Open season: shareholders put directors on notice
January 15, 2008
This story by Nick Lenaghan appeared in The Courier Mail on December 8, 2007.
Hardened by the credit crunch and recent stock market volatility, shareholders unleashed some of their own fireworks at this season's annual meetings.
Australian investors have thrown off a reputation for docility, particularly when it came to voting on executive payouts.
Former federal Liberal leader Andrew Peacock, now well into his third career as a company director, found this out the hard way when he fronted investors for the first time as the new chair of listed investment fund MFS.
Peacock told shareholders he considered himself ``extremely fortunate'' to have been invited to join the Gold Coast-based company, just as its profits, funds under management and market capitalisation were hitting record highs.
But the storm clouds quickly gathered over Peacock's good fortune when it came to voting on the company's remuneration report at the November 7 annual general meeting in Melbourne.
The vote on the report – which is not binding, but gives shareholders the opportunity to vent their anger or show support for executive pay structures – was passed on proxies with 114,000 in favour and 82,000 against.
What really got investors' attention was a resolution to issue 500,000 options to Peacock – the first time MFS had granted options to a non-executive director.
Almost 94,000 proxies were against the resolution, which eventually scraped through on 102,000 votes in favour.
But this embarrassing outcome was overshadowed by the events at Telstra's annual meeting on the same day.
Two-thirds of the telco's shareholders voted against its plans to boost the pay of senior executives and supremo Sol Trujillo.
The Telstra AGM was a watershed in how companies and their investors should engage. It also signalled the emergence of institutional investors as a force to be reckoned with.
Australia's new sovereign wealth fund, the Future Fund, with more than 16 per cent of Telstra stock, spoke out against the generosity extended to the telco's executives.
"A critical principle in remuneration is that there is clear alignment between long-term, equity-based executive reward and returns to shareholders,'' Future Fund chairman David Murray said.
"We believe this principle is not sufficiently evident in the Telstra arrangements.''
There were other cases of shareholder unrest this AGM season. The day after the Telstra upset, AGL Energy shareholders voted against the company's remuneration report, angered by a $5 million payout to dumped managing director Paul Anthony.
Meanwhile, Suncorp-Metway shareholders forced their board to admit to bungling incentive arrangements for its top managers. Suncorp-Metway chairman John Story acknowledged ``serious criticism'' of the scheme from some of the lender's large institutional shareholders.
"We accept that these matters were not well handled by us,'' Story said.
But the chairman's mea culpa was not enough to defuse the wrath of one retail investor.
"I would like the board to take into account how much is too much. I've had this discussion with you before, Mr chairman,'' the shareholder said.
"I just think it is time there was some stock taken of that by all of those companies in the top 50.
"Really, it's out of whack, isn't it? And you know it and all of these people in this audience know it too.''
While the legislative changes three years ago allowing the non-binding votes on remuneration reports were welcome, shareholder groups say there's more to be done.
A Senate committee is now looking into how to further improve shareholder engagement in how companies are run.
The Australian Shareholders Association, which has made a submission to the inquiry, says it is concerned by the significant rise in votes cast against remuneration reports.
ASA deputy chairman Stephen Matthews says that, while the increased level of engagement between companies and shareholders is a good thing, the rising ``against'' votes are not necessarily a positive sign.
"We need to see a lot more discussion, a lot more commentary from chairmen, from the Australian Institute of Company Directors, the Business Council of Australia and shareholders,'' he says.
"It's not working at the moment.
"With these very large `against' votes, it frustrates retail shareholders.
"People don't understand the concept of advisory or non-binding votes.''
ISS Proxy Australia played a key role in much of the voting this AGM season, by giving advice to institutional investors and super funds.
Co-founder Dean Paatsch says the rising proportion of ``against'' votes is a sign shareholders are becoming impatient over the slow progress by some companies in improving accountability.
"The untold story lies in the increasing dialogue between company directors and institutions around governance issues,'' Paatsch says. ``It's natural to focus on the miscreants, but a lot of companies have cleaned up their act on remuneration, and that's why the outliers stand out.''
Paatsch says there has been a steady increase in investor engagement since 2000, driven by the emergence of super funds as major players.
Super funds are today less likely to simply sell off recalcitrants, and are more interested in getting involved in governance issues.
"Funds management is a highly competitive game,'' he says. "Institutional shareholders are taking every opportunity they have to influence companies in the direction of long-term wealth creation.''
There are signs, too, that shareholders are getting tetchy about items other than remuneration reports.
Executives of fund manager Perpetual were grilled at its AGM over its investment in controversial timber firm Gunns.
Shareholder activist Stephen Mayne, who notched up about 15 AGMs this season, agrees investors showed some spirit this year – but not enough.
"The really big thing which is lacking is `against' votes on directors,'' Mayne says.
"That is the last great challenge for shareholder engagement.''
He also believes some of the barriers to shareholder resolutions should be removed and has made a recommendation to the Senate committee.
For some shareholders, however, it's still the little things that matter most.
One investor in Goodman Fielder, Australia's largest listed food company, patiently sat through a sobering forecast on what the rising cost of raw materials could do to his company's bottom line.
Brushing aside the fact Goodman Fielder produces milk for the New Zealand market only, the shareholder squared off with chief executive Peter Margin over the perennial problem of plastic milk containers that drip when they are opened.
Tongue firmly in cheek, Margin confirmed the technical word for the issue was "dribbling''. "That's a pretty good question and a major problem for all of us,'' Margin said.
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