Desperately seeking: Board accountability and active voices

At the AGM

One reason that poor governance persists in many large corporates is explained by the rise in passive investing.

We have found in the past that we are often the only shareholder who consistently makes stands on governance issues, but this AGM season has been remarkable for the size of protest proxy votes against director resolutions at large-cap Australian companies.

Specifically, Telstra1 received a 62% vote against its remuneration report (signalling a ‘first strike’ against executive pay), and even more notably, Tabcorp1 received a more than 40% vote against both a director re-election and its remuneration report.

But boards are crying foul

However, even more remarkable has been the defensive response of directors.

The Tabcorp chair, Paula Dwyer, has lashed out at investors for attempting to hold the board to account for:

  • serious governance failings in relation to anti-money laundering (AML); and
  • entering into the Sun Bets joint venture that resulted in losses of A$200 million in just two years.

The Chair of Telstra, John Mullen, has also lamented that investors are only angry about executive compensation when they don’t align with share price outcomes

Governance framework helps us access proxy votes

Martin Currie Australia voted against each of these board resolutions, and they highlight two important aspects of the framework that we use to assess a company’s governance:

  • board accountability; and
  • appropriately aligned incentive structures.

Questionable accountability

Good corporate stewardship is about looking out for the interests of all stakeholders, including customers and staff, maintaining ethical and regulatory standards and generating long-term and sustainable wealth for shareholders.

The board needs to remember that it is elected by shareholders to represent their interests and appropriate oversight of issues, and AGM votes are the opportunity for shareholders to express their opinion on performance.

Good corporate stewardship is about looking out for the interests of all stakeholders, including customers and staff.

If they failed in governing and lose the confidence of shareholders, why should they remain as their elected representatives?

Tabcorp AML breaches and Sun Bets’ losses are a demonstrable track record of poor governance which require accountability by the board.

Inappropriate incentive structures

A remuneration structure that could pay executives 90% of target (without a 30% arbitrary board cut) in a year when Telstra’s2 dividend was cut from 31c to 22c, forward earnings forecasts fell 40%, and the share price fell nearly 40% is clearly inappropriate.

In this case we would expect more discretion to be exercised by the remuneration committee, than simply changing from 90% of target to 60%.

Our vote against the remuneration report was a vote highlighting the board’s inability to execute an appropriately aligned remuneration structure.

Last year, Telstra changed its long-term incentive (LTI) structure to one that was less dependent on objectively measured long-term shareholder value creation (relative total shareholder return or TSR) to one more dependent on the board’s judgement of progress.

Clearly a problem in most short-term incentive (STI) structures is that the target to be met is the executive-set budget for the year ahead. Telstra performed close to this self-assessed budget, despite two profit warnings and earnings falls.

In simply blaming the national broadband network (NBN) rollout for the profit falls, Telstra’s board, in our opinion, appears to be overlooking the longer-term issue of what it did (or, perhaps more accurately, didn’t do) between 2014 and 2017 to prepare for NBN’s multi-year impact.

Unanswered questions

When reflecting on these issues for Telstra and Tabcorp, and the board’s angry response, my questions are:

  • For Tabcorp, how is it that the vote against a director with a poor track record was only 40%? Given the issues, we would have hoped for even greater shareholder pushback; and
  • For both companies, how long will it take for boards to accept responsibility and make change rather than believe they have a right to be on a board without being questioned (especially without owning substantial shares)?

Investors deserve better

One reason that poor governance persists in many large corporates is explained by the rise in passive investing and active managers who fully outsource proxy voting to third party advisors. Specifically concerning is the lack of analysis of governance and corporate sustainability that this entails, as well as a reduction in shareholder engagement with boards to enact positive change.

The other reason for its persistence is hubris at the top. This is clear from the somewhat affronted reaction of boards this AGM season to the calls for them to demonstrate greater accountability. If directors don’t hold themselves accountable for poor governance oversight, they are setting a poor tone for culture of the whole organisation.

It is clear from this remarkable AGM season that investors are looking for more accountability. It needs to start at the top, and be held to account by active voices.


1 The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
2 Source: Martin Currie Australia, Factset; between 1 July 2017 and 30 June 2018


Important information

Past performance is not a guide to future returns.
The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable

Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice. The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.