Fund manager challenged CSL on debt, buybacks and CEO pay

By James Mitchell
 — 1 minute read

A boutique fund manager says ASX darling CSL had gone way off track until the group stepped in and pressured the blood products company to change its ways.

That’s according to Doug Ledingham, an investment analyst at Stewart Investments, a substantial shareholder in CSL.

Speaking on a panel at a Stewart Investors event in Sydney on Thursday, Mr Ledignham used CSL as a recent example of the sustainable investment group’s success as an activist.


“CSL was one company that we thought was heading in the wrong direction from a quality perspective and we stepped in to engage and hopefully bring them back to a point where we feel the preservation of capital was best served,” he said.

“Over the last five years we had seen a deterioration in their balance sheet and they had taken on a significant amount of debt and used that debt to buy back shares.”

But leveraged share buy-backs are not something Stewart Investors usually looks for in a business. In fact, the fund manager spends much of its time scouring the globe for sustainable, profitable enterprises in emerging markets.

“You wouldn’t see a quality owner doing such a thing,” Mr Ledingham said. “So we felt as responsible owners it is our job to sit down and talk to the company.”

During these discussions with the CSL board and management team, the fund manager highlighted its concerns with the company, which currently has a market cap of around $80 billion.

Critically, Stewart Investors also flagged what they saw as a misalignment in CSL’s executive remuneration structure.

“The CEO was incentivised on growing EPS numbers rather than focusing on the loan-term health outcomes of patients. So again, there was a long discussion,” Mr Ledingham said.

The analyst noted that trust is very important when it comes to fund managers taking an activist approach with a company.

“We have to earn the right to have these types of discussions with management and boards,” he said.

“But we got to a point where they have agreed that the level of debt on the balance sheet had reached a point where the risk was too big to bear. They have also changed their remuneration structure and removed the weight from the CEO being paid on EPS and more on the return on capital over a seven-year period.

“The long-term view is more aligned with the shareholders, employees, scientists and patients.”

In 2018, CSL’s chief executive Paul Perreault received no increase to his fixed remuneration from the previous year, which remained at US$1, 751,000. He received his bonus, or short-term incentive (STI) payment last month of just over $3 million.

The group’s annual report, released last month, noted that after taking into consideration shareholder feedback and global market positioning, the CSL board has determined to make no increase to fixed reward or STI target and maximum opportunity for the second year in a row to the CEO.

“Consistent with CSL’s guiding principles for remuneration, the board has decided to rebalance the remuneration pay-mix toward LTI.

“To ensure our CEO has market appropriate incentives and remains aligned with the interests of our shareholders, in 2019 he will receive a 13 per cent increase in his LTI target which is both time and performance hurdled.”


Fund manager challenged CSL on debt, buybacks and CEO pay
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