ASX under the pump like never before
February 2, 2010
Dear Mayne Reporters (plus some extra ASIC execs and Big Four audit partners who will find this interesting),
Risk Metrics has really set the cat among the pigeons with its 21-page report to institutional clients spelling out in great detail how ASX Ltd has dropped the ball on corporate governance and now should be punished by investors with a protest vote against incumbent director Russell Aboud at the AGM on September 24.
Rather than tackling the detail of what the world's biggest and most powerful proxy advisory firm said, ASX could only hit back yesterday with this limp five paragraph press release. Mark Hawthorne summed up the thoughts of many in The Age today:
The ASX had better come up with some better evidence that it is doing its job. The best it can muster is to restate ASIC's annual assessment of the ASX's compliance.
"For the sixth consecutive year, ASIC gave ASX a clean bill of supervisory health, concluding that ASX is adequately supervising the market, and managing any conflicts between its commercial and supervisory operations," the ASX declared yesterday.
Sadly, the sentiment about town is that perennially under-staffed and under-funded ASIC would struggle to catch a cold, let a alone a crook.
Whilst targeting Aboud is controversial and many agree with John Durie in The Australian today that Trevor Rowe was the more suitable director on the ASX ballot to oppose, the bigger issue is that our monopoly stock exchange has blundered badly in recent times, damaging Australia's reputation by not upholding strong governance standards.
The AFR's Chanticleer columnist Alan Jury has today called the Risk Metrics approach "very worthwhile" because of the debate it has triggered. Unfortunately, it appears that the other reputable proxy advisory firm CGI Glass Lewis has opposed my candidacy and endorsed the two incumbents, despite apparently having serious concerns about the ASX as well.
Why the ABC chairman should quit ASX now
Long-serving ASX chairman and current ABC chairman Maurice Newman, a close mate of John Howard, has been the biggest single contributor to the problem with Australia's highly conflicted monopoly exchange. He drove the demutualisation of the ASX in 1998 and then for a long time denied it had any regulatory role at all.
Whilst compulsory super combined with the great credit and financial engineers boom to deliver 300-fold returns for the 606 stockbroker members who retained their shares earned from the original $25,000 membership, Newman was also the chairman who progressively let standards slip. For instance, how on earth did AWB get to be listed in Australia when the owners of the company could only appoint 2 of the 12 directors?
AWB fundamentally offended the one vote one value principle, but Maurice Newman and the ASX were happy to help its mates in the government who got them rich through the demutualisation.
Whilst Newman's replacement David Gonski has issues with his tax haven advice to Westfield boss Frank Lowy, at least he is a relative ASX board clean skin who will be able to drive reform once the 70-year-old Newman retires after the ASX AGM.
I asked Gonski at the Westfield AGM earlier this year who would be chairing proceedings on September 24 and he wasn't sure. Given that it will be a contentious day, surely it is not appropriate for Maurice Newman to control the debate and then promptly resign. If all was happy in the markets, a swansong AGM farewell would have been fine, but we're now dealing with serious issues and it has been Gonski who has apparently been doing the rounds with institutional investors and corporate governance groups.
If Gonski is the man for the future he should be in charge of the AGM and it would be easier for all concerned if Newman retired the day before and didn't even attend.
The ASIC reports into ASX
Whilst the ASX has claimed a clean bill of health from ASIC each year, there are plenty of criticisms in the fine print, especially in the most recent version.
After all, you don't suddenly have the first broker fail to settle in 24 years and then declare everything is perfect. Check out the ASIC reports for yourself:
latest report - July 2008
March 2006
July 2005
September 2004
first report - September 2003
In July 2004, ASIC and ASX signed this Memorandum of Understanding over market supervision, which clearly hasn't worked very well when you consider the lack of insider trading prosecutions and the bedlam of recent months.
And where has ASX been on director dealings? The whole issue was comprehensively explained by Greg Hoy in this story on The 7.30 Report a few months back.
Why hasn't Michael Sharpe resigned?
