ACSI CEO Quarterly Update
March 2010
Dear Members,
ACSI held its last Committee of Management for 2010
on the 22 November followed by the AGM.
During the AGM, our speaker Attorney Darren Check
informed us of the outcomes of the Morrison versus
National Australia Bank case in the US and its impact on
shareholder rights. Essentially the rulings of this case
have now placed limitations on international
shareholders intending to use the US courts for actions
that occurred in the US by non US companies.
We are finishing the year on a high note with successful
engagements to cease the funding of cluster munitions
by Australian financial institutions and with Transpacific
looking for new board members after shareholders voted
off directors for the first time. Additionally, the Board
Effectiveness and Performance Research has been well
received and now provides us with a means to insist on
greater disclosure in this area. It is the view of many
experienced governance professionals that effective
board evaluation will lead to better performing boards so
ACSI will be pursuing this issue with vigour in 2011.
Our 2010 Annual Report will be distributed to members
and posted on the website by the end of the year.
ACSI Governance Guidelines Review
ACSI’s
Governance
Guidelines
for
Australian
Companies are a critical cornerstone of our engagement
and proxy voting work. To ensure that the guidelines
remain relevant to the evolving Australian corporate
th
governance landscape, a 4 revision will be released
before the mini-reporting season beginning in May 2011.
A sub-committee has been established for the review
and can include any member funds who wish to
contribute. If you would like to take part please contact
Dawn Loh by email at dloh@acsi.org.au.
UK Stewardship Code
After a request from one of our international members
RailPEN, ACSI has supported the new UK Stewardship
Code.
These actions can have a significant impact on the
quality and quantity of engagement with UK companies
and the UK Financial Reporting Council is encouraging
all institutional investors to report if and how they have
complied with the Code.
In supporting the Code, ACSI has requested our
members to contact their UK managers and request
compliance with the Code.
ACSI was also fortunate to host a special meeting for
our members and associates with Peter Montagnon,
Special Adviser to the FRC in relation to the Code whilst
he was visiting Australia.
ACSI Strategic Planning Day
Member representatives including Trustees, and staff,
will be invited to ACSI’s Strategic Planning Day being
held on Wednesday 16 February 2011. The feedback
obtained on the day will help us draft our Strategic Plan
for 2011 – 2014 so please save the date in your diary.
And now for those who like to catch-up on some reading
over summer, the ACSI staff are recommending the
following:
Ultimatum, M. Glass – a climate change thriller for our age
A Few right Thinking Men, S. Gentill - a mystery set in
1930’s Australia in the tension of the depression.
Delusions of Gender: The real science behind sex
differences, C. Fine – Debunks neuroscience assumptions
that hard-wired differences between male and female
brains are wrong, gender is all in the mind.
The Secret History, D. Tartt – a murder mystery
concerning six college students and how their study of the
classics alters their lives irreparably (a best-seller following
its publication in ’93).
The Crucible, A. Miller – An allegory about McCarthyism
set in Salem that is on Phil’s son’s VCE reading list but
topical in the age of Wikileaks.
The man who owns the News, M. Wolf – about Rupert
Murdoch (need I say more).
From all of us at ACSI, thank you for your continued
support and have a Merry Christmas!
The Code was introduced on 6 December and is
dependent on both asset owners and asset managers to
monitoring company performance and governance.
Ann Byrne
Chief Executive Officer
December Edition 2010
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Engagement Update
ACSI has completed 54 engagements for the year on a
range of issues including include sustainability reporting,
contentious voting resolutions, director independence,
executive remuneration and the Listing Rule 10.14
loophole.
Some recent engagement highlights include:
Cluster Bombs
ACSI and IFM engaged with ANZ and Colonial First State
to discuss their investment in and lending support of
companies associated with the manufacturing of cluster
bomb components. During the meeting, Colonial First
State confirmed that they no longer held investments in
Singapore Technologies, who is a company associated
with the manufacturing of a specific component of the
cluster bombs.
