Crullers has given some very favourable assessments on corporate governance lately, with Perpetual now getting a thumbs up, following on from Boral last week. What’s next? Will he give Young Jamie the seal of approval later in the week?

For the second AGM in succession, he gave a company – Perpetual, following on from Boral – a thumbs up on corporate governance.

So Crullers was a bit taken aback when the ASA’s representative, David Jackson, went in boots and all and absolutely slammed the company on its corporate governance record.

Having read the company’s annual report, I thought they were pretty good in this regard.

At the AGM, I suggested that, of the companies they invest in, PBL stands out like a sore thumb for poor corporate governance and Perpetual should ram their corporate governance statement down PBL’s throat.

My suggestion gained a few chuckles from the crowd but not a direct answer from chairman Charles Curran!

In answer to my question on the departure of head of investments Peter Morgan, Curran assured us that the company would continue to be an activist fund manager which may include, when appropriate, using the public forum of an AGM to make a point, as Morgan had done often in the past.

I suspect that I’ll be going it alone on this one at PBL’s AGM later this week.

The ASA’s gripes

Here are Jackson’s charges against the company on the corporate governance front (and a few related matters) and the company’s response:

Jacko – No nominations committee.

Chairman Charles Curran – Nominations is handled by a senior board committee.

Jacko – Perpetual is in a shrinking minority in having executive retirement benefits, they’re adequately remunerated with their salary.

Curran – Incorrect – the vast majority of companies have them.

Crullers – I commended the company for at least setting out clearly what the retirement benefits for directors are – most companies don’t disclose. They range from 1.33 times their finishing salary for 3 years’ services to 5 times their finishing salary for 15 years’ service. I agreed with Jacko that the company should ditch these and as a fund manager have a moral obligation to lead the market, but asked how their retirement benefits compared with other companies. Curran said they were around the middle of the market – certainly not top dollar but not afraid to pay a decent rate to attract good directors.

Jacko – the performance hurdles on the executive options were too soft – handing them out when the company beats the total shareholder returns for the S&P ASX 300 Industrials Accumulation Index is merely a reward for mediocre performance.

Curran – the hurdles are appropriate and you can see from our good performance that the performance hurdles are working.

Crullers – I tend to agree with Jackson – I don’t know if Curran’s cause and effect holds much water. I must admit to not having been up to speed on this one prior to the meeting and it showed in a dopey question I asked.

Jacko – interest free loans to employees to purchase shares are unacceptable.

Curran – they’re fully disclosed and reasonable.

Crullers – I don’t think they’re such a big issue for Perpetual. The annual report discloses that 16 such loans are on foot totaling $214,401, with a maximum loan of $24k – chump change, really.

Jacko – queried the independence and tenure of the auditor (KPMG), rotation of the audit partner, the size of “other” non-audit services (around 7 times the audit fee).

Curran – We’ve gone further than most on this. We have mandatory external review of the audit, we’re extremely careful on the awarding of non-audit assignments, non-audit fees appear so high because we have a number of trusts which have services performed by KPMG and the auditor doesn’t provide advice on acquisitions.

Crullers – While the non-audit fee appears unreasonably high, it seems the company is “locked in” to using its auditor to a certain extent. While one would like to see that non-audit fees decrease, we’ll have to take Curran on face value that for certain work there it is not possible to dole it out elsewhere.

Jacko – There are many important omissions from the annual report: (a) a 5-year summary, (b) a timetable of upcoming events, (c) specific guidance on profits for the 2003 year, and (d) specifics on the $30k in political donations.

Curran – (a) Will be mailed out to shareholders separately, (b) the annual report was prepared earlier than usual and timetable wasn’t settled at date of publication, (c) it’s not standard practice for any company to issue profit forecasts, (d) didn’t answer this one.

Crullers – I wouldn’t get myself too worked up about any of these, Curran’s answers were satisfactory except for skipping (d) and I’d prefer they ditch political donations altogether.

Crullers was comforted following the meeting when he read in the Newcastle Uni survey on corporate governance – which would generate as much debate as the Fairfax Good Reputation Index if it garnered as much publicity – that Perpetual ranked 10th out of 250 companies.

While this is by no means definitive, my initial concerns that I had missed the boat completely on Perpetual’s corporate governance record were assuaged somewhat!

Options

Aside from Jackson and Crullers, only one other shareholder piped up for one quick question, making the good point that he didn’t like the fact that the performance hurdles for the executive options were based on share price only. What about criteria like EPS, return on equity or the duties that the individual executive performed within the organisation?

Aside from stupidly asking for more disclosure of the options hurdles in the Notice of Meeting – it was in the annual report, if only I’d done my homework and read it properly – I said I wasn’t opposed to options in all circumstances but some shareholders were, so when would they get another chance to vote on them? The current scheme was agreed to by shareholders six years ago, which in shareholder terms was the Jurassic era as far as the grant of options were concerned – it’s a different day and age now.

Curran didn’t really answer this one, although he was distracted by having to point out my lack of research and fielded another question from the ASA’s Jackson.

ASX – Perpetual Registry Services

Both Jackson and I asked questions about Perpetual’s new joint venture with the ASX, ASX-Perpetual registry services. Managing Director Graham Bradley had noted the company’s successes in its infancy, including snaring the important account of the dual-listed Brambles, and said its market share was growing.

Share price belting after Peter Morgan’s departure

The lack of questions was a reflection on the company’s solid performance in a difficult year. The standout for mine was the fact that their investments group managed to get a return of 4.5% went the ASX 300 accumulation index went backwards by 4.5%.

“The market” seems to have put this result down to Perpetual’s head of equities, Peter Morgan, as “the market” wiped a good slab off Perpetual’s share price when he announced his departure from the company, sending it to two and a half year lows.

Interestingly, both Curran and Bradley were very coy in their opening addresses in not referring to Morgan by name, instead mentioning “succession planning” in relation to “internal developments”!

When I raised the question of the “cult of personality” and how the market reaction doesn’t reflect the company’s faith in Perpetual investments not just being a one-man band, Curran re-iterated the strength of their “team”.

He and Bradley both mentioned that they place more credence in again getting the mandate of institutional investors, which they now have, following Morgan’s departure.

It’s going to be an even tougher twelve months for Perpetual, but based on what I saw at their AGM I’m reasonably confident in sticking the neck out and saying that they’ll weather it pretty well. Their share price is down about 10% from 12 months ago, but I suspect a lot of the recent decline has to do with an over-reaction from Morgan’s departure.

Obviously the overall decline in equities markets has hurt them too, but there is a bit of slack to be picked up once the market gets over its hysterical reaction from the departure of Morgan.

Peter Fray

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