The AFR's Rear Window column today made some good points about the whole Babcock & Brown disaster which is at the core of governance problems within our market now that the world regards these Bermuda-registered, over-geared, opaque, listed infrastructure vehicles as something akin to the Wild West. Rear Window gossip columnist Andrew White explained the issue as follows:
As Russell Aboud could be excused for thinking, a better target for Risk Metrics's wrath might have been fellow ASX director Michael Sharpe, who has served on the market supervision board. Until recently Sharpe was also a director of Babcock & Brown, chairing the audit and risk committee. Gripes about the ASX's soft touch to B&B make up the bulk of Risk Metrics reasons for going after the board. He resigned from B&B last month for health reasons, although they don't appear to have been so severe as to force him off the ASX board.
I've been raising concerns about Sharpe ever since hearing from a very good source that as chairman of the Babcock & Brown audit committee, he had been involved in decisions that led to PwC being appointed as auditor to various Babcock listed satellite. This is a terrible look given that Sharpe maintains an office at PwC.
PwC has pocketed many millions more from these appallingly governed Babcock vehicles than the ASX has collected in listing fees. And I reckon they haven't done a very good job either.
PwC audit partner Marc Upcroft signed off on the latest Babcock & Brown Power accounts, which claims it has net assets of $1.4 billion after the modest write-downs that led to the $426 million net loss for 2007-08. Given that the market values the whole business at $105 million, which is more than the $106 million in fees that Babcock & Brown ripped out in 2007-08, investors begs to differ.
If you need a reminder about the scandal of Babcock & Brown Power with its still undisclosed and largely irrevocable 25 year management contract, check out Alan Kohler's strong column on Business Spectator last week. How an ASX director can be associated with such a debacle is hard to comprehend.
Exposing ASX for its rorted election process
I've also sent this edition to the new management team at ASIC because The Australian's John Durie today finally ventillated the issue known as the "no vacancy rort" when he wrote that "the vote at this (ASX) meeting seems rigged to block corporate gadfly Stephen Mayne from winning a seat".
The best way to demonstrate the rort is to look back at the voting results from my first tilt at the ASX board in 2000. It was statistically impossible to get elected because the ASX constitution gives the board the flexibility to pick any number to be the maximum, rather than allowing shareholders to decide within an overall minimum and maximum.
This is how the voting unfolded in 2000:
Max Fowles: 95.34% of directed proxies in favour, rising to 96.6% after poll
Michael Sharpe: 96.44% of directed proxies in favour, rising to 97.45% after poll
Catherine Walter: 95.61% of directed proxies favour, rising to 96.84% after poll
Stephen Mayne: 13.55% of directed proxies in favour, falling to 8.85% after poll.
So why did the vote of the incumbents rise in the poll, whereas I plunged from 13.55% to 8.85%? It's called undirected or open proxies and these largely get accumulated by the chairman when shareholders just sign the form and send it back without ticking all the boxes.
There were only 11.53 million directed proxies on my candidacy, but chairman Maurice Newman still felt it necessary to smash me back into single digits by using the 5.168 million open proxies in the poll.
Whilst having 20.5% of the final votes on Cathy Walter's election and 29.1% of the final votes on mine sitting in his back pocket as open proxies was comforting for Maurice Newman, the killer blow comes when you combine this with what's called the "no vacancy rort".
You see, in 2000 the ASX board decided there was no room on the board for the challenger. It was four candidates for three spots, so I had to knock off one of the incumbents.
If you run the numbers again assuming I got 100% of the directed proxies in favour, I still would have lost badly because Maurice would have deployed the 5.1 million open proxies against me to drag the final poll result down to just 69%. He then would have declared the other three elected with their typical high 90s result.
If you read this letter nominating for the ASX board in 2008, I was very forthright in urging them not to do the "no vacancy rort" again, using the following language:
In the interests of running a fair election, I strongly urge ASX Ltd to follow the lead of Telstra and declare there is a vacancy for an additional director if 50% of the shares voted support such a move. The practice of declaring there is no vacancy normally makes it statistically impossible for an outsider to get elected, even with 100% of the directed proxies in favour. I will protest loudly and publicly if ASX goes down this road, like it did when I ran for the board in 2000, 2001 and 2002.
Lo and behold, they've done it again - three candidates for just two spots. A humble 50% majority is not good enough, I have to knock off one of the incumbents.
