Murray's toxic attack on Telstra

If there had been any doubts about the nature of the relationship between Telstra and its biggest shareholder, the Future Fund, today's annual meeting dispelled them. It is poisonous.

Intrigued by the size of the "against" vote on every resolution that was put to the meeting, shareholder activist Stephen Mayne asked Telstra's chairman, Catherine Livingstone, whether the Future Fund had voted its 10 per cent shareholding against them. She confirmed that it had.

Subsequently the fund confirmed that it had voted against all three resolutions put to the meeting, saying the decision to do so was based on its voting policy and principles that were designed to protect and enhance shareholder value.

It said its board of guardians believed Telstra would benefit from increasing the level of telecommunications experience among its non-executive directors, particularly given the very significant changes in Telstra's operations that would have a lasting impact on shareholder value.

The fund also complained about Telstra's remuneration policies, saying there was inadequate detail around how the returns from its 'Project New' investment program would be measured. It was also was concerned about the use of free cash flow as a hurdle for the long term incentive plan while the company was negotiating payments from NBN Co and that there was limited clarity on how this approach would align remuneration to the creation of shareholder value.

At present four of the 11 Telstra directors, including CEO David Thodey and CFO John Stanhope, have telco and/or technology backgrounds. Chairman Catherine Livingstone has had 10 years on the Telstra board while John Stocker, a former chief scientist and CEO of CSIRO, has been on the board 14 years. Both of them presumably have some understanding of the sector.

Mayne asked Livingstone whether any of the governance advisory groups had recommended institutional shareholders vote against the remuneration report – as they have in recent years. She said they had recommended voting in favour of the report.

It has been apparent for some time that there were tensions in the relationship between the fund, and particularly its chairman, former Commonwealth Bank chief executive David Murray, and Telstra.

Indeed, Murray is credited with playing a significant role in destabilising the Telstra board and forcing the departure of former chief executive Sol Trujillo and his chairman, Donald McGauchie.

Subsequently he has complained about the lack of information the fund receives from Telstra, in particular the details of its in-principle $11 billion deal with the Federal Government and NBN Co to provide access to its infrastructure and customers as the national broadband network is rolled out.

Telstra, of course, is still negotiating the detail of that deal and in any event can't provide special treatment and privileged access to market-sensitive information for the Future Fund. It has said that if there is a final binding deal struck it will provide the full detail of the agreement to its shareholders, along with an independent expert's report, and allow them to vote on it.

Murray's willingness to complain publicly about Telstra and its unwillingness to provide the fund special treatment has annoyed and unsettled Telstra and the latest confrontation is unlikely to improve the relationship.

That relationship has been further damaged by the fund's decision to sell down its shareholding into an already falling market for Telstra shares. The fund revealed last month that it had sold 113.6 million shares for about $300 million, a disclosure that triggered another step down in the already beleaguered Telstra share price.

The fund has made it clear it wants to reduce that holding further "in an orderly manner over the medium term."

There are suggestions that Murray's aggression towards Telstra – which hasn't exactly helped the value of the fund's shareholdings – played a role in the decision of the fund's inaugural general manager, Paul Costello, to announce his resignation. Costello, the fund's first employee, will leave the organisation at the end of this year.

It may not have been the only factor – Murray can be assertive and abrasive – but the continual attacks on the fund's biggest single investment wouldn't have been well received by those most immediately responsible for the fund's performance.

Now, it appears, the fund has informally declared war on Telstra, even to the point of voting against relatively uncontroversial changes to its constitution and the appointment of a new director, Dr Nora Scheinkestel, who bears no responsibility for Telstra's past.

The fund, of course, expresses it differently, saying that the Board of Guardians would continue to "engage constructively" with Telstra and exercise its ownership rights to "enhance shareholder value."

On the evidence so far the fund's "constructive engagement" hasn't helped Telstra or the value of the fund. The latest intervention and the prospect of more collisions between the embattled company and its biggest shareholder are unlikely to be any more helpful or value-accretive.