 for 5 at $1.25, being a 29% discount to last closing price and a 22% discount to theoretical ex-rights price. The times were desperate.
    
   It was obligatory for Directors to subscribe even in a falling market. The offer received only 35% support from retail shareholders. Read more here;
        
5. The recent post-EGM purchase in April 2012, see Appendix 3Y here, was hardly 'voluntary'. It followed suX's vigorous campaign of  shame, sample here.  
                 
6. Curiously, the latest purchase brought total holdings to exactly 250,000 units notwithstanding it involved two Boon entities. 250,000 is an attractive round number, however the Board policy reviewed below is based on $ value, not units. I hope 250,000 wasn't chosen as some future quotable level of 'commitment'.
      
7. The Board policy reviewed below makes reference to 'progressively increasing' the NEDs shareholding. The above figures don't look too progressive to suX.
        
8. After 4 years Harry Boon has managed to allocate just 22% of his current annual fee income, not the 100% target. SuX submits that nearly half of that level arose from involuntary purchases. Clearly either the policy is wrong or Harry Boon is in breach of Board policy.
            
9. I assume no more shares will be purchased as June 1, 2012, is the start of a legitimate Blackout Period.

(2) the truth about PaperlinX changes to NED Remuneration and NED share purchases during 2008-2011

My second concern is that the reasons given for non-compliance with Board policy by some Directors, not all, in Annual Reports 2008-2011 are miserably inadequate. They are the words of dissemblers. 

Every year the Annual Report comments on Remuneration of NEDs. In 2011 the Board policy was described thus:

“The policy of the Board has been that each Non-executive Director increases their shareholding in the Company progressively so that their holding is, over a period of time, at least equal in value to one year’s fees”.

Sounds simple, but what does it really mean and how is it measured? Think about it.

I submit that its meaning is intentionally ambiguous and thus it is impossible to monitor each director’s compliance with Board policy.

I presume:   

• “fees” means gross fees before superannuation; and
      
• “increases … progressively” has the common commercial usage which simply hasn't happened in the case of Harry Boon.

In a commercial context, synonyms for "increases … progressively” might be: by installments, constantly, continuously, regularly, sequentially, serially or something along those lines. Still, this is vague.

For reasons best known to PaperlinX, and considered suspect by suX, the wording relating to NED Remuneration have been subject to regular revision unrelated to external factors like legislation,

The wording was already sufficiently ambiguous until 2007, remember the bull market topped in October 2007, then in 2008 some anal retentive added the the words "over a period of time".

This addition was simply armour plating to further and better assist NEDs avoiding their responsibilities and undertakings. This was a forerunner of things to come.

In 2009 and 2010, the Annual Reports advised 

"However, the Board recognises that this [the Board policy] is not currently being met as a result of share price volatility".

Apparently exceptions to this Board policy are permitted. Do you see any provisions for exceptions in the 2011 Board policy above? 

Whereas "Compliance in mandatory" and "There is a line that divides what is right and wrong ..." are Core Operating Principles they conveniently don't apply to Board policy affecting non-executive directors' hip pockets. Most reassuring.

"Volatility" is a lame duck excuse for crashing share price of PPX. That was a disgraceful act of subterfuge. It gets worse. Be sure to review the charts below to see how pathetic this excuse is.

In 2011, the anal retentive was back at work with a new excuse:

“However, the Board recognises that this [the Board policy] is not currently being met due to periods of lock-out and share price volatility”. 

Lock-out or Blackout Periods are where designated persons are prohibited from trading in a company's securities. They are designed to avoid insider trading, deliberate or inadvertent. 

Clearly "volatility" was and remains an indefensible excuse to avoid this Board policy; however when changes to ASX Listing Rules came into force on January 1, 2011 that potentially opened up a new line of excuse.

The ASX changes more clearly defined Blackout Periods and management of them. The purpose of the changes was to provide clarity and to clamp down on insider trading by placing a higher duty of care on companies by way of self-regulation. Each ASX listed entity was required to develop a Securities Trading Policy and lodge it with the ASX. 

Cleverly, PaperlinX embraced theses changes to further avoid this Board policy. After research, suX believes the use of Blackout Periods to avoid this Board policy is itself indefensible. It is a technical topic to be addressed next within this series. 

Just imagine if this creativity was channelled into making money instead of protecting Directors' backsides! 

In summary, even if PaperlinX could ever manage to defeat any of my arguments here, Harry Boon's shareholder alignment indicates that it certainly isn't increasing progressively. In fact, it is decreasing progressively. He is clearly in breach of Board policy.

(3) correlation between changes to NED remuneration and the share price of PPX during 2008-2011


Firstly:

• Were these changes to NEDs Remuneration, ie allowing exemptions to Board policy, put to a shareholder vote - NO.
                
• Does anyone believe the changes benefited anyone except NEDs choosing to protect their backsides - NO.

This chart tells the story since PPX listing in 2000. Click here for a full sized image in a new window.