BHP-Billiton show ASX how to run a fair election
Compare the lousy rorting effort by the ASX with BHP-Billiton, which replied to my recent board nomination with the following from company secretary Jane McAloon:
We can confirm that the resolutions regarding your candidature will be put as separate resolutions and passed if more than 50% of the votes cast are in favour of your election.
If it's good enough for the biggest company listed on the ASX, then why can't the ASX itself run a fair election and acknowledge the very simple principle that board size is a matter for shareholders, the owners of the business. Sadly, Risk Metrics completely ignored this issue in its otherwise comprehensive report.
Canvassing for votes
It will be a very busy couple of week leading into the ASX AGM now that Risk Metrics have "lobbed a grenade" by recommending against Russell Oboud, as Stephen Bartholomeusz described it on Business Spectator yesterday.
I spent an hour in Sydney yesterday looking through the list of ASX beneficial owners (after nominee companies have been stripped away) at the offices of Orient Capital and tomorrow afternoon will hopefully get to inspect the full share registry at Link Market Services in Melbourne. The time has come to start directly canvassing ASX shareholders to vote against the incumbents because that's the best way to put a rocket up the board on corporate governance.
And such a rocket would hopefully then lead to forced disclosure of all those Macquarie and Babcock management agreements, which is the subject of my "single issue" candidacy. Unfortunately, this platform has been rejected by both the big proxy advisers, even though I tried to make it a safe protest by also providing an undated letter of resignation that would be triggered as soon as the disclosure requirement was satisfied.
Despite having simultaneous conversations with representatives from Risk Metrics and CGI Glass Lewis about this strategy at the ACSI governance conference earlier in the year and receiving positive feedback, when it came to the crunch both groups have recommended against.
Russell Aboud should feel hard done by for being targeted when the simpler protest vote have been to vote for me, but Risk Metrics has instead picked a big fight with a largely innocent victim and it will be very interesting to see if its clients follow the recommendation.
Past experience has shown that institutions are happy to vote against pay resolutions, but they're reluctant to pick on individual directors when advised by the two proxy advisers. Come September 24 we'll know if things are different this time.
For more on the 2008 campaign to clean up the ASX, check out this website package.
That's all for now.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
Risk Metrics has really set the cat among the pigeons with its 21-page report to institutional clients spelling out in great detail how ASX Ltd has dropped the ball on corporate governance and now should be punished by investors with a protest vote against incumbent director Russell Aboud at the AGM on September 24.
Rather than tackling the detail of what the world's biggest and most powerful proxy advisory firm said, ASX could only hit back yesterday with this limp five paragraph press release. Mark Hawthorne summed up the thoughts of many in The Age today:
The ASX had better come up with some better evidence that it is doing its job. The best it can muster is to restate ASIC's annual assessment of the ASX's compliance.
"For the sixth consecutive year, ASIC gave ASX a clean bill of supervisory health, concluding that ASX is adequately supervising the market, and managing any conflicts between its commercial and supervisory operations," the ASX declared yesterday.
Sadly, the sentiment about town is that perennially under-staffed and under-funded ASIC would struggle to catch a cold, let a alone a crook.
Whilst targeting Aboud is controversial and many agree with John Durie in The Australian today that Trevor Rowe was the more suitable director on the ASX ballot to oppose, the bigger issue is that our monopoly stock exchange has blundered badly in recent times, damaging Australia's reputation by not upholding strong governance standards.
The AFR's Chanticleer columnist Alan Jury has today called the Risk Metrics approach "very worthwhile" because of the debate it has triggered. Unfortunately, it appears that the other reputable proxy advisory firm CGI Glass Lewis has opposed my candidacy and endorsed the two incumbents, despite apparently having serious concerns about the ASX as well.
Why the ABC chairman should quit ASX now
Long-serving ASX chairman and current ABC chairman Maurice Newman, a close mate of John Howard, has been the biggest single contributor to the problem with Australia's highly conflicted monopoly exchange. He drove the demutualisation of the ASX in 1998 and then for a long time denied it had any regulatory role at all.
Whilst compulsory super combined with the great credit and financial engineers boom to deliver 300-fold returns for the 606 stockbroker members who retained their shares earned from the original $25,000 membership, Newman was also the chairman who progressively let standards slip. For instance, how on earth did AWB get to be listed in Australia when the owners of the company could only appoint 2 of the 12 directors?
