Why Murdoch prefers the American way on pay
Since News Corporation shifted its domicile from Australia to the shareholder unfriendly state of Delaware in the US back in 2004, executive chairman Rupert Murdoch has been paid $US185.13 million ($182 million).
That's an average of $US26.45 million over the past seven years - a period when News Corp has underperformed other companies in the Australian top 10.
Over the previous six financial years through until June 30, 2004, Rupert was paid a total of $US64.41 million - an average of just $US10.7 million a year.
Unfortunately, News Corp shareholders have never been able to reflect directly on this sky-rocketing pay because the shift to Delaware coincided with Peter Costello's successful reform introducing the non-binding vote on remuneration reports for all Australian public company annual general meetings held after June 30, 2005.
If News Corp was still based in Adelaide, the AGM this Friday would almost certainly have seen the remuneration report defeated for the first time.
That's because the Rudd-Gillard government has further refined Costello's reforms by introducing the so-called “two strikes” law which triggers a full spill of the board if 25 per cent of participating shareholders vote against the remuneration report in two successive years.
Executives banned from voting
A vital element of these changes is that key management personnel, including non-executive directors, cannot vote their own shares in favour of a remuneration report which includes their own pay.
This rule would have meant that Rupert Murdoch couldn't vote his 39 per cent voting stake in favour of the 47 per cent pay rise he received in 2010-11 to a record $US33.3 million.
As it happens, the News Corp AGM at Fox Studios in Los Angeles on Friday (Saturday AM, AEDT) will be the first time shareholders ever get to vote on a remuneration report. The Americans were late to this particular party.
A big protest is expected and, as with the re-election of various Murdoch family directors, this will probably be the first time the Murdochs are forced to use their family's gerrymander over News Corp to retain control.
(Fairfax Media, publisher of this website, competes with News Corp in Australia.)
News Corp opposed say on pay
Last year, a News Corp shareholder put up a resolution calling for a remuneration vote but the board recommended against it. In spite of the Murdoch family voting its 39 per cent stake in favour of not having a vote, the board was only supported by 62 per cent of those B class shareholders who bothered to vote.
With News Corp you need to remember that almost 70 per cent of the total shares, known as A class, don't get a vote on anything. The Murdochs barely own any of these.
Whilst News Corp shares have underperformed the market in recent years and the executives are clearly over-paid, at least the shareholders do get to vote on the entire board every year.
The dual-listed Rio Tinto and BHP-Billiton have also recently moved to this system, rather than directors having three year terms.
A few Australian directors have been complaining about the entire board being spilled after two votes exceeding 25 per cent against the remuneration report, but if an entire board spill is good enough for News Corp, BHP-Billiton and Rio Tinto every year, then why not introduce it across the market in Australia?
Thumping board mandates
The key statistic to remember is that your average Australian director is re-elected with 95 per cent of the vote in favour.
Even when 44 per cent of the voted shares went against the 2009 Qantas remuneration report due to concerns about the $10.7 million paid to former CEO Geoff Dixon, James Strong was re-elected with more than 95 per cent in favour even though he was chairman of the Qantas remuneration committee at the time. What will he get this year?
There just isn't a culture in Australia of shareholders voting out directors, which is why Lend Lease chairman David Crawford feels confident supporting his old KPMG colleague David Ryan for another three-year term at the AGM on November 9.
Mr Ryan was a long-serving director of ABC Learning and chairman when it collapsed in 2008. He suffered a record 34 per cent against vote as Transurban chairman in 2008 due to concern about the $3 billion-plus lost by investors and lenders in ABC Learning.
Easy to spill a board any time
The other key point to remember is that 100 shareholders of any listed company, or even a single shareholder owning 5 per cent of the stock, can call an extraordinary general meeting and put up a resolution to sack the entire board at any time.
It's a tool that is already available but rarely used. Given this existing power, why resist a mandatory board spill after two 25 per cent pay protests 12 months apart? Based on historical voting, the board would simply be comfortably re-elected.
We haven't yet seen any major companies trigger the first strike during the current AGM season with the three closest efforts being as follows:
Metcash: 24.3 per cent of directed proxies against, no poll called.
Bradken: 21.95 per cent of directed proxies against, no poll called.
JB Hi-Fi: 17.87 per cent of directed proxies against, no poll called.
The most disappointing aspect of these meetings was that neither the respective chairs or shareholders attending the AGM, called for a poll.
Indeed, we had the first shareholder driven remuneration report poll for the season yesterday at the Ansell AGM when a clear majority from the floor voted against. However, institutions responded positively to a strong lobbying campaign by the company and the against vote finished at less than 10 per cent after the poll, even though the Australian Council of Super Investors recommended against.
