Break a leg
By Ruth Williams | smh.com.au | 13 October
Corporations, it was once famously said, have no bodies to kick and no souls to damn. But as the annual general meeting season gears up, that might not stop retail shareholders trying.
This year's round of meetings is tipped to be a stormy one for some companies, as retail shareholders voice their anger on the simmering issue of remuneration and on corporate capital raisings that, in some cases, delivered generous discounts to big shareholders while diluting the holdings of the small.
Executive pay has long been a controversial and widely debated topic, but rarely has it been as centre stage as it is now.
And although many companies have frozen salaries and cut bonuses this year, more than a few have raised eyebrows for remuneration structures and termination pay-outs that could be perceived as overly generous.
Coupled with the increasing willingness of all shareholders to voice their disapproval by voting against directors' re-election, the scene is set for a feisty couple of months. "Some retail shareholders are quite cynical about the way they have been treated, and quite rightly," says Martin Lawrence, of proxy adviser RiskMetrics.
"You are going to see some very stormy AGMs." Retail shareholders are seething over a long list of dilutionary share placements that gave big slabs of discounted equity to institutions.
According to the Australian Securities Exchange, a record $90 billion was raised in 2008-09. But much of it was through discounted share placements with institutions rather than the traditional pro-rata entitlement offer, so shareholders not favoured were diluted.
And when retail shareholders were given the chance to take part in subsequent share purchase plans, allocations were capped and in some cases scaled back after a huge take-up.
Some companies, such as ANZ, chose to accept all offers. Some, such as National Australia Bank, did not. It did not help that shareholders were already faced with dividend cuts and lower profits.
Companies have defended their offering structures, saying share placements were quick, efficient and relatively safe in volatile markets.
But some shareholders will take some convincing. "Shareholders have often seen their holdings diluted, and they're been subjected to cutbacks in the relatively small amount that they were begrudgingly given by some companies in the first place," says Australian Shareholders Association (ASA) chairwoman Helen Dent.
"'That's an area where some shareholders feel very rightly aggrieved." But although boards may encounter some fireworks over capital raisings in the AGM question-and-answer sessions, outrage over the raisings is unlikely to be reflected in big protest votes on resolutions.
Remuneration is another matter, and it has already become a flashpoint. Yesterday, RiskMetrics signalled its intention to recommend against Qantas' remuneration report — the section of the annual report that sets out the pay given to executives and directors.
The remuneration report is subject to a non-binding vote by shareholders — a tool that an increasing number of institutional and retail shareholders alike have been prepared to wield.
The airline's annual meeting in Perth next week may be the first to feature a big "no" vote. It would hardly be a surprise, given the reaction to the $10.7 million "golden goodbye" handed to former chief executive Geoff Dixon after a year when Qantas slashed dividends and 1750 jobs.
Last year was a watershed for protest votes on remuneration — among top 200 companies, a record number of eight "no" votes of more than 50 per cent were recorded, and a long list of other companies received significant negative votes.
This year? The community's focus on executive pay has become even more heightened, especially with the release of the Productivity Commission's draft report on the topic last week.
And in the past month, the steady stream of corporate annual reports lodged with the Australian Securities Exchange have been picked up and scrutinised to an unprecedented extent.
But it remains to be seen whether the wider community anger about executive pay flows through into another record-breaking number of "no" votes.
The ASA, which represents retail shareholders, says it will not take a deliberately adversarial approach. But it expects some "substantial" no votes where pay has gone up and shareholder returns have done the opposite.
"Shareholders have always looked closely at the way in which remuneration is structured, but given what we're just been through, you can expect them to look at it much more closely," Dent says.
Institutions and their advisers are also poised to vote against some remuneration reports, the RiskMetrics move on Qantas being the first example. But there may not be as many "no" votes as last year.
As Lawrence notes, many companies whose remuneration reports were slammed last year, such as Wesfarmers, "have done their best to try and address shareholder concerns".
But a few companies appear to have ignored the warning of last season. "Remuneration always remains an important issue — it's a litmus test available for shareholders," says Australian Council of Superannuation Investors (ACSI) executive officer Phil Spathis.
"Whether there's some correlation between pay and performance is the main issue."
Spathis and Dent say they are on the lookout for changes to how long-term incentives are structured — whether share-price hurdles have been revised down, for instance, or whether an executive who missed long-term incentive triggers was given short-term payments or "unexplained increases in base pay".