ANZ provide credit facilities to cluster bomb component
manufacturers Lockheed and L3 Communications.
Following our discussions, ANZ have since engaged with
both companies to ascertain what plans they have with
respect to future manufacture of containers/dispensers for
the bomblets. Both companies have now confirmed to
ANZ that they will cease any further manufacture of these
components at the end of the current contract cycle.
ANZ has also written to ACSI advising that it will tighten
its lending policies to the extent of banning outright any
loan facilitates or credit to companies that manufacture
cluster bombs.
Pay legislation
The Federal Government has finally released the draft
legislation introducing the recommendations of the
Productivity Commission on pay. ACSI had recently met
with the Parliamentary Secretary for Corporate
Governance, Hon. David Bradbury to urge them to press
ahead with the reforms to the law in this area. The
inevitable howls of the ‘sky falling in’ from the
management lobby have accompanied the last ditch effort
by some director and executive groups to dilute aspects
of the legislation. ACSI is on the public record for saying
that the bonus claw back provisions should be entrenched
in the Corporations Act and not in the ASX Corporate
Governance Principles.
Voting and Engagement Outcomes
Transpacific Industries Limited was the first ASX200
company in 2010 to have (board endorsed) incumbent
directors voted off the board.
The major issue at Transpacific were multi-million dollar
loans to senior executives made for undisclosed reasons.
ACSI was extremely concerned with these arrangements
given the potential to align the interests of five executives
with those of the major shareholders. It is still not clear on
what basis the company advanced funds to these
executives in the 2009 financial year – at a time when
Transpacific was itself under financial pressure – and why,
given the significant incentive each of the five executives has
to remain with the company until 2014, additional equity
grants are required for these individuals.
December Edition 2010
Outcome: Applying the policy approved by the May
Committee, ACSI recommended against two incumbent
directors (Graham Mulligan and Bruce Allan) at
Transpacific’s November AGM. These two directors were
subsequently voted off the board.
For the second year running, Transurban shareholders
have rejected the company’s remuneration report. A
proposed grant of performance awards to Chris Lynch
(who was paid $6 million last year) did not gain support
from shareholders. During the meeting, the board
indicated that it would pay Lynch a cash equivalent.
ACSI held two meetings with Transurban to discuss
ongoing remuneration issues and whilst ACSI noted that
the company had made several improvements to
remuneration during the year, our final recommendation
was against both the grant to Lynch and the remuneration
report. The primary issue which led to this
recommendation was the use of proportional EBITDA
performance measures for both short and long term
incentives.
Asciano lost $976 million in the last financial year, and
the spin-off of Toll has not paid a dividend to shareholders
for the last two years, yet CEO Mark Rowsthorn pocketed
$3.8 million and the 40% vote against Asciano’s
remuneration report follows the 32% against in 2008.
ACSI met with the company making it clear that the bonus
payments appeared out of line with the company’s
performance and signalled opposition to the $900,000
cash ‘retention’ bonus to be paid in 2011 ‘in lieu’ of
termination entitlements forfeited by Rowsthorn.
Paperlinx received a significant backlash from investors
with a 67% vote against the remuneration report. In the
lead up to the vote, ACSI spoke to the company which
had posted a $225 million loss and suffered a 20%
decline in the share price. ACSI noted the fact that
despite this, outgoing CEO Tom Park still received a
total package of $2.68 million (including a short-term
bonus of $962,235 for “excellent cash flow
management”). ACSI also engaged on Paperlinx’s
Sustainability Reporting practices, particularly the
company’s response to the Forest Footprint Disclosure
initiative.
Approximately 60% of shareholders voted against
Billabong’s remuneration report. One major reason
which lead ACSI to recommend against this proposal
was the fact that Billabong substantially increased the
bonus potential of its executive directors in the 2010
financial year due to the fact that long term incentives
granted in prior years with EPS growth hurdles were
unlikely to vest.