AWB fundamentally offended the one vote one value principle, but Maurice Newman and the ASX were happy to help its mates in the government who got them rich through the demutualisation.
Whilst Newman's replacement David Gonski has issues with his tax haven advice to Westfield boss Frank Lowy, at least he is a relative ASX board clean skin who will be able to drive reform once the 70-year-old Newman retires after the ASX AGM.
I asked Gonski at the Westfield AGM earlier this year who would be chairing proceedings on September 24 and he wasn't sure. Given that it will be a contentious day, surely it is not appropriate for Maurice Newman to control the debate and then promptly resign. If all was happy in the markets, a swansong AGM farewell would have been fine, but we're now dealing with serious issues and it has been Gonski who has apparently been doing the rounds with institutional investors and corporate governance groups.
If Gonski is the man for the future he should be in charge of the AGM and it would be easier for all concerned if Newman retired the day before and didn't even attend.
The ASIC reports into ASX
Whilst the ASX has claimed a clean bill of health from ASIC each year, there are plenty of criticisms in the fine print, especially in the most recent version.
After all, you don't suddenly have the first broker fail to settle in 24 years and then declare everything is perfect. Check out the ASIC reports for yourself:
latest report - July 2008
March 2006
July 2005
September 2004
first report - September 2003
In July 2004, ASIC and ASX signed this Memorandum of Understanding over market supervision, which clearly hasn't worked very well when you consider the lack of insider trading prosecutions and the bedlam of recent months.
And where has ASX been on director dealings? The whole issue was comprehensively explained by Greg Hoy in this story on The 7.30 Report a few months back.
Why hasn't Michael Sharpe resigned?
The AFR's Rear Window column today made some good points about the whole Babcock & Brown disaster which is at the core of governance problems within our market now that the world regards these Bermuda-registered, over-geared, opaque, listed infrastructure vehicles as something akin to the Wild West. Rear Window gossip columnist Andrew White explained the issue as follows:
As Russell Aboud could be excused for thinking, a better target for Risk Metrics's wrath might have been fellow ASX director Michael Sharpe, who has served on the market supervision board. Until recently Sharpe was also a director of Babcock & Brown, chairing the audit and risk committee. Gripes about the ASX's soft touch to B&B make up the bulk of Risk Metrics reasons for going after the board. He resigned from B&B last month for health reasons, although they don't appear to have been so severe as to force him off the ASX board.
I've been raising concerns about Sharpe ever since hearing from a very good source that as chairman of the Babcock & Brown audit committee, he had been involved in decisions that led to PwC being appointed as auditor to various Babcock listed satellite. This is a terrible look given that Sharpe maintains an office at PwC.
PwC has pocketed many millions more from these appallingly governed Babcock vehicles than the ASX has collected in listing fees. And I reckon they haven't done a very good job either.
PwC audit partner Marc Upcroft signed off on the latest Babcock & Brown Power accounts, which claims it has net assets of $1.4 billion after the modest write-downs that led to the $426 million net loss for 2007-08. Given that the market values the whole business at $105 million, which is more than the $106 million in fees that Babcock & Brown ripped out in 2007-08, investors begs to differ.
If you need a reminder about the scandal of Babcock & Brown Power with its still undisclosed and largely irrevocable 25 year management contract, check out Alan Kohler's strong column on Business Spectator last week. How an ASX director can be associated with such a debacle is hard to comprehend.
Exposing ASX for its rorted election process
I've also sent this edition to the new management team at ASIC because The Australian's John Durie today finally ventillated the issue known as the "no vacancy rort" when he wrote that "the vote at this (ASX) meeting seems rigged to block corporate gadfly Stephen Mayne from winning a seat".
The best way to demonstrate the rort is to look back at the voting results from my first tilt at the ASX board in 2000. It was statistically impossible to get elected because the ASX constitution gives the board the flexibility to pick any number to be the maximum, rather than allowing shareholders to decide within an overall minimum and maximum.
