Despite the disaster that was OneTel last year, and despite Jamie solemnly intoning that the company had learnt its lessons, if PBL and Ecorp’s corporate governance principles are anything to go by, we’d have to ask what lessons have they learnt?
At the Ecorp and PBL AGMs, Crullers locked horns with chairmen Peter Yates and James Packer respectively over their corporate governance shortcomings and the message just didn’t sink in with either.
CEOs on the audit committee
Rule number one in the book of corporate governance is that the CEO should not sit on the audit committee.
As we keen students of corporate governance know all too well, the audit committee – working along side the auditor – is there to protect the minority shareholders against management running amok.
So having your CEO on the audit committee is completely anathema to that notion.
But Jamie and Yates didn’t care for that thinking – both reckoned that most companies have their CEO on the audit committee.
Without having their annual reports at the ready, I’d be prepared to wager that none of the big four banks, BHP, Boral, Coles, AMP et al would have their CEO on the audit committee. Then I’d take my winnings to Crown and double it, as Eddie would say.
Jamie and Yates are both swimming against the tide on this one – unless of course they have been going to Uncle Rupert’s school on corporate governance.
Both PBL and Ecorp have problems with the perception of audit independence in our view. And the key word here is “perception”.
We at Crikey wouldn’t dare suggest that the good folk at Ernst & Young are anything but a reputable firm and similarly we have no problem accepting that the audit partner on the PBL and Ecorp job, Brian Long, is beyond reproach.
I raised several questions about the perceived independence of the audit – I certainly wasn’t trying to suggest there was an actual lack of independence and when James leapt to Ernst & Young’s defence I said I had no problem with their reputation.
Our beef is that Ernst & Young have been PBL’s auditor for a long time and EYs and its predecessor firms have had a long association with Big Kerry and CPH.
I asked what Ernie and Bert’s partner rotation policy was, how long EYs and Long had audited PBL and how often the audit job was put out to competitive tender.
Jamie got Ernst & Young audit partner Brian Long to get up and discuss their partner rotation policy. Viz, Long has been the audit partner for the past four and a half years and they have a partner ready to take over the gig at the five year mark as is required under accounting standards.
After a bit of argey bargey we finally got an answer on how long Ernst & Young had been their auditors – since PBL was listed in its current form. I’m not sure how long ago that was, but it was a while back.
When I asked about what PBL’s policy was on putting the audit out to competitive tender, Jamie said we were all very happy with Ernst & Young, happy that we’re paying reasonable fees, and we should all consider ourselves very lucky to have EYs and Brian Long on the case.
But focusing on price competition ignores a key governance consideration in having a regular competitive tender.
From a governance perspective, it is best practice for companies to put their audit out to regular competitive tender to send the clear message that the auditors’ tenure isn’t indefinite.
In the end, I don’t recall getting a specific answer on whether PBL actually does put the audit out to regular competitive tender.
The other corporate governance doozy is fees for non-audit work.
Personally, I’m not a particularly keen subscriber to this theory, but it says that a firm should limit the amount of non-audit work it gives to its auditors, otherwise making the account too lucrative will make the auditors less likely to raise the tough issues in the course of the audit.
I raised the issue with James and noted that this is the “best practice” policy that many companies are embracing.
In the case of PBL, these “non-audit” fees had risen by $700 over the year, so they were going backwards on this count.
Jamie again filibustered and said we were all very happy with Ernie & Bert’s and we used other firms for other work – but mentioned a law firm and a merchant banker.
When I pressed him to give us one example of some due diligence work or the like that they’d given to a competitor of Ernst & Young’s, Jamie looked around a bit, PBL CEO Peter Yates did the same, nobody could quite come up with an answer so Jamie said he wasn’t going to list them out!
Number of board and audit committee meetings is indaequate
Another of my many gripes was with the number of board meetings conducted during the year – 4 – and the number of audit committee meetings during the year – 2.
Compared to your major companies, that’s way too low. Most would have around a dozen board meetings and an audit committee that meets quarterly.
