Annual General Meetings - Corporate Australia's itch

Under the Australian Corporations Act, public companies are required to have Annual General Meetings annually and no later than 5 months after the end of the financial year. It's not surprising that in October 2016, the Australian Institute of Company Directors [AICD] issued a checklist of possible questions which might arise from the floor of Annual General Meetings of Australian companies.  A raft of negative media stories about the franchising sector, (many of which are part of publicly listed companies) Board and executive remuneration and increasing class action litigations have left many companies working overtime to deflect public criticism.

So what did the AICD recommend as a question checklist ?

Of the 21 major questions suggested, 15 were on Chief Executive remuneration, 3 on Board remuneration and 3 on Board diversity. It's plain to see where the main focus of attention was directed. Questions included  were: Why is the CEO's remuneration so high when the company's performance over the last 3 years has not shown any significant improvement ? What has the CEO done to deserve the "bonus" you have paid him or her ? Why is the new CEO paid more than the previous CEO ?

The AICD also pays considerable attention to question involving the proportion of Short Term Incentives (STI) and Long Term Incentives (LTI) included in CEO contracts. Quite often a higher proportion of bonus payments have been placed in the STI category not the LTI one. In contrast, the Australian Shareholders Association continues to argue that greater incentives, such as share options should be placed in the long term incentive category to prevent CEOs making short term focused decisions (such as asset sales) giving the impression that a company is doing well when in fact, its normal operating results are poor. Perhaps the AICD would be better placed to ask companies to do some self examination to determine why these type of questions are necessary in the first place.

Corporate conduct in Australia and first strike votes

The corporate reporting season and Annual General Meetings of ASX listed companies in Australia runs until November each year but usually extends up until the Christmas eve period followed swiftly by half yearly results in February. Late 2016 saw a raft of companies falling foul of their shareholders and experiencing first strike votes. This particularly affected what are known as the remuneration reports which provide information about how much Board directors and chief executive officers are paid.

Under the Corporations Act, if 25 per cent of the votes cast at two consecutive annual general meetings oppose the remuneration report, then at the second meeting the company must give shareholders the option to require the entire board to stand for re-election. What the table below (provided by the Australian Shareholders Association) shows is the disconnect between Boards and executives with their shareholders.

  

Commonwealth Bank	First strike. Ian Narev, CEO of CommBank saw his LTI grant withdrawn and 50.91% of voted stock opposed the remuneration report.
CSL	First strike. 26% voted against the remuneration report, 27.25% against the CEO’s  Long Term Incentive grant and 33.82% against the proposed rise in the fee cap for directors from $3M to $4M.
Cabcharge	46% voted against the re-election of Donald McMichael after the Board reversed his promised retirement and failed to source new directors.
LendLease	Withdrew proposed new constitution after investor rejection of proposals.
Carsales.com	First strike. 54.8% voted against the remuneration report.
Goodman Group	First strike. 39.94 voted against the remuneration report as the pay for the CEO with $18m incentive was considered too high.
Sims Group	First strike. 31.7% voted against the remuneration report and proposed constitutional changes.
News Ltd/ 21st Century Fox	First strike. 31.1% voted against the remuneration report or 63.7% if the Board directors votes are excluded.

Executive Remuneration: Should directors have a stake in the company ?

One of the much vexed questions which arises with Executive remuneration particularly with Chief Executives, Board Chairs and Directors is how much of a stake in terms of shares/equity should these people hold in the companies which they govern ?  This is particularly relevant for underperforming companies where directors receive high fees but own little or no shares. This becomes all too transparent when a corporation undertakes risky debt financed acquisitions or material business changes which leave shareholders with less value, but directors are unaffected as they have no shares which can be affected. In contrast, engineering company UGL actually issues shares to directors which make up 30% of their fees. The Chair of the Board of Coca-Cola Amatil owns shares in his company worth 11 times his directors fee yet the Board Chair of Spark Infrastructure paid a fee of $245K in 2012 has no shares in that company.

The Australian Shareholders Association undertook research on the issue of shareholdings and gathered data on the 64 independent non-executive chairs of Boards in Australia's top 100 companies. A snapshot of some of the information is below and shows the numbers of share owned, their market value and the level of director's fee paid to the Chairs. Clearly some chairs have little stake in their companies whilst others have committed sizeable amounts of investment.

 

Company	Shares owned	$ Value	Latest $ fee
Spark Infrastructure	0	0	$ 245,000
Fairfax Media	99,206	$   48,611	$ 432,730
Westpac	16,039	$ 449,092	$ 677,464
Woodside Petroleum	20,000	$ 700,200	$ 751,771
Adelaide Brighton	4,739	$   15,638	$ 269,178
Telstra	140,000	$ 653,800	$ 684,441
Perpetual	2,431	$   84,477	$ 484,275
Tabcorp	34,292	$ 102,535	$ 449,625
ASX Ltd	3,825	$ 127,181	$ 326,694
Aust Found Invest Co	2,444,439	$13,077,525	$ 150,000

Executive Remuneration - pay for performance, the myth and the reality

With the Annual General Meeting season well underway in Australia, the issue of Chief Executive and senior executive remuneration again comes into the spotlight for individual shareholders and institutional investors alike. Despite constant statements from remuneration advisers and optimistic sounds from boards, the reality is that paying the CEO more and providing extraordinary pay packages does not have any relationship to financial results for shareholders.