Clearly the big bonuses in store for the US-based management team at Ansell were not a worry for supportive major shareholders such as Perpetual and Blackrock.
Goal post shift at JB Hi-Fi
It certainly appears that shareholders in strongly performing companies are prepared to condone questionable pay practices.
For instance, why did Paul Fiani's Integrity Asset Management vote its key 8.2 per cent stake in favour of the JB Hi-Fi remuneration report last week when the management team was able to pocket a seven-figure bonus in 2010-11 because a $33.4 million write-down on the struggling Queensland-based electrical retailer Clive Anthony was excluded from the profit measure?
When the JB Hi-Fi incentive scheme was first established it was measured by straight earnings per share. Suddenly, after a business went pear-shaped, the board moved to “normalised earnings per share” and managed to ignore a substantial write-down.
When the pay protest comes, call a poll
One of the reasons it is important that shareholders attending AGMs demand a poll when the proxies against the remuneration report are above 10 per cent is because you never know how many open votes are sitting on the floor of the meeting.
In the case of Metcash, chairman Peter Barnes, who also doubles as an independent director of News Corp, failed to inform the meeting of the proxy position so that shareholders could have seen how close it was and called for a poll.
As it happened, the Australian Shareholders' Association held 2.8 million undirected Metcash proxies which it would have voted against the remuneration report in a poll, potentially lifting the final outcome above 25 per cent.
Mr Barnes strongly contested this summary of the situation when challenged at the Ansell AGM yesterday and urged Ansell shareholders to read the Metcash clarifying statement posted on the ASA website.
Need for ASIC clarification
Given the disputed facts and interpretations, it really is time that ASIC issued a practice note clarifying how the voting is handled on the “two strikes” legislation because it does get quite complicated with certain votes excluded.
For instance, if you look at the voting results from the JB Hi Fi AGM last Wednesday, there were only 160,000 fewer proxies cast for or against the remuneration report than with the re-election of former CEO Richard Uechtritz as a non-executive director.
Whilst Uechtritz has sold all of his 2 million ordinary shares, it would appear that new CEO Terry Smart didn't vote his 1.5 million shares for either the remuneration report or the re-election of his old boss to the board.
Maybe the simplest solution would be to move to a system of disclosure of institutional voting, as occurs in the US, along with a requirement that share registry companies like Computershare and Link develop full electronic audit trails for major corporate elections.
Watch out for GUD and Wesfarmers
In terms of upcoming AGMs, Melbourne-based appliance manufacturer GUD is expected to be the first to trigger the 25 per cent threshold at its AGM on Thursday.
Whilst long-serving GUD CEO Ian Campbell has done a good job over the years, his total package shot up from $1.68 million to $2.23 million in 2010-11 - a 33 per cent increase when shareholders have seen the share price fall from $8.65 on June 30, 2010, to $7.65 yesterday.
Amongst the large caps, Wesfarmers will come under intense scrutiny at its AGM in Perth on November 9. The two issues concerning shareholders are the sheer quantum of pay, $15 million in 2010-11, which Coles boss Ian McLeod collected and the way the board is moving the goal posts for CEO Richard Goyder after he looked like missing out on a $6 million bonus.
Given that Wesfarmers suffered an embarrassing 51 per cent vote against its 2008 remuneration report, a second defeat just three years later will be acutely embarrassing for remuneration committee members such as Bob Avery, Colin Carter, James Graham, Charles Macek and Wayne Osborn.
Falling board room productivity
Some members of the Directors Club have expressed concerns about the new “two strikes” legislation, but this columnist is yet to see a strong argument against it because board room pay has got out of hand and more needs to be done.
Indeed, outgoing Business Council of Australia President Graham Bradley is yet to say anything about his statistical record as Stockland chair as outlined by Michael West on BusinessDay last week.
Why has the pay for the position of chairman at Stockland doubled to $475,000 over the past six years when cash returns to shareholders only rose by a miserable 4.3 per cent a year over the same period?
The best feature of the “two strikes” legislation should be that it puts some spine in the back of directors who for too long have been caving into the demands of greedy CEOs.
However, whilst shareholders do directly control the overall cash amount that can be shared amongst the non-executive directors, these fees have also been ratcheting up in recent years.
This columnist is not aware of a single proposed fee increase for non-executive directors that has ever been rejected. Not even close.
Given the double-digit compound growth in director fees over the past five years, maybe it is time more attention was focused on this issue as well as the telephone-number salaries pocketed by Australian CEOs.
Disclosure: Stephen Mayne is a director of the Australian Shareholders' Association, where he is company monitor for News Corp. He will be travelling to the October 21 AGM in LA. Follow him on twitter @maynereport or email Stephen@maynereport.com.