A struggling small Brisbane-based technology company has offered its new MD one of the most generous remuneration packages that we have ever seen – and the shareholders agreed to it!

Financial carnage

In its two financial years since listing, Trysoft has posted 2 substantial losses – $2.1 million in 2001 and $2.5 million in 2002, on turnover of around $8.4 million and $7.0 million in each year respectively.

The 2001 loss was sheeted home to the company’s R & D costs written off of $2.35 million. Shareholders were told that the company is now almost completely out of the software development business is now more or less a systems analysis and consulting business.

The company’s new MD, Douglas Wong, said the company’s main asset was now “human capital and its customers” and its core competency was now “technology integration”.

The company’s chairman, Peter McKnoulty, was convinced that it had turned the corner and predicted “at least” a break-even bottom line for the 2003 year, a seemingly ambitious claim given the company’s results in prior years, but one that shareholders are certain to hold him to.

Shareholders were told that the company’s cash burn is slowing, with some $63,000 going out of the company in the first quarter of 2003.

The new MD’s association with Trysoft

Wong’s history with the company is interesting. Initially, he was a consultant from KPMG hired to diagnose the company’s problems and propose some solutions. His report included a recommendation to revamp the management team.

The company took on board this suggestion – and took on board Douglas Wong!

His CV in the company’s annual report says that he was “formerly a senior executive of KPMG Consulting Private Equity Operations, the Australian head of a global PC hardware vendor and a corporate advisor to the largest Australian-owned PC hardware vendor”.

Wong commenced providing consulting services to the company in November 2001. It didn’t take long for the company to take a shine to their consultant – he was engaged as an executive director on 24 December 2001 and then became MD on 23 January 2002.

The MD’s package

The company is obviously ecstatic with Wong’s work, putting forward an employment package for shareholders to vote on at the AGM which included some provisions which seem extraordinarily generous.

Wong, who is the MD, remember, is to “[assist] where necessary to ensure that appointees to the Board are skilled professionals who can make a valuable contribution”.

This is pretty unique – a MD who has a say in who gets onto the board. Usually it is the other way around – the shareholders choose the directors and the directors appoint the MD and keep them in line.

Despite the suggestion from this proxy holder that this clause gives Wong extraordinary power and the opportunity to get his “mates” on the board, shareholders were assured that this clause would be exercised moderately and Wong wouldn’t be given carte blanche to stack the board with his mates.

But later in the meeting, a shareholder and customer of the company noted that Wong had roped in a new board member who, based on what the shareholder was saying, appears to be a good mate of Wong’s.

Another unusual aspect to the package is that Wong gets options over some 15% of the shares in the company, but he doesn’t have to shell out a cracker. The purchase of the shares will be funded by the company paying bonuses to Wong when he chooses to exercise the options.

The overall cost to the company should all of the shares be exercised is $495,000, which is an extraordinary benefit on top of a salary of almost $300,000.

As we noted above, the company has struggled financially and despite the chairman’s assurance that the company has turned the corner, Wong really doesn’t have any tangible runs on the board, certainly not as far as the performance indicators that matter to shareholders. The share price is currently languishing around the 15 cent mark after listing at $1 and the 2003 first quarter results still do not give comfort that things will be different this year.

So handing out this generous bonus now really seems a case of way too much, way too soon.

Those shareholders who opposed the package certainly had no gripes with Wong personally, but the general mood was that he should post a few runs before getting paid a generous bonus.

His package doesn’t contain any performance hurdles in terms of profit targets or share price improvement.

One of the “hurdles” is merely joining the company, another is to close down one part of the company’s business. Numerous shareholders suggested this was a job that the fabled sight-impaired Freddy could perform, but were told repeatedly that the company had churned through three MDs in not much time and none of these could do the job, as Wong just about has.

Despite the company’s assurance that we need to give Wong this package to tie him to the company, there is actually nothing in the package that locks him into the company for a fixed period of time. If Wong is as good as the company says and its share price responds accordingly, then that alone may tie him to the company.

But if he doesn’t work out, he can walk away from the company, someone else might come in and fix the share price, and Wong reaps the benefits via his ownership of some 15% of the company.

Despite all that seems wrong with the package, it got up!

After almost three hours of discussion on the company’s poor financial results and the package being offered to Wong, the package was still overwhelmingly agreed to.

The final vote was some 14 million shares voted in favour of the resolution and 1.66 million shares voted against it.

But those figures betray the overwhelming dissention of the small shareholders. Only 13 shareholders cast their votes in favour of the resolution, as opposed to 90 shareholders who opposed it.

One shareholder mounted an individual campaign against the package and obtained 84 proxies against it. That compares quite noticeably against the prior year, where only 47 proxies were lodged to vote down an increase in non-executive directors’ fees.

The odds were stacked against the small shareholders after the company’s founder and largest shareholder had indicated that he was voting in favour. He gave a long speech in favour of Wong and noted that nobody had more to lose than he, as the largest shareholder in the company, did.

So the shareholders – well, in reality the major shareholders – in Trysoft have made their minds up.

Time will now tell whether Wong can produce the results that the shareholders will be demanding after this package was accepted.