KEY POINTS:
Why do a number of chief executives of poorly performing companies get the sack while others seem to have a lifelong tenure in the top job?
Why were Vicki Salmon of Restaurant Brands and Matthew Slatter of Tabcorp dismissed this week while Evan Davies of underperforming SkyCity Entertainment has started his 12th year as chief executive of the casino operator?
The answer to these questions can be found in the strength, independence and decisiveness of a board of directors and the willingness of big investors to play an active role in corporate governance issues.
Salmon lost her job on Wednesday when chairman Ted van Arkel announced that she had stepped down and would be replaced by acting chief executive Russel Creedy until an appropriate replacement had been identified.
Salmon was a non-executive director of Restaurant Brands when it listed in 1997 and was appointed chief executive under Bill Falconer's chairmanship in December 2003
Directors take a huge risk when they appoint a fellow director as chief executive and this proved to be the case at Restaurant Brands.
The group's net earnings, dividend payout and share price have all fallen during her tenure and another disappointing result is expected for the February 2007 year.
In theory a board of directors sets the strategy for a company and appoints a chief executive to implement its plans. If a company performs poorly either its policies or the implementation of these policies is flawed.
In reality a high percentage of chief executives set the strategy, which is approved by the board, so they have to be dismissed when a company's plans and targets are not achieved.
When van Arkel replaced Falconer in July 2006 he had one of two choices, he could either do nothing or take decisive action. He took the latter option without any apparent pressure from large shareholders.
Somebody had to be held responsible for Restaurant Brands' poor performance and Salmon was the obvious choice. But van Arkel's job is only half done as he now has to find a high quality replacement. This will not be an easy task as the fast food industry is extremely competitive and Salmon, along with her predecessor, Jim Collier, struggled to achieve acceptable shareholder returns.
The dismissal of Tabcorp chief executive Matthew Slatter, a former New Zealand investment banker, demonstrates that the Australians are far more ruthless when it comes to underperforming executives than we are. Tabcorp, the big Australian casino and gaming, has outperformed Restaurant Brands and SkyCity in sharemarket terms over the past six-month, one-year and two-year periods.
In addition it raised its interim dividend for the June 2007 year from A44c to A47c whereas Restaurant Brands cut its interim dividend from 4.5c to 2.5c and SkyCity from 12c to 9c.
A number of institutional Australian shareholders were dissatisfied with the December 2006 six months result and Slatter's failed acquisition strategy. They lobbied the Tabcorp board and Slatter was ousted without the usual platitudes that he was leaving for personal reasons and so on.
Herein lies an important difference between institutional shareholders in Australia and New Zealand. Large shareholders on this side of the Tasman lobby directors on specific issues, including corporate strategy, the appointment of directors and executive remuneration, but avoid criticising the overall performance of a chief executive.
This means that underperforming management tends to hang on longer in this country than in Australia.
Evan Davies was appointed managing director of SkyCity in February 1996. At the time Hugh Fletcher was running Fletcher Challenge, Paul Collins was head of Brierley Investments, Doug Myers ran Lion Nathan from Auckland and Air New Zealand's Jim McCrae had just bought a 50 per cent stake in Ansett Australia.
Davies' stewardship was extremely successful at first but it has flagged notably in recent years.
The interim result for the six months to December 31, 2006, was a shocker with net earnings falling 23.2 per cent to $45 million and the dividend was slashed by 3c.
The dividend cut was particularly relevant because it indicates the board's view of future prospects and the group has more than 22,500 shareholders, many of whom are retirees who are heavily dependent on dividend income.
Why hasn't the SkyCity board held Davies accountable for the poor performance and has it identified a high quality internal candidate to succeed Davies?
The simple answer is that the SkyCity board has been hopelessly indecisive in its response to declining earnings and a dividend cut. The other explanation is that large New Zealand shareholders are extremely reluctant to lobby directors to sack a chief executive.
Analysts believe that the acquisition of the Force cinema chain, Adelaide casino and Darwin casinos have been value destructive and the group has a relatively weak balance sheet. SkyCity has total long-term debt of $1.16 billion compared with annualised ebit (earnings before interest and tax) of $221 million whereas Tabcorp has total long-term debt of A$2 billion compared with annualised ebit of A$809 million.
But the most disappointing feature of SkyCity in recent periods has been the deteriorating performance of its flagship operation, the Auckland casino. The casino complex's contribution to group operating earnings has fallen from 69.3 per cent in the June 2005 year to 59 per cent in the latest period.
There is considerable disquiet among big shareholders because Heather Shotter, SkyCity's former communications manager, was appointed general manager of marketing and New Zealand operations after she married Davies. How was this appointment made and who determined her remuneration?
Shotter left SkyCity last year after the marriage broke up but the Auckland casino, which was under her stewardship, continues to disappoint. Gaming machine revenue declined 2.1 per cent in the first half of the June 2007 year, compared with the same period of the previous year, gaming tables revenue was down 9.3 per cent and VIP/international income fell a whopping 40.1 per cent.
There is something wrong with the VIP/international division as its website segment identifies a rugby union test match between the All Blacks and British Lions as one of Auckland's highlights in the months ahead and its fixture list for the New Zealand Warriors rugby league club is two years out of date.
We should all be concerned about the poor performance of our leading companies because it makes them far more vulnerable to a takeover, particularly from overseas interests. If this eventuates the purchaser appoints a strong management team, the performance of the acquired company improves dramatically and there is a significant transfer of wealth from New Zealand to foreign shareholders.
Chief executives of poorly performing companies often look for a takeover offer as a way to leave with their reputation intact.
Rumour says that Vicki Salmon wanted to sell Restaurant Brands but her board of directors rejected this approach.
If this is true then Ted van Arkel and his fellow directors should be congratulated for their decision to dismiss Salmon.
SkyCity's shareholders would also benefit from more decisive decisions from their directors.
