Professor John Shine
It has taken five years, but finally, yesterday, one of Australia’s 10 biggest listed companies suffered a “first strike” from investors over its remuneration practices.
Bio-pharma giant CSL might be a market darling — the stock floated at $2.30 in 1993 and closed yesterday at the equivalent of $320 — but an impressive financial scoreboard didn’t save it from the ignominy of a 26% vote against its remuneration report.
The largely Australian-based directors appear to have lost faith with their shareholders when they got in on the pay giggle by requesting their own pay rise. The optics were not good, and all four of the proxy advisers in the Australian market — ISS, Ownership Matters, CGI Glass Lewis and the Australian Shareholders’ Association — recommended a vote against at least one of the three pay resolutions yesterday.
Domestic player Ownership Matters, which has particular influence over industry funds, raised concerns about a change in culture at CSL and led the campaign for a strike, as The AFR reported on Tuesday.
It is rare day when a remuneration strike is imposed without the opposition of global proxy voting giant ISS, which generally delivers the votes of the big American index funds such as BlackRock, Vanguard and State Street.
However, that’s what happened yesterday as ISS only objected to the fee cap rise for the directors, which explains why that was the biggest of the three protest votes on the day.
The “two strikes” regime on executive pay was a 2011 Rudd-Gillard reform, which has stiffened the resolve of directors to negotiate harder with their management teams on the question of executive pay. It was a world-first system dreamt up by the Productivity Commission, ably assisted by Allan Fels, and the new regime has worked well.
History has shown that when a “first strike” is delivered, boards insist on material changes to avoid a “second strike” the following year which would automatically trigger an Extraordinary General Meeting to spill the entire board. For example, look at this letter Ansell sent to its shareholders yesterday explaining the raft of changes it has introduced to avoid a second strike at its Annual General Meeting on October 19.
The CSL board, led by Professor John Shine, met on Tuesday and discussed the pay protest at great length. This was after the proxy votes had been lodged but before yesterday’s AGM in Melbourne.
Surprisingly, they have dug their heels in declaring there is nothing wrong with a US-style pay regime and they just need to communicate better.
The story here seems to be one of a big-talking US executive team — led by American CEO Paul Perreault — persuading a folksy Australian board that the big money should flow like it does in the US pharmaceutical industry. This is a major change in culture from what CSL’s legendary Australian CEO Brian McNamee, a former public servant, delivered during his 20-year run at the top of the public company.
McNamee, who has made close to $200 million on his CSL shares, is said to be unimpressed that his successor has seen his pay triple in three years and is now earning 25% more than what he got at the peak.
There was extensive coverage on the CSL strike in today’s newspapers, which will hopefully reinforce to CEO Paul Perreault that he needs to recast his incentive scheme next year to win back the confidence of shareholders.
There will be plenty more major protest votes during the AGM season before Christmas and here are a few interesting issues to watch:
- The former chairman of collapsed education provider Vocation Group, Doug Halley, is seeking another 3 years term as chairman of DUET group on November 16 and may run into some opposition;
- Slater & Gordon chairman John Skippen is expected to run into trouble when he seeks re-election to the board of Super Retail group in Brisbane on October 24;
- With no culpable directors up for elections, Slaters is also expected to cop a big protest vote on its remuneration report, partly because the directors gave themselves a pay rise in 2015-16;
- Stockland has put up Tom Pockett as its new chairman — but wasn’t he the long-time CFO at Woolworths who supported the Masters disaster?;
- Harvey Norman is also expected to continue its record breaking run of director protests as it now operates with arguably no independent directors because the last new appointment was way back in 2007. Billionaire founder Gerry Harvey doesn’t seem to care but this year’s AGM is shaping up to be more contentious than usual; and
- Rupert Murdoch is running the gauntlet with back to back AGMs for 21st Century Fox and News Corp in Los Angeles on November 10 and big protests are expected on remuneration and the Murdoch gerrymander.
*Stephen Mayne is a director of the Australian Shareholders’ Association and also owns one CSL share. The ASA voted its 1.9 million undirected proxies against two of the three pay resolutions yesterday.