If the cap fits

There is a new twist in the saga over the sudden departure of BT Investment Management chief executive Dirk Morris that raises questions about the ability of the company to maintain the key staff that manage its funds.

A notice to the ASX has revealed that the company's board, led by executive chairman Brian Scullin, allowed all of the former CEO's restricted shares to vest immediately. The shares were meant to vest over five years and could only be vested immediately under special circumstances.

The board appears to have established a precedent that would open the door for other staff issued with $60 million in shares to seek board approval to have their equity unlocked if they resigned.

BTIM issued about 12.5 million shares to staff in 2007 when the funds manager was spun off from Westpac and floated on the ASX.

Those shares, which represent about 8 per cent of issued capital, were designed to lock in the staff, particularly the fund managers that run BTIM's multi-boutique strategies.

The stock was issued to staff amid bullish forecasts in the prospectus about BTIM's growth prospects. But the global financial crisis derailed the prospectus promises.

However, BTIM shareholders continue to carry the burden of the up-front equity grants through large amortisation charges in the income statement that will continue until 2012.

About $16 million will be amortised in the year to September 2009, $13 million next year and $17 million in 2011 and 2012.

A total of $73.5 million is being amortised over the five years to 2012 comprising $59.8 million in equity grants and $13.7 million in cash that was put aside in 2007 to buy shares to satisfy equity grants to future employees.

The BTIM prospectus warned that one of key risks facing the company was the possibility that key staff might leave. The equity grants were an important contractual arrangement locking staff into the company.

But the experience with Morris has raised doubts about the board's willingness to enforce its lock-in arrangements.

An ASX director's interest notice posted on Friday showed that the "holding locks” on Morris's 596,677 restricted shares in BTIM were lifted last Monday when he left the company.

The shares were meant to vest over five years unless the board terminated Morris with 12 months' notice, in which case restrictions were lifted immediately. BTIM told the ASX on June 30 that Morris had resigned after being unable to commit himself to complete a three to five year strategy presented to the board.

Scullin said Morris would stay until October 1, which suggested a three month notice period. But a week later the chairman took control of the day-to-day running of the company and said Morris would leave on July 13.

Scullin said he would remain in charge until a search firm found a new CEO. Scullin has ignored calls to provide some clarity about the circumstances surrounding Morris' departure and the financial arrangements agreed with him (Why the secrecy at BTIM? July 8).

The BTIM chairman may have to confront the question of lifting the restrictions on equity grants for other staff because of possible tension in the fund management ranks at the company.

The BTIM board has failed to follow through with a commitment made at the time of the float to give uncapped bonuses to investment staff at three boutiques within the group.

At this stage only the equities strategy boutique led by Crispin Murray is participating in the uncapped bonus plan, which operates under a profit-share formula.

The income strategies, multi strategies and macro strategies investment teams were meant to have joined the uncapped bonus plan by June this year. But Morris said last month that this had been put off until "market conditions improve”.

Until that happens the board determines their bonuses based on absolute dollar value targets that are checked against industry remuneration data.

The board may be holding back on providing BTIM's non-equities boutique staff with uncapped bonus plans to cut costs.

BTIM had negative net flows of $300 million in the three months to June 30 partly because of the $200 million capital return to unit-holders in the BT Global Return Fund, which was terminated in April.

A rising market pushed funds under management up to $32.2 billion at June 30, compared to $30.6 billion at March 31.

However, latest performance figures show that 34 of BTIM's 60 funds failed to beat their benchmarks in the year to June 30.