Now consider this more recent chart of PPX price action with the Board's excuses noted by date on the chart. If you're not yet cynical, suX expects you'll be after viewing this chart, here. 

If anyone believes suX's cynicism is misplaced, please telephone or write and explain why. Thanks.

(4) examples of what comparable ASX companies did about NED shareholder alignment during 2008-2011

Changes in the Federal Budget in May 2009 limited salary sacrifice arrangements to $5,000 effective July 1, 2009. Some NED shareholder plans used this as a reason for change whereas others didn’t. IMO suspension of mandatory NED shareholder alignment contributions due to limitations on salary sacrifice are mere weasel words for two reasons: Normally, people who become directors of listed companies are at an age or stage in life where they have discretionary investable funds.                     If non-executive directors choose not to invest in companies where they have personal responsibility for outcomes then their motive is clear for all to see.

Tatts Group TTS This extract from its 2011 Annual Report is exquisitely vague. Chairman Harry Boon is to be congratulated for this classic worthy of a "Yes Minister" award.


Origin Energy ORG The Origin plan is based on a quantum of shares and a fixed time period. 

It recognizes the changed tax legislation then ignores it. Post July 2009, the required quantum is reduced from 20,000 to 10,000 shares due to rising price of ORG. Still, 10,000 shares within three years means $130-170,000 within three years. Price chart here.


Pacific Brands PBG Pre July 2009, a mandatory 25% of fees. Scheme suspended post July 2009. The plunging share price of PBG may have been a factor, see here.    


Ansell ANN Mandatory 10% of fees. Exquisitely simple and unchanged for years. It was in place at Ansell’s predecessor, Pacific Dunlop, before 2002. Here is the latest ASX announcement of Appendix 3Y notices filed as "Change of Director`s Interest Notice x 6" for Ansell. How simple is that?


Worley Parsons WOR  A new plan was introduced post July 2009 being a mandatory 100% of fees within the first full term of three years as a director.

Worley Parsons wins the prize for compliance, full disclosure and plain speak: "All directors fully comply with this requirement" 


(5) why Directors must abide by Core Operating Principles

Because there is a line that divides what is right and wrong. Right doesn't mean being devious and avoiding consequences. What's happening now is wrong.

Where is the Directors' exclusion?
What is ambiguous about "Compliance is mandatory"?

(6) a Proposed Non-executive Directors' Equity Plan

It is seen from above that implementation on the ASX varies from loose wishful expectations (TTS) to mandatory time bound programs. Some have fixed time frames to reach equity at 100% of annual fees (ORG and WOR). Others are in perpetuity (ANN).

Like it or not, its down to its uppers. If members of the Board were the only shareholders of PaperlinX, meaning they potentially faced personal financial ruin at present, do you really think they'd have made some recent decisions? 

We're all past promises by those without any substantial skin in the game.

Here is a Plan, submitted as a motion:

“Commencing [on start date] the Company will introduce a binding irrevocable Non-executive Directors' Equity Plan ("Plan")

1. from their date of appointment each Non-Executive Director may take up to 100%, but never less than a mandatory 12.5%, of their fees in the form of  equity in the Company; however until their holding is at least 100% of their current annualised fees from time to time, all Non-executive Directors must take at least 33.33%  of their fees in the form of equity in the Company ; 
                                    
2. from this date “equity in the Company” issued under this Plan is to be split equally by value between ordinary shares and hybrids and any other listed equity instrument subsequently issued by the Company;
                 
3. all equity in the Company issued under this Plan will be acquired on behalf of each Non-executive Director by the Company no less than quarterly on the ASX at the prevailing market price, by applying the value of cash remuneration foregone by the Non-Executive Director and retained by the Company for this purpose; and
          
4. equity in the Company issued under this Plan is excluded from the Company's policy Transacting in Company Securities as it is being compulsorily acquired by the Company on behalf of each Non-executive Director; and this will be noted on each Change of Director's Interest Notice, Appendix 3Y, filed by the Company;
      
5. the appointment of a Non-executive Director is terminated at any time the Director ceases to comply with the Plan;
       
6. details of the Plan to be published on the Company's website and in its Annual Report and confirmation of Directors' compliance; and
       
7. the terms of the Plan may only be modified by a vote of the members of the Company at a General Meeting.

Regular readers may recall this proposal is an expanded version of Question #14 in the pre-EGM questionnaire of March 5, 2012 see here.

(7) a "what if" Excel user tool for the proposed Plan

Did you realise that until the EGM, Harry Boon held just 15% of his current annual fee of $275,000? Even after the post EGM purchase it is still just 22%.

The Plan proposes a running 12.50% in perpetuity defined as "mandatory".

Three years to reach 100% of fees is appropriate in the circumstances.

The model contemplates regular purchases and avoids problems with Blackout periods. In summary, there are no loop holes. 

Download the model here. 

(8) research for those who want to know the truth about NEDs equity alignment and company performance.

To be continued ...