BlueScope Steel’s largesse to its senior executives comes as no surprise. In 2011-11 financial year, BlueScope gave its entire board, CEO Paul O’Malley and two other senior executives pay rises despite a $1 billion-plus loss and the share price tanking. But BlueScope has always been generous to its board and executives.
Chairman Graham Kraehe’s fees have steadily climbed from $300,000 in 2003 to nearly $490,000 this year, while the company’s first CEO, Kirby Adams, was lavishly rewarded with total remuneration packages just shy of $5 million per annum, except for an off-year in 2006, when flat growth and a fallen share price only saw him scoop up a mere $2.9 million.
The key reason is that BlueScope’s strategy for most of the past decade has been focused not on developing a robust business model but on being the darling of the share market.
As Glenn Dyer explained on Monday, our other, smaller BHP spin-off, OneSteel, has been a very different beast under chairman Peter Smedley and CEO Bob Every, moving into iron ore exports, higher-grade steel products and using the strong dollar to acquire assets offshore and move up the value chain.
BlueScope has settled for sticking to its basic steel production model and hitting governments up for assistance. OneSteel started off with much more debt than BlueScope, with a gearing ratio of over 38% in 2003 in the aftermath of its spin-off from BHP. It steadily paid down debt until 2006. Its dividend growth was steady but not spectacular — 11 cents a share in 2003, steadily rising to 21.5 cents on the eve of the GFC.
BlueScope, under American CEO Kirby Adams, took a different approach. The company repeatedly paid out special dividends — seven cents in 2003, 10 cents in 2004, 20 cents in 2005, as well as big final dividends each year. The company also launched a $200 million share buyback in early 2005. Meanwhile, it was taking on debt rapidly — having started with virtually none, its gearing ratio had hit 38% by 2006. BlueScope also aggressively built its presence in Asia and China, spending too much money on a strategy that was well thought out but badly executed — by 2006, the company was publicly admitting the performance of its new Asian assets was poor.
But the strategy made BlueScope a stock market star. The relative performance of the two companies shows BlueScope initially far outstripping OneSteel:
By 2005, even the Sunday papers had tips on how you could get in on the action of BlueScope’s remorselessly rising share price.
Adams’s and Kraehe’s strategy included targeting unions. In late 2004 Adams launched a savage attack on “manufacturing sector trade union leaders” whom he accused of handicapping the sector. Adams’s attitude perfectly suited the times — at that point the Howard government was preparing its WorkChoices assault. Then-AWU secretary Bill Shorten had already gone to the company’s AGM that year to lash the company for refusing to talk to the union.
Wages growth for the company’s workers lagged inflation and was well below that of workers at OneSteel and Smorgon Steel (later to be split between the two larger companies). In what would become a familiar story, Adams sacked 600 workers across the company’s operations, including 250 at Port Kembla with the closing of the steel works, in June 2006 to try to take the heat off the company’s flagging performance. The dose would be repeated in 2008 and again this week.
Adams, who left BlueScope in 2007, took his anti-union strategy to Tata’s Corus in Europe, where he instigated a brawl with British unions at the Teesside Cast Products plant, only to be moved on last year.
But as OneSteel paid down debt and looked to expand into iron ore before anyone knew about a resources boom, the writing was already on the wall for BlueScope. As early as February 2004, commentators were wondering what would happen when Chinese steel production, rapidly improving in quantity and quality, turned that country from a net importer to a net exporter. Adams at the time publicly worried about what would happen if the Australian dollar rose — at that stage it had just fallen below 80 US cents.
Instead of responding creatively, Kraehe and Adams stuck to the standard-issue management model — go the unions, look after investors and keep the company share price going up and up. The trick was still working when current CEO Paul O’Malley took over but the company couldn’t defy economic gravity forever, even without a global financial crisis. However, executive remuneration apparently can continue to defy gravity.
I’m in agreement about the points you make regarding excessive executive remuneration and also have no argument with your analysis of the poor strategy adopted by the BSL leadership that has brought them to this point.
I would add that the current strategy is bad as well. Stopping exports and reducing the blast furnace capacity will drive up the unit cost of domestic supply. Exporting steel, though it might not be profitable, had the effect of amortising overheads across a facility operating at capacity. So the reduced throughput will probably have a higher unit cost and be vulnerable to import competition.
The other strategy that I think would make a difference and where I differ from you is that increased productivity through a more flexible workforce could have made a significant difference. Sacking workers and shutting a facility is an admission of defeat but I think that workforce flexibility could have made a difference.
The other point I want to make is that confidence in the future is a big factor. A business which is increasingly marginalised in popular culture as an evil polluter that is threatening the wellbeing of future generations might well adopt a strategy to shut the shop and go.
Has the profound implications of the closure of a third of Australia’s steel making capacity sunk in yet. It’s not coming back in a hurry.
Thanx for these pieces comparing BlueScope and OneSteel which I have found most informative.
This article is a further illustration of why I will never understand modern business practices.
[(crikey.com.au/2011/08/22/how-onesteel-stole-the-march-on-bluescope/#comment-154172)
MICHAEL R JAMES Posted Monday, 22 August 2011 at 3:19 pm |
And it is not as if there hasn’t been plenty of precedents to OneSteel’s strategy. In the UK in the 80s there were only two possible futures for the steel industry: move up the value chain with speciality steels & products etc, or get out of the business.]
This may have been worse for countries like the UK who import all the raw ingredients (as well as a disappearing car industry), but it is not an issue that loomed out of the mist only when the Chinese surpassed a certain threshold. The steel industry in the West (excluding the Asians except that the Chinese & Indian production has also caught up with Japan and Korea) has been under stress for decades. The industry in the US has been decimated which is why cities like Pittsburgh and Cleveland are called rust belt cities. In 1980, there were more than 500,000 U.S. steelworkers but by 2000 the number of steelworkers fell to 224,000.
Note that Japan, Germany and Korea are still very big producers and no doubt some of this relies upon some measure of protection (overt or indirect) as well as being big consumers (by virtue of big car industries for one thing). I also see that The Netherlands and the Czech Republic produce almost the same amount of steel as Australia. Tiny Belgium manages to export almost three times Australia’s production! I guess what that tells me, even without further investigation, is that it surely should be possible for Australia to retain a steel industry of about that size (ie. prior to these closures).
Paul Howes was just on Lateline make a plea that the government needs to devise a long term strategy/policy to keep our steel industry. That may sound like pure special pleading for subsidies, but surely even BK has to think a steel industry is pretty strategically important, and that to let it disappear is not an option especially when it is mostly due to the artificial and somewhat arbitrary issue of exchange rates. (If you used PPP our dollar would not be valued at what the money markets say, and of course ditto for the Yuan. In a few years this will come to pass but we won’t get the steel industry back.)
As soon as you see Graham Kraehe’s name on a board list, sell the shares. There is a long list of companies, with Southcorp possibly his worst company, crowned by a stupid deal with Bob Oatley that ruined it. Perhaps the Chinese will buy Bluescope.