Macquarie ‘Millionaires Factory’ put at risk by investor revolt

[SINGAPORE/MELBOURNE] Macquarie Group’s long vaunted money-making machine for top bankers is showing signs of strain.

Known as the “Millionaires’ Factory”, the Australian financial giant has for years awarded more generous pay to its senior management and dealmakers than rivals across Asia. Former commodities head Nick O’Kane famously earned more than JPMorgan Chase chief executive officer Jamie Dimon, before he left last year.

A recent string of lapses in risk management and senior departures are putting that at risk. Macquarie faces potential penalties amounting to hundreds of millions of US dollars after drawing the ire of regulators from the US and UK to Australia. Concerns are also mounting among investors as they demand more accountability from management.

The biggest blow came last Thursday (Jul 31) when more than a quarter of its shareholders, including some of the nation’s biggest pension funds, rejected the bank’s executive remuneration plan at an annual meeting. The humiliating rebuke to the board increases the risk of a confidence vote next year.

“We expect greater transparency around how regulatory compliance issues have affected the profit share across all levels of the company,” said Debby Blakey, head of the Hesta fund which holds roughly 0.8 per cent of Macquarie and voted against the pay plan. “This can build confidence that the company is taking action in response to the issues raised.”

Earlier that same day, Macquarie investors and its own executives were shocked by news that chief financial officer Alex Harvey will retire, according to sources familiar with the matter. Harvey, who spent nearly three decades at the firm, was seen as ambitious and hard-driving by colleagues, and until recently was considered a top candidate to eventually run the bank, they said, asking not to be named discussing private matters.

The stakes are high for chief executive officer Shemara Wikramanayake to fix the problems at one of the world’s most complex financial empires. From its start as a unit of UK-based Hill Samuel & Co in 1969, it now has operations spanning energy and gas trading to private markets and infrastructure investments. It also manages close to A$1 trillion (S$835 billion) in assets.

Pressure is building on the four-decade veteran to take a heavier hand and discipline bankers, while showing she can recapture earlier growth momentum, according to more than a dozen investors, analysts, current and former staff interviewed by Bloomberg.

Macquarie declined to comment.

Already, the regulatory probes have hampered the A$83 billion firm. Australia’s so-called Big Four banks’ shares have benefitted from the sector’s reputation as a haven amid tariff wars, but Macquarie has fallen 2 per cent this year. Still, some fund managers say their holdings in Macquarie offer global exposure that’s unmatched by the domestic banks.

The timing and style of Harvey’s retirement announcement at age 54 raised questions, with the news nestled between a results update and the outlook in Thursday’s statement. The country’s highest-paid CFO, his responsibilities were expanded in January to include people and engagement, requiring him to protect and promote Macquarie’s reputation globally.

Harvey, a former tech and media investment banker who later headed the firm’s Asia operations, was tired of the daily rigour, according to sources who have spoken to him. That comes as Wikramanayake is likely to extend her tenure amid the present uncertainty, they said.

Harvey was not available for comment.  

At last week’s annual meeting, Chairman Glenn Stevens batted away assertions his team had done too little to clip executive pay when things went wrong in recent years.

“We found a problem, we owned the problem, and we have moved to address it,” said Stevens, a former central bank governor. He added that more may be done in the coming months to curb bonuses after a lawsuit filed by the markets regulator.

While Wikramanayake’s A$24 million pay package for the year ended Mar 31 was trimmed, her other nine key managers were largely unaffected. They drew more than A$100 million in combined remuneration, which is a mix of fixed pay and performance-linked shares and bonuses.

Macquarie’s board and leadership have “turned a blind eye for a long time because they were making so much money and nobody was going to do anything to them”, said Andy Schmulow, an associate professor at the University of Wollongong who specialises in conduct risk in financial services.

The suit filed in May alleged the firm misreported millions of short sales for more than 14 years, a move that carries a penalty as high as A$783 million. Joe Longo, chairman of the Australian Securities & Investments Commission, has accused the firm of complacency and hubris in its compliance culture. Macquarie said it’s working on an improvement plan.

There are other headaches outside Australia. In Germany, the firm is ensnared in an industry-wide investigation related to dividend trading. About 100 current and former staff have been designated as suspects by authorities, and Macquarie is facing a number of civil claims.

In the US, Macquarie paid a fine of about US$80 million in September to settle charges including overvaluing collateralised mortgage obligations. In the UK, its British unit was penalised £13 million (S$22 million) after a junior trader on the London metals desk booked fictitious trades.  

Overall, more than 50 people were fired in the last fiscal year for improper conduct or policy breaches, among the roughly 140 cases reviewed, according to a bank presentation. Some pay has been withheld from executives due to lapses in the US, according to Stevens. Meanwhile, regulatory compliance spending at the Sydney-based firm has more than doubled in the past five years to about A$1.2 billion, a separate presentation showed, even as it grapples with tougher capital requirements.  

The shareholder dissent “reflects ongoing concerns about the alignment between pay and performance, as well as expectations for transparency and accountability”, according to the Australian Shareholders’ Association CEO Rachel Waterhouse.

One Macquarie institutional investor who declined to be identified said that the regulator may be much tougher on the bank in the future when it comes to liquidity and capital requirements. An executive at another big shareholder was supportive of the firm’s pay package, reasoning that compensation needs to be competitive with big Wall Street firms.

Macquarie’s woes add to a litany of regulatory probes at Australian firms, many of which have struggled to shed their cowboy culture. At ANZ Group Holdings, a string of bad trader behaviour, including alcohol and substance abuse, prompted the regulator to impose punitive capital requirements and eventually led to the departure of CEO Shayne Elliott. Even the stock exchange operator, ASX, is under review for “repeated and serious” failures in governance and risk management.

For Macquarie, the spate of problems has rekindled questions about who will ultimately succeed Wikramanayake, 62.

In her seven years at the helm, she has forged a reputation that some who have worked with her labelled as a steel hand in a white glove, able to hold her own in an environment full of risk takers. Other senior bankers, however, say she’s often hands-off and dispassionate, leaving her reports to make their own decisions.

Harvey’s exit leaves asset management head Ben Way and Macquarie Capital chief Michael Silverton as among the top CEO replacement candidates, the sources familiar said.

Wikramanayake needs to convince the market Macquarie can keep driving growth, even as it reins in risks.

The firm’s profit rose 5 per cent to A$3.7 billion in the year ended Mar 31, though that was lower than the record A$5.2 billion notched two years earlier when it rode volatility in commodities markets.

The bank has replaced O’Kane with Simon Wright, whose division saw a 12 per cent decline in profit last fiscal year and has been hit by key people leaving its North American team. The commodities and global markets remain far and away the biggest earnings contributor.

Analysts at JPMorgan worry about Macquarie’s core franchise performance, including market share losses. It’s “hard not to be more sceptical” about achieving its targets, they said in a note this month. They see the firm’s regulatory failings adding pressure to its capital surplus and have assumed a remaining A$1 billion buyback is cancelled.

“To be critical, you could probably say Macquarie missed opportunities” that rival firms such as KKR and Blackstone generated over the last decade, said Matthew Wilson, an analyst at Jarden Securities, which has an ‘underweight’ rating on Macquarie. The others “have grown a lot faster and a lot bigger”. BLOOMBERG