InvestSMART

CEOs not enjoying the payback from shareholders with hands on power

THERE is no coincidence that the Occupy Wall Street protest against income disparity is spreading like wildfire throughout the world and arrived in Sydney over the weekend as protesters gathered outside the Reserve Bank of Australia to make a stand against corporate excess.

THERE is no coincidence that the Occupy Wall Street protest against income disparity is spreading like wildfire throughout the world and arrived in Sydney over the weekend as protesters gathered outside the Reserve Bank of Australia to make a stand against corporate excess.

In Australia it coincides with the start of annual general meeting season, where shareholders finally get to vote whether to accept or reject proposed executive salary packages. With headlines such as "Qantas bosses' salary up $5 million", "Banks' pay practices in spotlight", "Corporate fat cats cash in" and "Leighton's $30 million man", the issue of pay was always going to be a corker this year.

And unlike previous years, shareholders finally get to have some bite. It marks the first year the new "two strikes" rule applies, which means if 25 per cent of shareholders reject two consecutive remuneration reports, a resolution is automatically put to dump the board, and it will pass if supported by 50 per cent of votes. The company would then have 90 days to hold another meeting to have a full board re-election.

The mood and new powers of shareholders has hit a raw nerve with directors, who last week released a report through their lobby group, the Australian Institute of Company Directors, trying to discredit proxy advisers whose job it is to make recommendations on how shareholders should vote on things including executive pay packages at AGMs. The report was launched by company director Don Argus, who inflamed the situation by telling investors that if they don't like executive pay levels and big bonuses, "they can sell the shares it's as simple as that".

But the renewed focus on executive pay and the anxiety it has produced among directors is a huge positive, according to the architect of the two-strikes policy, Professor Allan Fels, the co-author of the Productivity Commission report on executive pay. "Last week's debate highlights the importance of the new law and it seems to have caused some anxiety, which is a good thing given there are still a significant number of excessive pay outcomes," he said. On the two-strikes rule, Fels is even less coy. "It is an extremely well balanced and some would say unduly soft law that sensibly puts pressure on boards to do the job well and better than they did in the past."

For Fels, the spat between proxy advisers and the institute keeps the debate alive. But Argus's comments, well, they were just plain wrong. "Most shareholders would resent having to incur significant costs selling shares. It is better to put more pressure on boards to manage pay properly," Fels said. "And, in any case, a significant number of shareholders in index funds can't sell shares."

The brutal reality is it is incumbent on boards to ensure they do the right thing by the people who own the company the shareholders when it comes to remunerating themselves and senior executives. Shareholders should have the power to do something about it, rather than having to dump their shares in protest.

In the case of Qantas, its shareholders would lose a fortune if they dumped the stock to protest the fact that Qantas chief Alan Joyce received a 71 per cent pay rise to $5 million at a time when it had to suspend dividend payments and is embroiled in industrial disputes with its workforce over its demand for small pay increases.

There is also the issue of Godzilla termination payouts, including Leighton's massive payout for Wal King that could be as high as $30 million, or Foster's recently appointed boss John Pollaers, who stands to get a termination fee as well as payment for the 960,000 shares the company has proposed he be granted under its long-term incentive scheme, which is worth at least $5 million.

Investors have had a gutful of watching their share prices tank, companies putting out warnings of profit declines, dividend cuts and too much debt but still getting big pay packets.

Most of all shareholders are fed up with the boards' flagrant disregard of the interests of shareholders the people for whom they are supposed to be acting. For years, shareholders had a non-binding vote when it came to remuneration reports, and as such most companies treated their votes with contempt. It says something about such a system. Rubber bullets bounce.

While the brouhaha gathered steam, independent senator Nick Xenophon and the Australian Shareholders Association promoted a plan to force the nation's leading companies to divulge their average or median staff wage every year. Research released last month confirmed there has been a huge jump in CEO remuneration over the past decade, far in excess of share price gains, and far in excess of the increase in the average weekly wage.

The Australian Council of Superannuation Investors' report found that the median CEO fixed pay in the top 100 Australian companies rose 133 per cent and the median bonus increased 190 per cent in the decade to 2010. That far outstripped the 31 per cent increase in the S&P/ASX 100 Index over the period.

With all this going on, it is no surprise that many directors are going into a meltdown and bracing for some big protest votes against board reappointments and excessive pay.

The majority of boards do the right thing but there are too many examples of companies acting in the interests of the club rather than shareholders. One hopes the new two-strikes rule will result in more communication with shareholders to bring shareholder returns and executive pay into alignment.

aferguson@fairfaxmedia.com.au


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