Stephen Mayne on executive pay

Shareholder activist Stephen Mayne has put his views on the Productivity Commission's proposed changes to executive pay up on the ABC's The Drum website, and I reckon it's worth a read. He talks a bit about proposals that have received little media attention, such as banning executives from voting on resolutions over their own remuneration reports or that super funds must now disclose how they vote on remuneration reports.

I liked two snippets from the article enough that I thought they were worth repeating:

"...since when has the basic democratic principle of majority rule been a bad thing? If 50% of the voting shares support an external candidate, they should be on the board."

And:

"...that is the heart of the problem. If boards feel their tenure is under no threat from shareholders they will continue to behave recklessly through value-destroying ego-driven takeovers and excessive executive pay deals."

Executive pay reforms

The Productivity Commission has released its report on executive pay, which strengthens the power of shareholders to run their company and increases the accountability, transparency and independence of directors. Details of changes include:

1. The “no vacancy” rule is to be eliminated. This currently allows boards of directors, rather than shareholders, to arbitrarily set the size of the board. In past candidates could receive a “for” vote of 50% but fail to be elected because there were only a limited number of vacancies. In such cases only those with the highest “for” vote (generally board endorsed candidates) are elected. This is a good reform as selecting directors should be left to shareholders, not the directors themselves.
2. Remuneration reports must include a Plain English Summary, the Remuneration Committee cannot have any executives of ASX 300 companies on it and use of remuneration consultants is to be “overhauled”. Remuneration reports are becoming very complicated and the Australian Shareholder’s Association has opposed remuneration reports just for being too complex. If executives cannot understand the incentive structure then it reduces its ability to act as an incentive. Strengthening independence on the remuneration committee is also a good move. On remuneration consultants, I’ll wait until more details are released.
3. The proposed “two strikes” rule, where a 25% “against” vote on the remuneration report for 2 consecutive years will require all directors to face re-election, has been weakened. A majority of shareholders will now be required to pass a resolution before moving to a spill. This was a result of lobbying by the Business Council of Australia, who rightly pointed out that as it stood this rule gave control to a minority of shareholders. I think this is irrelevant, as a majority would have to vote against any director to vote them out, and is more a way for the BCA to save face.

A number of changes were not made:

1. A salary cap was rejected as impractical. This is correct, with this change being pushed by unions and their politics of envy rather than shareholders. Increasing accountability and shareholder power is a better approach, as this allows pay to be linked to performance. And recent AGMs have demonstrated that shareholders are very willing to oppose outrageous pay when the executives are not performing.
2. No quotas for women directors will be set. A number of European countries have a similar policy in place. While true that directors are an old boys club, the problem is the old, not the boys. As with the salary cap, this is not a practical solution as it doesn’t tackle the underlying problem. Reforms such as removing the no vacancy rule are a better way of getting qualified candidates (including women) on boards.
3. The chairman is still automatically given undirected proxies if shareholders do not nominate a proxy. Chairmen should be allowed to hold proxies, but currently shareholders who sign their voting form and send it back give their proxies to the chairman by default, even though they don’t indicate it, effectively giving power to the board and taking it from shareholders. As with the no vacancy rule, this should be eliminated, or at the very least chairmen should vote undirected proxies in line with how shareholders on the floor vote.

Overall these are good changes. Anything that gives more power to shareholders, the people who own the company, can only be good for their interests.

Remuneration report resolutions - An overview

One of the changes introduced as part of the then Howard Government's corporate law reforms, commonly known as CLERP 9, was the introduction of a non-binding resolution on executive remuneration to be put forward to shareholders at each year's AGM. The new rules regarding executive remuneration, similar to ones previously introduced in the UK in 2002 and soon to be introduced into the US by the Obama Administration, came into effect in mid-2004, affecting AGMs from mid-2005 onwards.

The non-binding nature of the resolutions was both important and key to their success. As these reports present what has already happened and not a proposal for future executive pay, it is not feasible to allow shareholders a binding vote (as has been suggested by opposition leader Malcolm Turnbull). Nor does voting it down actually put forward any alternative proposals. But what it does do is act as a measure of shareholder approval, and means that even a strong minority vote against it can send a strong signal to the board.

