Lendlease Group chairman Michael Ullmer has explained why long-serving chief executive Steve McCann survived a financial catastrophe in the group’s engineering division that will ultimately cost shareholders about $1 billion in losses.
Ullmer, who took over as chairman of Lendlease from David Crawford in November last year, says he led a discussion about McCann’s future with the non-executive directors and without McCann in the room.
This was done after McCann had openly declared he was personally accountable for what happened in the engineering and services division.
It appears that the risk management of three major projects failed. These were the Gateway Upgrade North, the Kingsford Smith Drive and the NorthConnex M1/M2 Tunnel.
The total losses will be up to $1 billion because of the combination of the pre-tax impairment of $500 million taken in the first half and up to $550 million in pre-tax separation and restructuring costs when it is sold.
A number of trade buyers have lined up to buy the business. It has a pipeline of $3.8 billion in work.
Ullmer said McCann’s accountability had been made clear to him by the board soon after the engineering and services division debacle was revealed last year. The board agreed he should not receive any short-term bonus.
This cost him about $900,000. Further financial pain for McCann was revealed in the annual report. His long-term incentives fell in value by $4 million.
It could be argued this equity pain was simply a reflection of the pain felt by every other shareholder who witnessed the decline in the share price. McCann’s total statutory remuneration in 2019 was $5.46 million, down from $6.37 million in 2018.
His actual take home pay, which includes security price growth and distributions, fell from $7.97 million to $6.54 million.
Ullmer said the first thing he did when he took over as chairman was to commission an independent review of the engineering and services business.
He said the last thing he wanted to do was to make a knee-jerk decision and abandon the business without proper due diligence about its long-term prospects.
Ullmer said the review confirmed the original strategic thinking behind the decision to expand into engineering and services on the east coast of Australia. It remained a business with sound growth prospects.
But the review found the risk profile in engineering had increased significantly and it was better off in the hands of somebody else.
Ullmer said during the discussion about McCann’s future the board had to strike the right balance between him taking accountability for what happened and the long-term interests of shareholders.
He said the board had to look at McCann’s contribution to the core strategy of Lendlease and the successful execution of that strategy over many years.
Ullmer said announcements made by the company over the past six months had confirmed the importance of McCann’s contribution, particularly winning the 10-year Google mixed development contract in the United States.
He said the changes made to Lendlease’s remuneration report had shown the board’s commitment to aligning the long-term interests of shareholders with the interests of executives. This includes longer term equity incentives and a mix of financial and non-financial performance measures.
It is possible shareholders will experience more fallout from the engineering and services business.
There are two separate class actions being brought against Lendlease by Maurice Blackburn and Phi Finney McDonald alleging breaches of continuous disclosure obligations. On the day the losses were first announced the stock dropped in value by $4.73 a share or $2.7 billion. Most class actions settle for amounts much less than the sharemarket losses experienced at the time of the disclosure.
Ullmer said Lendlease will defend the class action vigorously.
The direct impact of the engineering and services business losses in the 2019 results released on Monday was a 41 per cent decline in net profit to $467 million. Also, the final dividend was cut to 30¢ a share from 35¢ a share making a full-year payout of 42¢ a share.
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