The chairman of Billabong, Ted Kunkel admitted that
“the major Institutions have sent us a wake up call”. He
also said that it was up to Billabong to present its
remuneration report in a very understandable form and
give our reasoning why we did adopt certain policies.”
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Toll Holdings - Shareholders emphatically rejected a
proposed constitutional change which would have made
it more difficult for non-board endorsed candidates to be
nominated by shareholders.
Boral on the introduction of a carbon price, board renewal,
and executive remuneration.
APN News & Media - Following ACSI’s engagement
with APN News & Media, the company has made
changes to improve the representation of independent
directors on the board. Independent non-executive
director John Harvey will join the board on January 1
2011 and affiliated directors Donald Buggy and Gavin
O’Reilly will step down.
Challenger on changes to the board, board performance
review processes, remuneration issues and the low level of
sustainability reporting.
Orica announced in December that it would not put
proposed Constitutional changes to the company annual
general meeting as a consequence of widespread
objections from shareholders. The resolution in question,
amongst other things would have made the hurdle for
shareholders to nominate directors more onerous.
Three weeks ago, ACSI met with the chairman of Orica
and indicated our firm opposition to this proposal and
this was reflected in our voting recommendations. In
short, we are pleased with the outcome and we thank
you for your support in backing our position.
Crane Group’s remuneration report received an against
vote of 70% at the company’s AGM in late October. The
key reason which lead ACSI to recommend against the
report were the significant termination benefits payable
to the CEO which are material in the context of the
company. The remuneration awarded to five of the
company’s executives in 2010 represents a significant
proportion (29.5 percent) of net profit after tax and it
represents approximately ten percent of 2010 net
operating cash flow.
Summary: since September
Abacus Property Group on sustainability reporting
executive remuneration and board diversity.
Alesco Corporation on board renewal in light of recent
performance and board diversity.
Beach Energy on the oversight of emerging market risk,
corruption risk, regulatory developments and the PRRT,
director independence and improved sustainability
reporting.
Bendigo and Adelaide Bank on board renewal, board
diversity, remuneration arrangements, sustainability
reporting and consumer lending practices.
BHP Billiton - ACSI met with the Chairman of BHP
Billiton - Jac Nasser, Global Head of HR - Karen Wood
and the Company Secretary - Jane McAloon, to discuss
various remuneration changes.
Bluescope Steel on remuneration, board diversity and
sustainability reporting.
December Edition 2010
Brambles on board renewal and executive remuneration.
Commonwealth Bank on regulatory risks, board
performance review process and succession planning, risk
considerations in remuneration and internal policies,
progress and longevity of customer satisfaction metrics and
sustainability reporting.
Lend Lease Corporation spoke in relation to board
diversity, the use of Listing Rule 10.14, board renewal and
changes to executive remuneration.
Mirvac Group on changes to termination entitlements,
disclosure of short term bonuses, board succession and
director capacity.
Mount Gibson Iron on director independence and over
representation of substantial shareholders.
Pacific Brands on increases to non-executive director
fees, increases in CEO Pay, director selection and
performance assessment, and management of supply
chain risks.
Perpetual on the company’s new remuneration
arrangements, board renewal, sustainability reporting and
responsible investment work.
Rio Tinto on the disconnect between past annual bonuses
and company performance, regulatory risk and government
relations post MRRT, board renewal, consideration of
corruption, emerging market and environmental risk at the
board level.
Seven Group Holdings on remuneration arrangements
following the Seven-Westrac merger.
Straits Resources on remuneration issues, board
composition and board diversity. Improvements in
sustainability reporting
Suncorp-Metway on succession of the chair, board
diversity, risk in remuneration and the use of ASX Listing
Rule 10.14.
Telstra on bonus outcomes for the 2010 year,
constitutional amendments reducing the board’s size,
director performance issues, regulatory risk and the NBN,
the company’s management of diversity issues at the
board and management level in light of disclosures on the
issue.
