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Nov 10, 2009

Corporate governance: wild west may finally be getting tamed

Investors are continuing to vent their anger at executives and directors' salaries, with shareholders in mining company Western Areas last week revolting over lucrative remuneration arrangements granted to directors.


Investors are continuing to vent their anger at executives and directors with shareholders in mining company Western Areas last week revolting over lucrative remuneration arrangements granted to directors. At its annual general meeting last week, the nickel miner saw its non-binding remuneration report rejected by more than 60% of shareholders. Even worse, the company was forced to withdraw two resolutions that proposed granting 200,000 options to directors David Cooper and Chairperson (and 15% shareholder) Terry Streeter.

Even in a sector not renowned for outstanding corporate governance principles, Western Areas managed to alienate shareholders. Despite the company’s share price falling from $12 in May 2008 to $3.03 in March 2009 (the share price has since recovered to $4.88), Western Areas increased remuneration paid to  CEO Julian Hannah by 37%.

Western Areas had resolved to issue 200,000 options to each of its directors despite the ASX Corporate Governance Principles recommending against granting options to non-executive directors. Even worse, the proposed options had no performance hurdles attached other than an “exercise price” hurdle. Commonly companies that grant equity incentives to directors to specify that the equity instruments are only able to “vest” after certain benchmarks to be met. Those benchmarks usually relate to the company achieving specified earnings-per-share growth or providing shareholders with a total return that exceeds rival companies or a relevant index.

This is to ensure that executives are not able to profit due to a general market recovery or other event outside their control. (For example, if an executive runs a widget factory and for some reason, the price of widgets doubles due to a worldwide shortage, that executive should not benefit if the price of his company increased but at a far lower rate than his major widget manufacturing competitor).

Western Areas, however, were none too concerned with irrelevant issues such as  performance hurdles. The options granted to directors merely had an “exercise” price of $7.50 and no performance hurdles whatsoever — therefore, should Western Areas’ share price recover to above that level, the directors would be able to quickly sell the vested shares and make a windfall gain.

If the company’s share price simply returned to its March 2008 levels, the directors stood to reap almost $1 million each. (Remembering it is very unusual for non-executive directors to receive options at the best of times, let alone options without any performance hurdles).

It appears that Western Areas investors felt the same way. Before the meeting, the company withdrew the resolutions pertaining to options grants for two of the non-executive directors (this only ever happens when proxy votes overwhelmingly oppose the resolution). Options grants to the remaining non-executive directors were formerly rejected by shareholders, with more than 57 million votes rejecting or abstaining from the grants, and only 22 million in favour.

Last week’s Western Areas annual meeting would have seen shockwaves through executives at many of Australia’s mining firms. It appears that the wild west of corporate governance may finally be getting tamed.


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