Stakeholders vs Directors - like bacon and eggs?

Posted July 13, 2012                                                              Twitter: @PaperlinXsuX

Comment: On July 12, 2012, PPX again closed at its all time low of 5.3 cents. Next stop? It looks like a "4" will soon be the leading digit. Anyone else alarmed yet? Some Stakeholders ought to be.

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“There is a responsibility of directors on boards to keep remuneration relative to rewards to other stakeholders.” Harry Boon, Chairman of PaperlinX quoted in the Australian Financial Review - July 6, 2012 

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We know who the directors of PaperlinX are; however the term "stakeholder" is a loose term.

What immediately follows is a tad dry, except for the yummy breakfast, but necessary to know for stakeholders' preservation. Let's be very specific in these uncertain times:

• "stakeholders" aren't equal when the proverbial hits the fan;
      
• there are lessons for PaperlinX, its directors and stakeholders from Hastie;  and
       
• when push comes to shove, to whom are the directors really responsible?

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ABC News, May 31 2012 

Millions shifted from UAE as Hastie collapsed

The ABC has learned that as many as 1,500 Hastie Group workers in the United Arab Emirates may have lost not only their jobs but also their entitlements in the company's collapse late last week.

Their termination entitlements are in jeopardy because more than $3 million was transferred from Dubai to Australia in the days before administrators and receivers were brought in.

The company's top three executives, who signed off on the money transfer, then left Dubai on fears they may be detained. Go figure. The directors obviously knew nothing about this. More ...

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ABC News: July 9, 2012 

Hastie Middle East exit 'completely mismanaged'

Deloitte told the Hastie board on August 17 last year [2011] that there was an opportunity to exit the Middle East and to ensure employee matters were handled appropriately.

The report says the Deloitte recommendation, "clearly highlighted that a managed wind-down required a controlled closure of the Middle East businesses and that there were employee issues to be considered."

"This advice was disregarded by the Hastie Board, their banking syndicate and authorised senior management in the UAE and Hastie have subsequently completely mismanaged their exit from the Middle East." Would directors really do that?  More ...

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I don't claim the following definitions are perfect, but under the circumstances its better to be nearly right than exactly wrong in our understanding about to whom the directors, and others, are responsible.

PaperlinX-suX was formed to protect the interests of PXUPA holders. Contrary to truly stupid malicious comments by people who know better, the interests of PXUPA holders are best served by PaperlinX prospering. Thus this keen interest in clarifying the term "Stakeholder". 

Primary Stakeholders, by financial preference:

1. Employees;
       
2. Hybrid-holders or preference shareholders (PXUPA) who put up funds in 2007 allowing PaperlinX to "tart up" its balance sheet; and
       
3. Ordinary shareholders (PPX) who put up the capital to get the business going in 2000.

In the event of a failure of PaperlinX, employees are first to be paid, ordinary shareholders are last (never) paid and hybrid holders are sometimes paid something as they rank in preference to ordinary shareholders as to capital and income. Makes suX wonder why most shareholders are so apathetic.

What most people conveniently forget, especially directors and senior executives, is that the ordinary shareholders and preference shareholders are the owners of the business. 

Two classes of Primary Stakeholders - vulnerable & immune.

Some primary stakeholders are vulnerable whereas others are virtually immune from any failure of PaperlinX. 

It's hard to imagine that any employee of Allan Gray (formerly Orbis), Schroders or Maple-Brown Abbott lost their job because their employer has lost tens of millions on its investment in PaperlinX. Similarly, long serving employees in positions of responsibility at PaperlinX are better equipped to move on than their colleagues in the lower ranks. 

As stated in the preamble, the interests of PXUPA holders are best served by PaperlinX prospering. 

The majority of holders of hybrid securities (PXUPA) are small investors, many of whom bought something that was sold as a fixed interest investment issued by an ASX100 company. Many are retired and looked to "responsible" fixed interest investing for income. They are highly vulnerable as most cannot now re-enter the workforce. 

Even Robert Gottliebsen got caught with PaperlinX hybrids and has written about the experience. Gottliebsen has been a doyen of the OZ financial press since 1974, see his full bio here.

I'm an investor in PaperlinX.

Secondary Stakeholders

1. Providers of financial accommodation to PPX such as banks, credit insurers, lessors of property and lessors lessors of equipment; and
        
2. Trade suppliers of goods and services to PPX.

These stakeholders are noted. I'll assume they can look after themselves.

Tertiary stakeholders. Those whose livelihood indirectly depends on the success of PPX, people like employees of smaller suppliers to PaperlinX. This category is added for completeness, as when one business fails the trickle down effect is often ignored.

Those who aren't stakeholders. In my assessment, the term "stakeholder" specifically excludes:

1. All directors of PPX,
      
2. Auditor of PPX,
       
3. Auditor of PXUPA, and
       
4. Responsibility Entity of the SPS Trust (PXUPA).

We're directors.

