The world is starting to wake up to the fact that public company directors, once considered the pinnacle of proper society, are often unwilling or unable to properly act in the interests which they are paid to represent. For the first time, directors are starting to receive actual protest votes from shareholders, rather than a re-election with Robert Muagabe-type majorities. The Allco non-executive twins, Rod Eddington and Barbara Ward, recently received ‘against’ votes of 40% and 42% at Rio and Qantas after they presided over a calamity at Allco.
However, the good news ends there, with many directors who presided over corporate collapses or paid executives millions amid flailing shareholder returns remaining ensconced in the rarified confines of the director’s club.
David Ryan, who was for four years the Chairman of ABC Learning Centres’ audit committee, was last year appointed Chairman of Transurban, and re-elected to the board of Lend Lease, after ABC was placed in administration. Ryan, one of the few alleged ‘independent’ directors at ABC, seemed unwilling to curb CEO Eddy Groves’ excesses. Similarly, former Oxiana chairman Barry Cusack, who not only presided over a near-fatal merger with Zinifex, and subsequently resolved to pay former CEO Owen Hegarty a $9.1 million golden handshake, was re-elected to the board of Macmahon Holdings last year.
The performance of non-executive directors like Ryan, Cusack (as well as Ward, Eddington and Mansfield at Allco), and their unwillingness to properly supervise their highly paid executive team, shines a spotlight on the relevance and applicability of the so-called independent director. It is possible that while they are ‘independent’ in a technical sense, in reality, many non-executive directors are not actually ‘independent’ at all. The ASX Corporate Governance Guidelines states:
An independent director is a non-executive director who is not a member of management and who is free of any business or other relationship that could materially interfere with — or could reasonably be perceived to interfere with — the independent exercise of their judgment.
Under ASX guidelines, a major shareholder is not considered independent, nor is a former executive, nor is a recent former legal or financial adviser. This leads to the requirement for boards to consist of “professional directors” — many of whom are former auditors or solicitors who possess outstanding expertise in their specific field, but in some cases may lack the commercial sensibilities to run a large business.
More importantly, some argue that a “professional director” will lack actual independence because their entire livelihood comes from their multitude of board roles. These directors will not want to destroy their reputation and future income by “rocking the boat” by rejecting transactions or cutting executive remuneration. For example, former Babcock & Brown, Ventracor and Commander director Elizabeth Nosworthy was deemed to be an independent director of all companies she was involved with, despite virtually all her income being derived from those non-executive roles.
On this point, Warren Buffet back in his 2002 Letter to Shareholders noted: “[Regulations proscribe that] an individual who is receiving 100% of his income from director fees — and who may wish to enhance his income through election to other boards — is deemed independent. That is nonsense.”
The same rules stipulate that Berkshire director and lawyer Ron Olson, who receives from us perhaps 3% of his very large income, does not qualify as independent because that 3% comes from the legal fees Berkshire pays his firm rather than from the fees he earns as a Berkshire director. Rest assured, 3% from any source would not torpedo Ron’s independence. But getting 20%, 30% or 50% of their income from director fees might well temper the independence of many individuals, particularly if their overall income is not large.
At Berkshire’s Annual General Meeting in Omaha last week, Buffett’s partner Charlie Munger went further, claiming that: “Liberally-paid boards of directors are counterproductive…corporations in America would be better managed if directors were not paid at all. The man who has a lot to lose from his office is going to be very loath to be an independent director.”
Many of the problems facing Australian public companies, from excessive risk taking to poorly considered corporate deals, to excessive remuneration, have been largely authorised by non-executive directors, possibly due to their interests not being adequately aligned with the shareholders who pay them. It’s high time the ASX and Corporate Governance groups rethought their views on what constitutes an independent director.