Lively Macquarie Bank encounter in 2005

Hard work landing a hit on Macquarie Bank

Talk about not being able to land a blow on The Millionaire Factory. The Australian Shareholders' Association and Crikey both had decent whacks at yesterday's AGM but it didn't resonate with the other 300 shareholders at The Westin Hotel, who just love the board and management team which have lifted the share price from $6 to $64 in ten years.

ASA chairman Stephen Matthews opened the questions session with a strong and long speech about Macquarie Bank "crossing the line" on executive pay. Chairman David Clarke batted it back with his usual line about Macquarie's people being its biggest asset and why would he change a successful profit-sharing formula that had worked for 30 years.

However, Moss added that the bank's reputation was its next most important asset, which opened up an opportunity for a follow-up question which AAP reported as follows: "Shareholder Stephen Mayne questioned whether Macquarie Bank's reputation had been damaged by the 'stratospheric' levels of pay. Mr Clarke did not answer the question."

The point I made was that even someone like Paul Keating had publicly sledged the $18.5 million CEO Allan Moss was paid last year. Keating is both a former prime minister and a former business partner of Macquarie's in Indonesia and China, so if even he was publicly outraged there comes a point when this must damage Macquarie's reputation, plus make it harder to do lucrative infrastructure deals with various Labor governments across the country.

Clarke certainly cranked up his rhetoric this year, saying that without these huge pay deals, everyone would leave and "there wouldn't be a bank."

This is true up to a point, but you need to look at both elements of the executive pay largesse at Macquarie. The first is the formula where staff share in about 40% of the gross profits. This money is not just handed over – it's drip fed over ten years and if anyone leaves to join a competitor, they forfeit all their deferred bonuses and options. This system is what keeps dozens of millionaires working when they don't have to. There are always millions on the table that get lost if you leave.

The second element is the Macquarie Bank options scheme, which is the most lucrative in the country, having produced an estimated $2-3 billion in gross profits for about 1,500 bankers since 1996. For instance, in the year to 31 March 2005, Macquarie issued 10.3 million new options at an average strike price of about $34. With the shares closing at $64.01 yesterday, these are already showing paper profits of more than $310 million.

Then you have the 6.38 million options which were actually exercised last year at an average strike price of about $25. These are now ordinary shares showing paper profits of $250 million. In other words, in addition to the top ten Macquarie executives sharing in almost $100 million last year, $560 million in paper profits from options was generated for senior staff right across the bank over the 12 months to 31 March.

I recited all of these statistic towards the end of the meeting in an attempt to generate some opposition to the proposal to issue even more options – 226,000 with a face value of $14.4 million – to Macquarie's four executive directors, Clarke, Moss, co-founder Mark Johnston and former ASX chairman Laurie Cox, all of whom should arguably be on the BRW Rich List with net wealth exceeding $110 million.

Alas, only about ten shareholders supported the argument that with 13% of Macquarie's capital already outstanding as options – that's 28.3 million options carrying more than $1 billion in paper profits and worth $1.8 billion at current market values – issuing even more options to these executive directors was "a bridge too far."

The support from proxy-voting institutions was a little bit stronger as you can see here. As usual, no media outlets bothered to report the results but there was a minor protest against chairman David Clarke getting another 25,000 options when he already has a $70 million equity exposure to the bank. Still, 103.6 million votes in favour and ten million against is hardly enough to stop the lads coming back for another tranche next year.

Getting the millionaires factory on the record over Allstate bonanza

At last, Macquarie Bank is on the record in a meaningful way about the extraordinary dealings surrounding Allstate Exploration and its Beaconsfield gold mine in Tasmania.

As we've reported before, Macquarie Bank is suing The Australian over a Michael West feature in May this year which claimed the bank had done a sweetheart deal with Allstate's administrators to buy $50 million worth of inter-company debts for just $300,000. Adam Shand and Paul Steindl from Channel Nine's Sunday program have also been working on a story about Allstate.

I mentioned all of this at the Macquarie AGM yesterday and then asked the board to explain what had happened. Was it true that Macquarie was on to a bonanza and what about all these allegations and legal stoushes?

Managing director Allan Moss declined to give any figures but said Macquarie originally "lent a large amount of money," believed to be $20 million, to Allstate and when the mine didn't function as planned the company went into administration.

"The administrator was appointed by the board," Moss stressed. "As one of the measures to raise money to keep the mine going, the administrator proposed to creditors that Macquarie Bank be offered some substantial inter-company debts.

"Subsequently, as sometimes happens in the mining industry, things have gone better than expected... and you are correct that that investment is turning out relatively well for us, but it's still got some way to go."

Making a 166-fold return on an investment is surely better than "turning out relatively well," although Moss was keen to stress that unsecured creditors are also doing better that originally expected.

"I understand that unsecured creditors have today been paid more than 80c in the dollar and I understand that they have got a very good chance of getting all their money back from a company that was in administration," Moss told shareholders. "We've looked carefully at this and we're satisfied we've behaved completely properly in all respects."

"To my knowledge we're not being sued by anybody... no action is being taken against us, of any kind."

Professional litigators IMF is taking action in the NSW Supreme Court to investigate the administrator, so Moss was technically correct in saying that Macquarie is not yet being directly sued, but the game plan is for IMF to put its hands in Macquarie's pocket and help itself to some of this extraordinary windfall coming out of the Apple Isle.

The Australian surprisingly ignored Moss's comments and The AFR remains uninterested, but The SMH and The Age both ran the Moss comments at the bottom of other stories.

How did Peter Kirby get 130,000 Connecteast shares?

Englishman Peter Kirby is one of the legends of Australian business, having created enormous value at CSR during his five-year stint as CEO which culminated in the demerger with Rinker in 2003 to create one of the world's ten biggest building materials groups, based in Florida.

Rinker is now worth as much as The Millionaire Factory and with a record like that, Kirby was a good recruit to the board of Macquarie Bank two years ago.

However, as a key independent member of the remuneration committee, Crikey asked him yesterday why Macquarie didn't give its shareholders a non-binding vote on its remuneration report, just as CSR and Rinker had done a couple of weeks earlier.

Demonstrating who runs the Macquarie board, executive chairman David Clarke answered that aspect of the question, saying it would have added to an already busy agenda and that Macquarie had disclosed all of the material required under the new laws.

The other point I raised when it came to re-electing Kirby to the Macquarie board was that old gem of who gets allocations in floats. Kirby was the happy recipient of 130,000 shares in the ConnectEast float last year which Macquarie packaged and sponsored after winning the rights to build the Mitcham-to-Frankston tollroad in Melbourne.

Clarke defended the policy of Macquarie executives getting shares in floats provided that the client approves. Who was the client with ConnectEast? Macquarie Bank. Clarke then went on to say he assumed Kirby's allocation was just part of the dealings he has with Macquarie's private banking operations.

The man himself became quite agitated about my "allegation" and explained that he got the allocation by applying for shares just like any other Victorian did. He then mentioned receiving some from another institution that wasn't Macquarie, even though the float was led by Macquarie. This presumably was from either ABN Amro or ComSec, who were the other joint managers of the float.

Whatever the case, Kirby will be delighted with his investment as the 50c shares closed at 80c yesterday, meaning he's made a 60% profit in less than a year.

The question of how large allocations of shares are handled in floats and placements remains a major sleeper in corporate Australia. In my view, no Macquarie Bank director should have applied for shares in ConnectEast given that they put the whole deal together and these things should be strictly reserved for third party clients.

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