While high remuneration and unnecessary termination payments garner most of the headlines, Australian shareholders are revolting in 2009 as company directors (and their hired help) design long-term incentive packages that continue to unjustly enrich executives. Yesterday, Transurban shareholders roundly rejected the company’s non-binding remuneration report for the second straight year — in total, 67% of Transurban proxy votes opposed the resolution.

The pay resolution was only able to scrape through with 53% support after Transurban chairman David Ryan voted “open proxies” in favour of the pay packages and a large number of votes in favour of the resolution were submitted from the floor. The notion of open proxies being voted by the chairman to support their own unpopular decisions is completely bizarre. This was noted by the Productivity Commission in its draft report on Executive Remuneration:

Where voting instructions are not specified, the proxy is “undirected”, which gives the proxy holder discretion to determine how to vote. Chairs can exercise their undirected proxies at their discretion, even on resolutions where they are otherwise prohibited from voting — for example, approving an increase in the director fee pool.

To rectify the problem the commission recommended:

The Corporations Act and ASX listing rules should be amended to prohibit company executives identified as key management personnel and all directors (and their associates) from voting undirected proxies on remuneration reports and any other remuneration-related resolutions.

Corporate Governance experts had recommended that shareholders vote against Transurban’s report largely based on the design of its long-term “performance share” schemes.

Long-term incentives are intended to align executives’ interests with those of shareholders. A well-designed scheme will ensure that executives are only able to benefit financially if shareholders also prosper over say, a five-year period. Essentially, long-term incentives aim to reduce “agency costs”. Sadly, in many cases, they actually cause more problems than they solve.

Transurban’s board (no doubt assisted by highly paid remuneration consultants) failed to understand the basic principles of structuring a long-term incentive plan. Transurban’s primary long-term incentive plan is its “Performance Awards Plan”. Under that scheme executives are able to receive free Transurban securities after three years if certain hurdles are met (unlike options, performance shares contain no “exercise price”, so Transurban shares could fall and executives may still receive value from the free shares).

The problem is that half of Transurban’s incentives are subject to an EBITDA hurdle, which is not adjusted for the amount of debt or number of shares on issue (the other half have a reasonable total shareholder return hurdle). Therefore, if Transurban decided to expand one of its tollroads using debt or equity, its EBITDA will (presumably) increase, however, those notionally higher earnings will not necessarily benefit shareholders. Unlike accountants, unit holders do not live in an Alice in Wonderland-type world where the payment of interest (or dilution of equity) does not exist.

Shareholders were also furious that Transurban introduced a second long-term incentive plan, which contained no hurdles at all (other than sticking around at the company for three years). Under this new scheme, 300,000 shares were granted to executives.

While companies are usually required to seek shareholder approval for equity grants to directors, Transurban deviously utilised a loophole from the ASX Listing Rules, which allows company to avoid a shareholder vote for incentive shares bought “on-market”. This tactic was also adopted by Telstra and Downie EDI.

Last year, Transurban shareholders rejected the company’s remuneration report after former CEO Kim Edwards received a lavish $16.6 million pay package, including a termination payment of $5.2 million and a short-term cash bonus of $9.2 million. The payout to Edwards was particularly criticised given that his business model and management of the company was repudiated by shareholders and the company’s new CEO, Chris Lynch, shortly after his departure. (The pay granted to the well-liked Lynch was also criticised, with the former BHP strongman receiving a $2.8 million cash bonus on to of his $2 million sign-on bonus last year).

Despite not being a member, CEO Lynch attended all five meetings of Transurban’s remuneration committee during the year.

It is expected that the embarrassing AGM may be the last for embattled Transurban chairman David Ryan. Given his involvement at ABC Learning Centres (Ryan was chair of the company’s audit committee), many believe the former CEO of Adsteam Marine, and other ABC directors, may suffer a similar fate to the Centro board, which last week was stung by an ASIC civil action for misleading shareholders as to the company’s debt levels.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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