Given that PBL’s directors get $45 grand a year, that’s not bad going for only four meetings. Compared to Boral, where plain vanilla directors get $58 grand for 12 meetings, PBL directors get more than double the amount on a per-meeting basis.
Get some independent directors on the board – now!
Both PBL and Ecorp suffer from the same problem of having a lack of truly independent directors.
Often when you call into question a director’s “independence” it’s mistaken for “integrity”.
It’s not – it’s merely a statement of fact.
Here’s what Newcastle Uni in the Horwath 2002 survey on corporate governance has to say on the importance of independence and what it means for a director to be considered to be “independent”:
“The fundamental premise is that independence is critical to ensuring that the Board of Directors fulfills its objective oversight role and holds management accountable to shareholders.
“…If the majority of the board are genuinely independent they have the power to implement board decisions, even contrary to the wishes of management or a major shareholder. This power not only creates a more desirable board culture but also imposes a responsibility on them to be especially diligent in making decisions. Second, an independent board majority is a key structure to assure shareholders that their company will be run competently, and in the best interests of all shareholders.
“…An independent director is defined as someone who is not a member of management (a non-executive director) and who:
– is not a substantial shareholder of the company, or otherwise associated directly or indirectly with a substantial shareholder of the company;
– has not been employed previously in an executive capacity by the company;
– is not an original founder of the company;
– is not a principal of a professional adviser to the company;
– is not a significant supplier or customer of the company, or otherwise associated directly or indirectly with a significant supplier or customer of the company;
– has no significant contractual relationship with the company, outside of their directorship;
– is free from any interest or relationship, which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the company.”
Given these criteria, it was little surprise that PBL rated a meagre two stars in Newcastle Uni’s survey and Ecorp a lowly one star.
Under this definition, none of the directors of Ecorp would be considered to be “independent” because they are all employees or directors of the major shareholder, PBL.
Similarly, just about all of the 12-person board of PBL would be considered “non-independent” under this definition – aside from the Packers, most are either current or former senior executives, with the former CEO of Ernst & Young thrown in to boot.
Perhaps a case could be made for Sir Laurence Muir and Rowena Danziger as being independent, but sticklers would point to their long personal history with the Packers as something that might rule them out on the “independence” test.
Again, this is not to suggest anything untoward or that they are derelict in their duties.
But if you look at the boards of PBL and Ecorp and ask who can be absolutely relied on to “fulfill [the board’s] objective oversight role and hold management accountable to shareholders”, the answer is probably “none of them”.
Having raised the question of board composition at the Ecorp AGM and getting no satisfaction that it would change, I missed the chance to raise it at PBL because Jamie didn’t invite debate on the vote to re-elect directors!
Record long meetings
Shareholders probably set a new record for combined length of Ecorp and PBL meetings this year – both meetings going about 50 minutes each.
In both meetings yours truly had about 10 or so questions – with similar issues raised at the two meetings – and at both meetings the chairmen asked me to sit down to give others a turn, a polite request I was more than happy to abide by.
The chairmen certainly didn’t do anything to unnecessarily drag the meetings out.
At Ecorp, the speeches from Yates and Deans went about 15 minutes – combined!
At PBL, the chairman’s speech went about 10 minutes, and CEO Peter Yates didn’t deliver an address! This is again somewhat unique, although James’ position as “executive chairman” probably explains it.
One bloke at Ecorp – who introduced himself as being from Deloittes – actually said their strong connections with PBL wasn’t such a bad thing – that was the reason he invested.
The next speaker, who had kindly given yours truly a proxy to the Ecorp meeting, adroitly noted that unlike the previous speaker he “wasn’t pitching for business” and raised a cracker of a question.
He asked Ecorp CEO Alison Deans which firm had done the valuation on the $120m sale of the company’s eBay business.
She didn’t know!
Fancy that, hey?
Highlight of the day was a lady who noted the gender imbalance on the board of PBL – largely made up of middle aged and elderly men.
She said that given that the majority of the company’s consumers were women, there should be a few more females on the board – instead the PBL board looked more like it could be a company selling Viagara!