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Ted Black: Constable’s happy lot – Why CEOs paid far too much

By Ted Black*

“Ahhh … when constabulary duty’s to be done, to be done, a Policeman’s lot is not a happy one,” sang the constable in Gilbert & Sullivan’s operetta “Pirates of Penzance”.

In contrast and judging by his pay packet, David Constable’s lot in Sasol has been a very happy one. So much so that Alec Hogg gave us a forthright view on his pay for performance since 2011 and then Brian Kantor waded in to lend balance with an economist’s view point.

Let’s now look at the issue using a Cash ROAM lens and start with the JSE’s starry sky. Last time we used it to look at Food Producers. This time we highlight Sasol’s performance and its link to Value-of-the-Firm (VOF).

Ted_Black_Cash_Roam


Can we tie the drop in the VOF with Sasol’s fall in ROAM from 2014? Not really. It fell but the Cash ROAM performance was still good in 2015. So why is the firm’s valuation relatively so low?

First take the point made by Brian Kantor that the biggest influence on its share price is the $ price of oil. Here is the link it has had with Sasol’s VOF over 15 years.

Ted_Black_Sasol_Oil_Price

Does the high correlation imply that a firm’s share price is influenced far more by overall market sentiment and investor perceptions of the industrial sector it competes in, than by the company’s actual performance? It seems to be, which raises a question.

What top management behaviours do incentives, particularly share options, really trigger and what impact do they have on a firm’s economic performance, if any?

The first profit measure most analysts and managers look at is Operating Margin or Return-on-Sales (ROS). Here is Sasol’s Cash ROS% trended over 15 years.

Ted_Black_Sasol_Cash_ROS

Despite quite big yearly variation you can view the trend as high, stable and predictable as it heads slightly upwards. It fell below 25% only once. That was just after the economic collapse before Constable joined in 2011.

Next, look at the Cash ROAM% over the same period.

Ted_Black_Cash_ROAM_Update

Despite the healthy ROS% the ROAM trend is down but has rarely fallen below 20%. Because of that, it means that Sasol’s Cash Return on Equity has been over 30% for most years and until now has generated an economic profit every year since 2001 – the ultimate profit number.

Whilst we wait for final results, the 2016 interims show a Cash ROAM drop to below 15% even with a Cash ROS of 31.6%. That’s because of another critical ROAM measure either ignored, or whose significance is rarely understood even at board level – the sales productivity of the asset base. It is Asset Turnover (ATO), the senior synergist in the ROAM equation.

With Sasol, a highly asset intensive business, ATO’s link to ROAM is a critical one as you can see in the next chart.

Ted_Black_Sasol_ATO

Since Constable joined, the sales productivity of production assets, including projects in progress, has fallen by 45%.

So has he been paid too much? Most CEOs are. Because of their, and his, stated focus on “Shareholder Value”, the share price becomes the driving measure – not ROAM, the true measure of their competence. And as we’ve seen in his case, the $ oil price drives it most.

Under his watch, Sasol’s plant facilities assets have more than doubled because of projects under way. As a “new broom”, he did the usual restructuring and there are about 3

Ted_Black_Sasol_Costs

000 fewer people. That might explain the spike in the share price in 2014. Analysts love job cuts. But have there been any results in profitability from that cutback?

Where there has been an impact is on “Material & Consumable Costs” – a critical measure and a major improvement since 2012. Look at this chart. It shows Material Costs, Expenses and Employee Costs as a productivity ratio – percent of sales.

Management reduced material and consumable costs from 49% of sales revenue to 42% – a great achievement.

And the restructuring and retrenchment program popular with analysts? No discernible effect.

More importantly, are there any hidden costs from cutting all those people…the salt of the earth “doers” and the “brains” lost? There are usually many. The real issue now is Sasol’s low ATO. The sales productivity of plant assets has fallen by 45%.

So how effective was Constable? It’s too early to say. To swap a lower return today for greater future returns is legitimate if there is a commitment to explicit, testable, trend lines. However, he won’t be around to take responsibility for any strategic decisions he took. He should have signed on for another five years.

Then we might know his true value because today’s Cash ROAM tells us he hasn’t demonstrated performance power so far.

Most CEOs who tout shareholder value, become little more than “Corporate Marketing” executives. They forever explain “strategy” to analysts and investors and most of them ride the wave that people created before them and create while they’re in office. Then they depart with a lot of loot, successful or not.

They might take the rare key decision but are as much “in charge” as key managers and frontline people are at various levels below them in the organisation.

That’s why they are paid far too much. Very few stamp their philosophy and values deep down – usually it’s only founding entrepreneurs who do that.

Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact himattblack@astrovoice.co.za.

* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.

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