Directors of Australian public companies have long enjoyed something of a closed shop with substantial barriers to entry and very few new entrants attempting to barge their way in uninvited. Each director faces re-election every three years and the average vote in favour is about 96%. The vast majority of major public companies -- including notables such as Rio Tinto, Wesfarmers, Lend Lease, Brambles, CSL, QBE, Newcrest, Woodside, Crown, Santos, Transurban, Orica and Toll Holdings -- have never once had an external candidate stand for their board. The contrast with political elections is stark indeed given that those standing for parliament or local government are usually competing with large pools of challengers. Yet when the Productivity Commission comes along with a modest recommendation to give shareholders the power to determine board size, the club closes ranks and behaves as if hoards of barbarian activists are storming the barricades. The latest debate has been triggered by yesterday’s release of the draft legislation to implement changes such as the "two strikes" rule, which triggers a board spill if the remuneration report attracts an against vote of more than 25% at two successive AGMs: Here is how The AFR covered the reaction by the big end of town this morning:
The Business Council of Australia remains opposed to the two-strikes rule and trying to open boards up to outsiders by scrapping the so-called 'no vacancy' rule, which allows boards to declare there are no positions available.
"The BCA remains concerned that two of the measures as proposed have the potential to cause unnecessary and unwarranted restrictions on the flexibility of boards to operate in the company’s best interests," BCA spokesman Scott Morrison said.
This position should come as no surprise given the BCA is essentially the CEOs union. The last thing Australia’s overpaid CEOs want is a group of non-executive directors who say: "Sorry fat cat, can’t approve such an exorbitant bonus this year because we’re already on one strike and don’t fancy triggering a board spill." It is worth remembering that the vast majority of Australian CEOs earn vastly more than the combined fees paid to all the non-executive directors. This is because shareholder approval is required for the overall fee pool paid to NEDs but cash payments to executives are completely at the discretion of these same NEDs who for many years have failed to resist exorbitant pay demands. When pay does get out of hand, the theory is that shareholders will rise up and sack the directors. The practice is that few shareholders vote against directors and even fewer external candidates run for public company boards.  This goes to the very heart of the lack of a culture of shareholder pressure in Australia. When external candidates do nominate, the boards can use existing barriers to entry. The worst rort surrounds "no vacancy" where a typical constitution will say that a company must have been 3 and 12 directors or any number the board deems to be the maximum. When I ran for the five-man Ten Network Holdings board last year, they declared "no vacancy", even though the constitution allows for a maximum of 11 directors. Fast forward to the 2010 meeting and out-going executive chairman Nick Falloon had no plausible explanation how "no room for a sixth director" last year could suddenly become "let’s add four directors representing billionaires and reach the maximum of 11" a year later. Have a listen to the shareholders laughing away during that exchange. As it happened, the least popular incumbent director at Ten’s 2009 AGM got 99.7% of the directed proxies in favour and he finished well clear of the serial candidate with support from a miserable 0.9%. In other words, the paranoid board could have let shareholders approve the appointment with 50% support and didn’t need to invoke no vacancy and make it statistically impossible for the challenger to win even with 100% of the directed proxies in favour. (This is because no vacancy means you have to score more than an incumbent and the use of undirected proxies by the chairman would have seen 100% support from the directed proxies at Ten still fail). Many of these directors seem to forget that the company is actually owned by the shareholders. The shareholders simply appoint directors as their agents. Why on earth shouldn’t the shareholders -- rather than the incumbent self-selected directors -- be able to determine board size?