Mind the information gap

David Hoare, the former chairman of what was Australia's most innovative financial institution BT Australia, has some sage advice for boards of directors trying to connect with disgruntled investors.

Hoare, who is the chairman of Principal Global Investors (Australia), says that companies need to fill the information vacuum between themselves and shareholders by sharing their medium term strategic plans.

At a time when chief executives are reluctant to give guidance about their earnings, Hoare says boards are making the mistake of allowing shareholders to rely on deduction, rather than the facts.

Hoare says it is time boards started telling shareholders and the broader market where they see themselves in two or three years' time and how they will put the value in place to bring that to successful fruition.

"I suspect that what the market has been asked to do now is to make decisions about primary and secondary investment on the basis of deduction rather than information direct from the company,” he says.

"I think the market really does want to know the metrics by which the management and the board judges the future of the company.

"I think there is a really big issue where boards can contribute a lot to how, when and the form of information that goes into the market place.”

His comments at the ASIC summer school on Monday night dovetailed with those made by John Stuckey, a senior advisor to McKinsey & Co and chairman of ASIC's external advisory panel.

Stuckey says boards need to change the structure of salary packages for chief executives to include a greater reliance on non-quantitative measures.

He says quantitative measures such as total shareholder return, share price relative to an index and share price relative to peers are often disconnected from the performance of the company.

CEOs have benefited from changes that have occurred across an entire industry or because of equity market increases, rather than any decisions they made.

At least half of all remuneration should be tied to the CEO's success in delivering on how the company is managed.

"What I would like to see is boards considering each several years, the CEO – senior executives and CEO saying this is what we want to pull off over the next few years,” he says.

Stuckey says this sort of discussion would not be about financial targets. Instead, it would be the CEO revealing plans to do something quite substantial such as change the culture of the company, or change a core system or build a decent IT system "without spending an enormous amount and getting nothing”.

Stuckey says the board would have to make a full proper assessment of the outcome of the plan put forward by the CEO before making decisions about executive pay.

Future Fund chairman David Murray says boards must be aware that they reserve the right to make a judgement about the performance of the CEO.

He agrees that assessment of a CEO's performance cannot be solely based on numbers.

"It's not just about the numbers because some of the financial engineers will outsmart you with the numbers,” he says.