It also appears that shareholders have not abused the resolutions. In the 5 years since it was implemented, only 7 times has a remuneration report failed to receive a 50% for vote. These companies were: Novogen, Telstra, AGL, Valad Property Group, Transurban, Boral and Wesfarmers. Over the next week or two I'm hoping to take a closer look at each of these individual cases.

For some extra reading on the issue, take a look at "The biggest votes against remuneration reports" by the Mayne Report and "Calls for Canberra to rein in executive pay packets" by the 7.30 Report.

The only finance report worth watching

The short answer is Alan Kohler on the ABC. Read on for the long answer:

As a child I used to watch A Current Affair, with its stories on saving money on the groceries, dodgy builders and weight loss miracles, and just assumed that this is what current affairs was about. Then I began watching the 7.30 Report and realised what a real current affairs show was like.

The same thing happened with finance reports. The usual nightly news finance report was the presenter reading off the changes of the All Ordinaries, some share prices, exchange rates and commodities like gold or oil compared to their price the day before. Often they gave a reason like "the RBA cut interest rates" or "Telstra reported lower than expected earnings". The problem was, for the average person this meant little or nothing, and for the sophisticated investor it was too little information.

Then came Alan Kohler. His success was in being able to explain why things happened, in a way that both the ordinary person and the sophisticated investor both understood. And he looks at the longer term trends, rather than just the day to day movements, so that each night you walk away learning something new.

Check it out for yourself: Monday to Friday at around 7:15PM on ABC1 or in "Featured Media - Finance Report" on the right rail of the ABC Business News.

Nicholas Bolton - white knight or villain?

"There are no winners in the BrisConnections saga", that's how the Financial Review described the failed attempt to wind up Brisconnect at yesterday's EGM. The man who called the EGM, Nicholas Bolton, had previously been seen as a white night standing up for mum and dad shareholders. Then yesterday it became apparent that he had sold the voting rights to his 77.4 million units (about a fifth of the company) to Leighton Holdings subsidiary Thiess-John Holland for $4.5 million.

Opinions of Mr Bolton have since deteriorated. Shareholder View will admit to mistakenly considering him a white knight, in hindsight a misplaced view. Though Mr Bolton was merely acting in self interest (as everyone in this whole mess has been, it should be noted), this should not suddenly make him an instant villain.

He did not sell his units, just the voting rights. He retains his liability, along with other unit holders. One Twitter post summed it up perfectly: "Is Nicholas Bolton the biggest knob-jockey in Australian Corporate history? Cuts a deal for $4.5m & now owes $127m!". And importantly, even if Mr Bolton had voted his stake to wind up Brisconnect, it would have only raised the for vote from 36% to 63%, still shy of the 75% needed to wind it up. In the end, the outcome would still be the same, but he was $4.5 million richer.

Given those options, who wouldn't have done the same?

The background on Brisconnect

The saga of Brisconnect has been a shambles that hopefully will never be repeated in Australia's investing community again. It all boils down to the partly-paid nature of Brisconnect's units (basically shares in Brisconnect). Investors purchased units for $1 each at the float, but also agreed to pay an additional $2 per unit at some point down the line. This is quite normal, and is how the recent Telstra share sales were done by the government.

Until two things happened. First, the business tanked, and the unit price went down with it. Down to one tenth of a cent. Some keen investors saw this and thought it looked like a bargain. Which led to the second problem - they were not told of the $2 liability attached to each unit. Unlike the buyers at the float, there was no prospectus to warn them, nor do online brokers give you a little warning when it flashes the brokerage costs and transaction details before making a bid. The result was mum and dad investors buying $1,000 in Brisconnect and taking on a $2 million liability with it.

Two things would have prevented this. The first is to make all partly-paid shares operate like Telstra did, if you don't pay the next instalment, you lose your stake. The second is to require all buyers to be warned of how much additional liability is attached to their purchase. The good news: ASIC and the ASX have introduced the latter. The bad news: this won't save the many Brisconnect investors who were caught unawares.