Sir Rod Eddington’s appointment as chairman of ANZ is shaping up as something of a turning point for corporate governance in Australia, exposing a simmering debate about whether institutional shareholders actually make their own voting decisions or “outsource” them.

Sir Rod is, in effect, being forced to campaign for the job. His “opposition” is the proxy advice firm RiskMetrics, which opposed his re-election to Rio Tinto board last week because of his previous role as a non-executive director of Allco Finance Group.

RiskMetrics was also going to oppose the appointment of another Allco director, David Clarke, to the board of AMP, before Clarke gave up this week and decided not to accept the appointment.

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And, also this week, the incentive plan for Babcock & Brown Capital’s CEO, Andrew Day, was rejected by shareholders after a recommendation against it from RiskMetrics.

Typically, Rod Eddington is not just giving up. But this is business, not politics, so any “campaigning” is being done in private. He is refusing to speak on the record and RiskMetrics is sticking to its public documents.

Both sides insist that they have the utmost respect for each other (which I think is true, actually) and don’t want to engage in a slanging match.

Eddington has let it be known he is planning to engage in a series of meetings with institutional shareholders of ANZ to “sound them out” about his prospective appointment first as a director and then as chairman later this year, succeeding Charles Goode.

It’s clear that he is not going to simply ask their opinion: he will be forcefully putting his case over his behaviour at Allco — in effect campaigning against RiskMetrics’ opposition.

To put it mildly this is not normal. Usually a new director is announced to the market and then at the next AGM his or her appointment is ratified by shareholder vote. The average vote in favour is 96 per cent. If they’re lucky, shareholders will see the candidate’s CV, and the appointment itself is usually taken to be statement enough of suitability for the role. But campaigning? Persuasion even? It’s just not done.

At last week’s Rio AGM Sir Rod’s re-election as a director received a “yes” vote of 63 per cent as a result of the opposition from RiskMetrics.

As I understand it, Sir Rod does not regard that sort of result at ANZ as sufficient support to be chairman. He will only take on the position if he can be sure the vote in his favour at the AGM will be 80 per cent or more.

The issue might actually be taken out of his hands: ASIC is investigating Allco and if charges are laid against anyone at all, APRA might decide that Sir Rod does not meet the “fit and proper person” test under the legislation. All new bank directors must submit themselves to APRA for approval.

RiskMetrics is not suggesting Sir Rod did anything actively wrong at Allco — only that he was not attentive enough.

My colleague Stephen Bartholomeusz examined the RiskMetrics report for the Rio AGM in an article last week. I will examine both sides of the argument about all the non-executive directors’ roles at Allco in detail later, but in summary, RiskMetrics opposed Sir Rod’s re-election because he supported two transactions that pre-dated Allco’s collapse: the acquisition of the Rubicon property business, and the advancing of loans to the Allco Principals Trust.

The issue that is now being hotly discussed in boardrooms is whether RiskMetrics and other proxy advisers have too much power because major shareholders ‘outsource’ their votes to them.

Kerry Roxburgh, the chairman of Babcock & Brown Capital, even told Business Spectator’s Tony Boyd that institutions are mandated by their super fund clients to follow RiskMetrics’ voting recommendations.

This does not seem generally to be true, although there is no doubt that funds prefer their asset managers to seek proxy advice if they are the ones voting the shares (often the super funds vote themselves, and get advice from their own proxy adviser, Australian Council of Superannuation Investors).

It’s clear that most fund managers these days do outsource the research on issues around upcoming votes at shareholder meetings; if they ever had their own departments dealing with these things, they don’t any more.

RiskMetrics says their power comes from the information they unearth and present, not from any mandates requiring their clients to follow them like sheep. They describe it is laughable that significant and experienced investment managers would simply be told what to do.

It’s worth noting that while RiskMetrics opposed the options package part of chief executive Andrew Day’s contract this week, it recommended in favour of the termination payment. However, both were voted down, so institutions went against the second of the RiskMetrics recommendations.

In any case the debate over the role of proxy advisers and whether corporate democracy should be more like political democracy has a long way to go, and will probably be brought to a head by Sir Rod Eddington’s appointment to the ANZ board.

It’s fair to say that boards have had it all their own way up to now, and David Clarke’s decision to bow out at the first sign of trouble to preserve the reputation of AMP is the usual response to any unpleasantness.

The fact that Sir Rod is pressing on and talking to institutions is great news for shareholders and the maturing of proper corporate democracy, in my view.

Democracy is, or at least should be, all about public debate.

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Peter Fray
Peter Fray
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