Over the past ten days a Boral delegation led by the chairman Kathryn Fagg has begun pounding the pavements to take the temperature of its major investors.
The feedback won’t have been palatable for Fagg, who will need to balance the board’s stated “support” for Kane against the escalating anger of shareholders who have had to stomach four earnings downgrades over the past 18 months, share price underperformance and now a US accounting scandal.
I think it makes sense not to necessarily wait until his [Kane] terms ends if a better outcome could be achieved by having fresh eyes.
Allan Gray managing director Simon Mawhinney
“I think it makes sense not to necessarily wait until his [Kane] terms ends if a better outcome could be achieved by having fresh eyes,” said Allan Gray managing director Simon Mawhinney.
“The board has accountability for all things related to asset allocation,” he told The Age and The Sydney Morning Hearld on Wednesday.
Argo Investments is another Boral investor prepared to go public about its disappointment with the Headwaters acquisition. Argo managing director Jason Beddow noted: “What’s happened at windows is disappointing. It’s another cross.”
On the subject of Kane’s future, Beddow said that even under Boral’s existing retirement schedule for Kane’s transition, the chief executive could be gone by the end of next year.
Others, who agreed to speak on the condition of anonymity, have been far more direct.
“This guy is toxic and needs to go,” declared one funds manager.
“He’s 100 per cent gone,” said one influential proxy adviser who added that many investors have been upset with Kane’s performance for a year – mainly in relation to the results of the Headwaters investment.
“It’s a question of does the board have a succession plan in place,” the proxy adviser noted.
Even before the windows scandal found its way into the public domain, there had been a growing concern about Kane’s big bet on the US construction market.
Disappointment with Boral’s performance was on show at its 2019 annual meeting, with almost 19 per cent of investors voting against its remuneration report and more than 9 per cent giving a thumbs down to Kane’s long-term incentive plan.
Boral director Karen Moses also suffered a near-32 per-cent protest vote against her re-election – but to be fair his had more to do with her time at Origin.
Had Boral’s annual meeting been held this week the outcome would have been far worse.
Fagg would also be well advised to stand up from the board table for a moment and take a look at what analysts are saying.
Headwaters’ returns have been so disappointing that suggestions are emerging Boral could take a writedown of up to $US1 billion on the business.
An investor note from Credit Suisse this week noted: “Serial Headwaters issues should warrant review of carrying value, gearing and net synergy realisation. We have previously estimated that the US business has underperformed market growth by around 25 per cent since the Headwaters acquisition was announced, with a return on funds employed of 5.6 per cent versus cost of capital of around 9 per cent.”
It added that a $US1bn writedown would raise gearing to 36 per cent.
Morgan Stanley said in a research note this week: “We had previously highlighted that earnings for the US had declined ex-synergies over the last two years and it now appears that the underlying declines have been greater than disclosed.”
Once Fagg’s investors meetings are done, her safest course of action would be to announce an orderly early retirement schedule for Kane and the appointment of headhunters to find a replacement – a process that could take six to nine months.
The last thing she needs is a drawn-out scandal or for investors to take matters into their own hands.
Elizabeth Knight comments on companies, markets and the economy.