Why is outgoing Suncorp CEO John Mulcahy still on the board of the Future Fund?

This is Kevin Rudd on 15 October last year:

The Australian Government will be working with the relevant Australian regulators to design a template … that links capital adequacy requirements to executive remuneration in a way that acts against excessive risk-taking in our financial institutions. The Australian Government will also now be examining with APRA what domestic policy actions would be appropriate in pursuit of this objective — ie to deal with the problem of executive remuneration to financial institutions.

If the Government was serious about delinking excessive risk and remuneration in financial institutions, not to mention excessive executive remuneration, it could look in-house first, and specifically at the Future Fund.

Mulcahy’s performance at Suncorp encapsulates the exact problem to which Rudd was referring. Given the relative strength of the Australian financial sector compared to its overseas counterparts, Suncorp’s performance, and Mulcahy’s remuneration, are even more remarkable.

Mulcahy’s pay went up by almost a million dollars in 2008 to $6.2m, despite net profit halving. He is now leaving with a $2m termination payout, leaving behind a 30+% collapse in half-year profit. And his remuneration package is almost a how-to guide to encouraging short-termism and risk. The package famously rejected by shareholders last October provided short-term incentives worth at least 150% of his salary (up from 100% in 2007), and long-term “incentives” with no link to performance. According to its annual report, the Suncorp remuneration committee, which included director and former Telstra head Ziggy Switkowski, developed its short-term incentive determinations on advice from Mulcahy.

Suncorp’s performance under Mulcahy followed the logic argued by Rudd about the link between excessive risk and remuneration. Its exposure to bad debts has surged in recent months, fuelled by loans to Babcock and Brown and Gold Coast property developers. Its reliance on wholesale funding rather than deposits left it exposed to the global credit crunch, but Mulcahy actually wanted to increase lending last year. Mulcahy’s wildly-overpriced 2006 acquisition of Promina was said by some to be aimed at protecting Suncorp from takeover, and also led to an increase in Mulcahy’s remuneration for the “increased complexity” of the business he was running. Mulcahy’s integration of Promina saw many of its executives bail out, as well as its entire equities team, which moved to Pinnacle.

And Mulcahy only avoided having to sell his banking arm to ANZ by the narrowest of margins when the Federal Government announced its wholesale funding guarantee last year.

Brisbane analysts have referred to Mulcahy’s “state of denial” and unwillingness to take responsibility for Suncorp’s parlous circumstances. Mulcahy has repeatedly claimed Suncorp had “strong underlying growth” but external events like the credit crisis and bad weather have hit its headline results.

Risk-taking, poor management, a predilection for excessive remuneration and denial are clearly not the sort of characteristics required of a Guardian of the $60b Future Fund. Its establishing act requires substantial experience or expertise and professional credibility and significant standing in investing in financial assets; the management of investments in financial assets or corporate governance.

Whether Mulcahy still has professional credibility might be debated but the issue is more what circumstances could lead to his removal from the board of the Future Fund. The act only provides the usual government agency grounds for removal — misbehaviour, physical or mental incapacity, bankruptcy, absence, failing to address conflict of interest or misusing one’s position, plus an ill-defined “unsatisfactory performance for a significant time”. There is no legal way to remove Mulcahy on the basis of his performance outside the Future Fund itself. Like most other board members, Mulcahy was appointed by the Howard Government in April 2006 for five years.

Some of his fellow Future Fund board members also have strong Queensland connections. Trevor Rowe, Rothschild executive chairman, is the much-criticised chairman of both Queensland Investment Corporation and Brisconnections. Susan Doyle, chair of the Australian Reward Investment Alliance (ARIA), used to be manager of equities at Suncorp. However, Doyle went on to greater success and became chair of the Commonwealth Public Service super schemes (later to become ARIA) in 2003.

Mulcahy’s record at Suncorp is everything the Prime Minister has been criticising in the financial sector. He should resign from his role as guardian of the Future Fund.