Wesfarmers
on
board
renewal,
remuneration
arrangements including those for the Coles CEO Ian
Macleod, management of sustainability risks including a
price on carbon (in light of the chairman’s public comments
on the issue) and supply chain risks.
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Research
Board Effectiveness and Performance
This research was conducted by Professor Thomas
Clarke from The Research Centre for Corporate
Governance at UTS with ACSI assisting with access to
Directors, and ensuring that the research would
ultimately benefit investors.
The perspective of investors was crucial to find good
evaluation practice from ‘researching the current state of
play’ of what actually happens during Board evaluation,
rather than developing a prescriptive framework of how
the process should be conducted without context. Most
importantly, the research attempts to record actual
experiences of the Directors on not just the process, but
also to get their point of view how board evaluation has
helped and not helped to perform their roles as stewards
of our investments; the companies they oversee.
The Global Financial Crisis puts the research firmly into
the context of investor realisation; how Directors monitor
their own performance is crucial to long-term
sustainability of the companies. There is recognition of
this importance from regulators and policy makers,
leading to the first research question: how should
Australian boards assess performance at both individual
and group levels? And what does effective board
evaluation comprise?
This research question was readily addressed. First,
there was a comparison of how Australian companies
conduct board evaluation compared to their international
peers. The regulatory environment plays a significant
role, influencing disclosure of board evaluation to be
standardised and perfunctory, or the potential for richer
disclosure in principles-based jurisdictions. Moving on
from regulatory expectations (or aspirations), the
analysis then moves towards the company level where a
template of good practice evaluation process is
supported or challenged by Directors’ insights and
experiences to reach “the current state of play” the
research aims to achieve.
Investor interest then steers towards the ability to
recognise high performing boards, leading to the second
research question: how can shareholder recognise high
performing boards? And how can information on board
evaluation and performance be communicated by
companies or extracted by investors?
The second research question of how shareholders can
recognise high performing boards is much more
challenging. The risk of information becoming
standardized and subsequently “meaningless” increases
when disclosure in public reports is expected. However,
investors should pay attention to companies that choose
to disclose board evaluation information in order to
differentiate themselves from others. However, it is
disappointing that this practice is not the norm in
Australia.
December Edition 2010
The preference towards informal communication with
board members remains and this presents risks for
investors. Risks that include the issue of inside
information, the availability of information that may be
price-sensitive, and most importantly the issue of
fairness that some investors get more information than
others.
If disclosure is the means by which investors would
“know” or assume about the performance of boards,
then the question is what should boards disclose?
ACSI proposes that information on the rationale and
implementation of a skills matrix be disclosed in a
meaningful narrative to minimize ambiguity on board
capabilities. The research has found an increasing use
of a skills matrix for board evaluation to identify the
different skills required to optimize board performance.
However, constructing a skills matrix remains a
challenge for many of the directors interviewed. From
the investor point of view, the disclosure or nondisclosure of a skills matrix could be useful to identify
gaps or weaknesses in a board’s composition. The
willingness of the board to communicate to shareholders
the rationale of what skills are crucial for a board also
provides useful insights into how a board operates.
2011 research – Labour Standards and Performance
ACSI has engaged researchers at Harvard University to
examine labour standards and workplace practices at
organisational level.
The research will provide knowledge on how global
corporations, especially Australian companies are
dealing with labour standards issues in Australia and
their off shore operations.
The research will enable investors to compare and
contrast individual companies against emerging sectoral,
and industry norms. It will also allow investors to
compare different risks when they assess companies
who adopt different approaches to mitigate (or not
mitigate risk to human capital.
Save the date
ACSI Strategic Planning Day - 16 February October 2011
ACSI Anniversary Dinner - 25 May 2011
ACSI 2011 Annual Conference - 26 May 2011
ICGN 2011 Mid-Year Conference
Kuala Lumpur, Malaysia
28 February 2011 – 2 March 2011
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