This is how the voting unfolded in 2000:
Max Fowles: 95.34% of directed proxies in favour, rising to 96.6% after poll
Michael Sharpe: 96.44% of directed proxies in favour, rising to 97.45% after poll
Catherine Walter: 95.61% of directed proxies favour, rising to 96.84% after poll
Stephen Mayne: 13.55% of directed proxies in favour, falling to 8.85% after poll.
So why did the vote of the incumbents rise in the poll, whereas I plunged from 13.55% to 8.85%? It's called undirected or open proxies and these largely get accumulated by the chairman when shareholders just sign the form and send it back without ticking all the boxes.
There were only 11.53 million directed proxies on my candidacy, but chairman Maurice Newman still felt it necessary to smash me back into single digits by using the 5.168 million open proxies in the poll.
Whilst having 20.5% of the final votes on Cathy Walter's election and 29.1% of the final votes on mine sitting in his back pocket as open proxies was comforting for Maurice Newman, the killer blow comes when you combine this with what's called the "no vacancy rort".
You see, in 2000 the ASX board decided there was no room on the board for the challenger. It was four candidates for three spots, so I had to knock off one of the incumbents.
If you run the numbers again assuming I got 100% of the directed proxies in favour, I still would have lost badly because Maurice would have deployed the 5.1 million open proxies against me to drag the final poll result down to just 69%. He then would have declared the other three elected with their typical high 90s result.
If you read this letter nominating for the ASX board in 2008, I was very forthright in urging them not to do the "no vacancy rort" again, using the following language:
In the interests of running a fair election, I strongly urge ASX Ltd to follow the lead of Telstra and declare there is a vacancy for an additional director if 50% of the shares voted support such a move. The practice of declaring there is no vacancy normally makes it statistically impossible for an outsider to get elected, even with 100% of the directed proxies in favour. I will protest loudly and publicly if ASX goes down this road, like it did when I ran for the board in 2000, 2001 and 2002.
Lo and behold, they've done it again - three candidates for just two spots. A humble 50% majority is not good enough, I have to knock off one of the incumbents.
BHP-Billiton show ASX how to run a fair election
Compare the lousy rorting effort by the ASX with BHP-Billiton, which replied to my recent board nomination with the following from company secretary Jane McAloon:
We can confirm that the resolutions regarding your candidature will be put as separate resolutions and passed if more than 50% of the votes cast are in favour of your election.
If it's good enough for the biggest company listed on the ASX, then why can't the ASX itself run a fair election and acknowledge the very simple principle that board size is a matter for shareholders, the owners of the business. Sadly, Risk Metrics completely ignored this issue in its otherwise comprehensive report.
Canvassing for votes
It will be a very busy couple of week leading into the ASX AGM now that Risk Metrics have "lobbed a grenade" by recommending against Russell Oboud, as Stephen Bartholomeusz described it on Business Spectator yesterday.
I spent an hour in Sydney yesterday looking through the list of ASX beneficial owners (after nominee companies have been stripped away) at the offices of Orient Capital and tomorrow afternoon will hopefully get to inspect the full share registry at Link Market Services in Melbourne. The time has come to start directly canvassing ASX shareholders to vote against the incumbents because that's the best way to put a rocket up the board on corporate governance.
And such a rocket would hopefully then lead to forced disclosure of all those Macquarie and Babcock management agreements, which is the subject of my "single issue" candidacy. Unfortunately, this platform has been rejected by both the big proxy advisers, even though I tried to make it a safe protest by also providing an undated letter of resignation that would be triggered as soon as the disclosure requirement was satisfied.
Despite having simultaneous conversations with representatives from Risk Metrics and CGI Glass Lewis about this strategy at the ACSI governance conference earlier in the year and receiving positive feedback, when it came to the crunch both groups have recommended against.
Russell Aboud should feel hard done by for being targeted when the simpler protest vote have been to vote for me, but Risk Metrics has instead picked a big fight with a largely innocent victim and it will be very interesting to see if its clients follow the recommendation.
Past experience has shown that institutions are happy to vote against pay resolutions, but they're reluctant to pick on individual directors when advised by the two proxy advisers. Come September 24 we'll know if things are different this time.
For more on the 2008 campaign to clean up the ASX, check out this website package.
That's all for now.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.