Eric Diack sat pensively as he waited to start Aveng’s AGM in a boardroom at the construction company’s campus at Jet Park near Johannesburg in late November.
There were about 20 people in the boardroom, but as crowded as it was no one was sitting next to Diack. He was parachuted into the role of executive chair in late August 2017 when then chairman Mahomed Seedat resigned. A month later he became interim CEO when Kobus Verster suddenly departed.
Diack found himself presiding over a company that had gotten itself into a world of trouble.
Its share price had crashed from just under R18 from where it was five years ago to its current level of 2c, and it incurred a R401 million operating loss for the 2018 financial year.
Aside from having to deal with a difficult local construction sector, Aveng also wrote off R2.3 billion relating to the Queensland Curtis Liquefied Natural Gas project in Australia.
It is not the only large construction group facing a difficult time. In the past year two giants of the sector – Basil Read and Group Five – entered business rescue.
With all this hanging over the group, it’s not surprising that despite the crowded boardroom, the AGM was unusually silent. Diack, a former Anglo American executive, who has sat on numerous boards, could sense the awkwardness and joked about it.
The room chuckled and from there the meeting rapidly proceeded to pass nine resolutions in just under 20 minutes.
All the resolutions were passed by a margin of over 90% – except for one.
It’s a non-binding resolution on the approval of the remuneration report, and passed with only 62% of the vote.
Diack said that as this resolution was not passed by 75%, as stipulated in the King codes of governance, the board would consult with the shareholders who opposed it and explain it to them.
Considering how senior executives were compensated, it is understandable that some shareholders were reticent about approving this resolution.
The top trio – Diack, CEO Sean Flanagan (a former non-executive who was appointed chief executive in February 2019) and financial director Adrian Macartney – collectively earned about R17.7 million in bonuses, which was way above the R4.2 million these positions paid out in the 2018 financial year.
The R4.2 million figure paid in the 2018 financial year was to Daick, which was on top of his R6.9 million salary.
The group defended the 2019 period’s incentive payments, noting that: “The 2019 short-term incentives were based on clearly defined performance criteria that were agreed between the board and the executives in advance.”
The 2019 Performance Incentive Plan lays out how the executive chair, CEO and FD got the R17.7 million in bonuses for, among other things, not breaking the company’s loan covenants, the quality of its audit opinion, retention of key staff, the disposal of non-core assets, as well as major interventions to “protect the balance sheet”.
They received these cash bonuses despite the group seeing revenue fall R30.6 billion to R25.7 billion and increasing its operating loss to R1.1 billion for the year to end-June 2019. It did, however, manage to reduce its long-term borrowings from R2.68 billion to R1.45 billion, improving its debt-to-equity ratio from 127% to 87%.
The 2019 incentive plan prioritises improving the balance sheet ahead of increasing profit. It effectively matches the goals of its turnaround plan, which prioritises reducing debt, raising capital and disposing of non-core assets.
This has seen it, among other actions, raise R460 million in a rights offer, renegotiate its debt repayments, and get R1 billion through the disposal of non-core assets, including the sale of its Jet Park offices.
Aveng said in a statement that given the precarious financial position of the group, it needed Diack’s experience to guide it through this period. For this, he needed to be properly compensated.
“At the time of appointment of the executive chairman, the company found itself under significant stress. The board agreed on several specific near term key performance indicators [KPIs] that were designed to ensure the continued existence of the company. This required a significant personal commitment and experienced leadership capable of delivering the required turnaround. The incentive paid reflects the extent of the achievement of these KPIs.”
It also pointed out that to date it has not received any communications from shareholders regarding concern over its remuneration report.