"I know that sounds cynical, but it does happen," Spathis says. Says Dent: "We need to look at the switching of money from long to short-term incentives, increasing base salaries, and retesting of the hurdles, which as far as we're concerned is entirely inappropriate.
Set a hurdle and stick by it, otherwise don't set it." The ASA has already signalled it will vote against remuneration reports at Suncorp Metway, Transurban and Ansell, but has endorsed that of Toll Holdings, which revised its long-term incentive plan after recording a substantial no vote last year.
But some are worried that shareholders will take an unfairly critical stance. Freehills partner Priscilla Bryans, who advises boards on remuneration reports and annual meetings, says the number of "protest" votes will depend on whether shareholders understand and accept that, in some cases, companies had good reasons to pay bonuses or benefits that may appear out of step.
"Even in a GFC [global financial crisis], there may be valid and entirely appropriate reasons to pay bonuses for last year," she says. "Short-term incentives and annual bonuses are often tied to non-financial hurdles, like completion of a project, occupational health and safety results, and environmental benchmarks."
As Bryans notes, several companies changed chief executives in the wake of the global financial crisis, meaning there will be equity grants under new contracts coming up for shareholder approval — along with votes on remuneration reports outlining the termination payments to the departed executive.
"There will be a few interesting remuneration report votes, just because of chief executives changing and termination payments that may or may not have been made," she says.
"Some of the 'no' votes will be as a result of legacy contracts struck during boom times when companies had a lot of competition for executive talent.
If an executive entered into a contract in the boom time, and is now entitled to the termination benefits under that contract, the company is committed to paying the sum – it's not a question of discretion."
Aside from remuneration reports, Bryans does not expect many other items of business to attract large "protest" votes. Few boards have proposed increases in their non-executive fee pools, for example, even though, as Bryans notes, there is a growing perception that some non-executive directors are underpaid.
ACSI, which advises superannuation funds about voting on corporate governance issues, noticed a rising trend of shareholder engagement last year.
Shareholder turnout at ASX100 company annual meetings was up to more than 55 per cent from less than 52 per cent in 2007, and for ASX100 companies, the average "no" vote on controversial resolutions — as judged by ACSI — sat at 27 per cent.
Last year was also notable for the number of directors whose election or re-election to a board was opposed by a large proportion of shareholders — often as punishment for issues at other companies.
The Allco Finance debacle dogged former director Barbara Ward, who suffered a 42 per cent vote against her election to the Qantas board late last year.
The ABC Learning failure helped persuade 34 per cent of Transurban shareholders that David Ryan was not suitable for a board seat there. And 27 per cent of MacMahon Group shareholders did not want Oz Minerals chairman Barry Cusack on the board.
Just as significant were the pre-emptive resignations. In April, Allco former chief executive David Clarke quit the AMP board rather than face defeat.
His move followed that of Meredith Hellicar, who quit the AMP board after the damaging James Hardie judgment.
The most high-profile director affected was corporate stalwart Sir Rod Eddington, who suffered a humiliatingly large vote against his re-election to the Rio Tinto board. The Allco fallout also cruelled Eddington's ambitions of becoming chairman of ANZ, which he relinquished after feedback from shareholders.
The big question now is whether that momentum will continue — whether shareholders big and small will keep flexing their muscles. Spathis says ACSI will continue to keep tabs on directors coming up for re-election whose CVs are marred by stints at failed or problematic companies.
"The obvious question is, what were the directors doing on their watch?" Spathis says. "If they are looking for re-election, we will endeavour to talk to them and engage with them and understand their side of the story."
Although many of the directors in question came up for re-election last year, Spathis says more "may well be in the pipeline. We know who they are, and when they do come up for re-election we will endeavour to talk with them."
The ASA will consider voting against directors' re-election if its pre-annual meeting talks with boards do not yield answers — especially on the capital raising issue. Such meetings often influence whether boards will have an amicable or acrimonious time.
"If we have concerns about a company's capital raising, we'll want to know why they've chosen that particular method that works against their own, on the whole, loyal retail shareholders," Dent says. "How we vote could well be reflected by what we are told by the board."
First published in the Age on October 10th.
First published by Smh.com.au on October 13 2009
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