Why are these four entities excluded? Because they:

• are all charged with specific duties of care, pursuant to legislation;
     
• suffer potential conflicts of interest as they are all paid by PaperlinX; and
     
• are either professional firms expert in their craft or a limited number of professional persons with insiders' knowledge. 

There is no suggestion that the latter three have failed in their duties of care; however the potential for conflict is clearly obvious. There are numerous examples of this and previous boards failing in their duty of care to the Primary Stakeholders.

The profile of excluded entities is starkly different from the hapless Primary Stakeholders because they are small in number, professional and nimble; and none of them would suffer a major financial setback if PaperlinX went bust tomorrow.

Primary Stakeholders are outsiders comprising large and diverse memberships. Employees numbered 6,200 spread around the world before sale of the Italian and US operations. There are circa 46,000 shareholders and 2,600 hybrid holders, principally resident in Australia. 

The vast majority of Primary Stakeholders, excluding substantial shareholders who hold greater than 5%, normally rely upon the directors to protect their interests. 

This presents unascertainable risks as seen above with the Hastie employees working in the United Arab Emirates.  More about the three substantial shareholders of PPX later.

Primary Stakeholders must protect their interests?

Employees are usually protected by labour laws in developed countries. In Australia the General Employee Entitlements and Redundancy Scheme (GEERS) was established in 2001. GEERS is designed to pay the wages, annual leave and redundancy entitlements of workers that are left unmet when liquidators are called in.

Insolvency experts believe directors of some troubled businesses are exploiting the system by trading until company cash reserves are exhausted because they expect GEERS will pay most of the entitlements they should have paid to their workers.

That's fine, but they still lose their job. 

Senior executives are the only protected employees because of their service agreements. If Toby Marchant was made redundant tomorrow he'd be entitled to 12 months salary, 2011 Annual Report, page 22, regardless of how successful he has been. 

As an example of this at work, PaperlinX has a Long Term Incentive (LTI) plan for senior executives. In the 2011 Annual Report, page 20, it's noted that not one senior executive has received a benefit from the LTI plan over the past five years.

Think about that. It means either PaperlinX has the wrong LTI plan or the wrong senior executives, or both.

Consider this hypothetical situation. An incompetent senior executive and a productive worker are made redundant on the same day; and obviously for different reasons. 

The senior executive receives 12 months salary and the worker his statutory entitlements. Senior executives are normally at the age and stage in life where they've built up assets and savings. 

Maybe this worker is young or has few financial reserves. 

Ignoring the discretionary expenses of the senior executive such as maintaining a villa in Spain or boarding school fees of £30,000+ per annum per child; the non-discretionary survival expenses like food, utilities and petrol cost the same for each. 

Moral of the story. The damage caused by managers' incompetence disproportionately afflicts all Primary Stakeholders. 

Time for Toby to resign and give some comfort to an estimated 53,000 defenceless Primary Stakeholders.

Shareholders and Hybrid holders are protected by the Australian Securities and Investments Commission (ASIC) which really amounts to nothing unless serious fraud or breaches of the Act occur. 

Hybrid holders have an even weaker voice because hybrids are complex instruments with relatively small numbers of holders - only 2,600 hybrid holders vs 46,000 shareholders for PaperlinX.

Why PXUPA Investor Group Supporters (PIGS) exists

Because of this weak position of PXUPA holders, PIGS was formed by Gaby Berger in early January 2012 following the launch of PaperlinX-suX in Nov 2011 by yours truly. PIGS operates under the direction of Gaby Berger and a small team of experts. 

Keep an eye out for PIGS in FY2013 which is just two weeks old.

As a group PIGS has lost faith in "the system" and is taking its own precautions in advance.

Why are directors excluded as stakeholders?

Because, IMO, executive directors:

• are "insiders";
     
• are responsible for day to day management of the business for which they are handsomely paid, including termination provisions when they under-perform;
     
• enjoy protection against personal loss through Directors and Officers Insurances paid for by the company;
     
• have the authority to seek almost unlimited advice when faced with difficult decisions; and
     
• are usually to blame when major stuff ups occur.

Executive directorships are usually limited to CEO, CFO or COO.

Because, IMO, non-executive directors:

• are "insiders";
     
• are responsible for appointing the executive directors and approving their ludicrous payouts, anyone remember Tom Park;
     
• enjoy protection against personal loss through Directors and Officers Insurances paid for by the company;
     
• have the authority to seek almost unlimited advice when faced with difficult decisions;
     
• are responsible for overall governance of the business;
     
• appear to put board unity ahead of common sense;
     
• appear to put their pride before owners' profit; and
     
• break their own rules and policies with impunity. 

PaperlinX

PaperlinX is like a beautiful English breakfast of bacon and eggs. The hen is involved whereas the pig is fully committed.