Letters of the Week

Finding a unified SMSF voice, ETFs and Westpac subordinated notes.

A call to action

The reporting season is upon us again, against a backdrop of pretty ordinary shareholder and super fund returns. Will Australia follow Europe’s ‘Shareholder Spring’?

From my perspective, as a retail investor and SMSF trustee, nothing much has changed since last year. We can probably expect more self-congratulatory directors’ reports and a string of remuneration reports that obfuscate the real outcomes and seek to justify, through verbal gymnastics, more fantasy-land bonuses and other executive pay.

No serious investors, retail or institutional, begrudge paying good basic salaries to attract the right people for the job. However, bonuses should be directly related to total shareholder return.

Sadly, what we are now seeing is a collective of CEOs who seem only to be interested in their jobs if they can earn entrepreneurial returns for simply doing their job, as an employee, with no skin in the game other than shares gifted to them as part of their bonuses.

Not only are shareholders, in practice, unaware of how the bonus structures are set, but we are usually in the dark as to how that translates into reality. Remuneration reports do not always indicate the actual payments in subsequent years following the “achievement” of hurdles, so that shareholders can see why bonuses have been paid.

For example, ANZ only reports on the CEOs potential earnings authorised by the remuneration committee for the current year, but not how this is finally paid or what the subsequent value was of option bonuses paid. CBA directors used their over-riding discretion in 2011 to allow for a bonus to be paid despite a customer service hurdle not being met. This diminishes the last vestiges of authority from shareholders.

In most businesses, the owners have the final say in wage negotiations. However, in public companies, the remuneration committees, composed of directors, determine their own packages. This is clearly a conflict of interest. In the interest of shareholders – and good corporate governance – there needs to be inclusion of independent “owner representation” on remuneration committees. It clearly is nonsensical to suggest that non-executive directors represent shareholders in these deliberations when clearly they have vested interests in the outcomes.

Similarly, directors are not, in reality, appointed by shareholders and absolute power effectively rests with the board. Again, in the interests of transparency of process, long-term independent shareholders should be included in the selection and review process otherwise the perception of closed shops and protection of underperforming or over-stretched directors will continue to haunt us.

SMSF trustees now control a meaningful percentage of the investment market and we are the elephant in the room. But without a collective voice we will continue to be disenfranchised and marginalized, not to mention ignored by governments as they change super rules. As a collective we can wrest back some control and recognition. There are 450,000 of us out there alone, doing our best. It is time we got ourselves organized into a truly independent, cohesive industry association! We have a lot of common ground on a broad range of relevant issues. To kick-start this activity I would appreciate comments and initial expressions of interest to leigh.kealton@exandpro.com.au.

If we do nothing, next year will be the same! And the next.

L Kealton

ETFs and offers

Could you explain the effects of share offers on the value of ETFs, as opposed to holding the specific equity?

C Edmonds

Editor’s response: ETFs are basically securities that reference a basket of securities funds hold in a special kind of bank. Because each of these are different in make-up, it’s hard to generalise about effects – two ETFs tracking the same index can perform differently. Many ETFs are on “cap-weighted” indices, so any change in the market capitalisation of a company would affect how much it contributes to the ETF because the funds maintain relative weightings, and that in turn will affect how much its individual performance will affect the ETF.

Westpac notes

I wonder if it might be possible to get a small story or comment about the Westpac subordinated notes offer that opened today, July 23? Is it a good time to buy this sort of thing and how good is this offer compared to others around this time?

P Mitchell

It would be appreciated if someone could give a comment on the Westpac Subordinated Notes Offer. The offer opens on 23 July 2012.

F Gutridge

Editor’s response: You should seek professional advice to find out if this product is right for you, but briefly: the Westpac notes are subordinated debt, with a 10-year fixed maturity to August 2022 and an option for Westpac to redeem after 5 years, $100 each, and are not convertible into ordinary shares. They rank above preference shares and perpetual floating rate notes. They will pay quarterly at 2.75% plus 90-day BBSW, which is currently at about 3.5%. There is no general retail offer, but retail investors can buy through a syndicate broker until August 22. On the face of it, the notes appear to be most comparable to the recent NABHB issue, which was also 10-year maturity subordinated debt at 2.75% plus 90-day BBSW.

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