Investment bank, CLSA examined the executive pay of Australia's top 200 companies plotting their pay in comparison to shareholder returns. The exercise demonstrated that there was no relationship whatsoever. The only relationship which was revealed was the size of the salary often equalled the size of the company - ie big companies paid more but it made no difference to their performance. So where does this leave investors including those who have these 200 top companies in their superannuation accounts ? Certainly the need to exert greater upwards pressure on performance and downwards leverage on disproportionately generous remuneration has never seemed more justified.

Executive salaries - where greed is not good

With the continuing and argueably expected poor economic conditions worldwide, the focus again has come onto the issue of executive and Board pay given its' scale and magnitude. The various rounds of Annual General Meetings of listed companies means that share/stockholders are presented with remuneration reports detailing the various levels of base pay, bonuses and share options.  A snapshot from Annual Reports reveals the data for CEOs of major Australian Corporations:

• ANZ Bank: $10.86M
• BHP Billiton: $10.84M
• Commonwealth Bank: $8.64M
• Crown: $7.71M
• Macquarie Group: $8.69M
• National Australia Bank: $7.73M
• Rio Tinto: $12.75M
• Westpac: $9.59M
• Woodside: $7.77M

Non executive Board directors of listed companies typically can expect between $200K to $300K in directors fees per company together with share options. But how realistic are these pay levels if the returns to shareholders are stagnant at best or most likely falling at worst (apart from the mining boom in Australia) ?

Turning Wall Street ?

US President Barack Obama has unveiled a sweeping series of measures aimed at checking the behaviour of banks and creating pressures against high risk financial transactions and deals. The proposals which are touted as the biggest regulatory crackdown on banks since the 1930s, include limitations on the size of institutions and barring the most cavalier trading practices.

According to media reports, Obama stated “We should no longer allow banks to stray too far from their central mission of serving their customers,” “My resolve to reform the system is only strengthened when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low and cannot refund taxpayers for the bailout. If these folks want a fight, it’s a fight I’m ready to have. Never again will the American taxpayer be held hostage by a bank that is too big to fail.”

Obama stated that Wall Street banks must: halt “proprietary trading”, where banks risk huge sums predicting the outcome of future moves in the price of commodities such as oil; operate more cautiously and have more available funds; not become too large by limiting the amount of ordinary banking business they can undertake.

Wall Street has certainly demonstrated the degree of risk for the global community when an unfettered market is allowed to trade with unfettered greed, however Obama faces considerable barriers to effecting change needed in the World's largest capital markets. Risky deals and large executive remuneration has been the practice for many years and turning around such a culture, which also influences the rest of the international finance community, is a mammoth almost impossible task.

When greed is not good

Documentary film maker Michael Moore has focussed on the capitalist system itself in his latest film offering 'Capitalism a love story'. In his film Moore explores some of the more unsavoury aspects of capitalism and focusses strongly on the financial markets, merchant banks and Wall Street in general. As with all Michael Moore films, he hides no punches and preaches his sermons from the front lobbies of many of the giants of American corporates. Nonetheless as with all Moore films he brings to life the exact human toll and presents the human face in the community often lost when discussing market performance, profit and the imaginery gains and losses in the synthetic securities markets. Could anyone imagine a corporate employer taking out a life insurance policy on an employee so the company benefits if the employee dies but the surviving family members do not?

Executive Salaries

The current world economic downturn again brings into sharp relief the level of remuneration of senior executive of large companies or corporations particularly where remuneration levels remain high when employees are being made redundant and or the corporation has suffered significant trading and business losses. American Sol Trujillo's remuneration for the Australian telecommunications company, Telstra is one such example. Trujillo's remuneration package in 2006 was $8.71M, then in 2007 it was $11.7M climbing to $13.4M in 2008 and he will leave the company mid year with a reported more than $30M payout. Telstra's share price has fallen during this period, it was ruled out of the tender for the national broadband network and has made redundant thousands of employees. Where is the logic of all this?

Yet this is minor compared with the stories coming out of Wall Street where financial institutions are receiving extraordinary bailouts courtesy of the American taxpayer, yet many of those responsible for the debt crisis have yet to be brought to account and have retained their massive earnings.

Opinion - Economic stimulus packages

The question of economic stimulus packages is problematic in the Western economies. Will the availability of large sums of public money to bail out the private sector be enough? Indeed providing larger payments in various benefits to increase consumer spending is questionable when the underlying financial institutions are either reluctant or unable to provide the level of business lending to provide economic growth.

Also the question remains whether the banks and other financial institutions have actually learnt anything from this situation or continue to believe (behind the scenes) that their actions in lending practices and selling dubious debt instruments into the market made any commercial sense other than greed. The bonus system used for the finance sector encouraged that behaviour. In that sense the Wall Street Bull might better be portrayed as the Wall Street goat.