October 2007

The Nation Reviewed

Backing the truck up

By Gideon Haigh
Illustration by Jeff Fisher.

Australians go to the polls this month in elections with a huge bearing on their future prosperity, in which they will not only return every candidate by an overwhelming majority but consent to the massive pay rises these people have demanded - pay rises, indeed, that they are actually powerless to prevent. They will, moreover, leave these polls with a healthy sense of a job well done.

For the season of the annual general meeting is upon us: two months in which the four in ten Australians owning shares in our 2000 listed companies are entitled to a rare and distant glimpse of the directors who represent them. Thanks to supine institutional shareholders and timid small investors, it is a sham of democracy that no dictator could not envy: directors are re-elected with an average 96% in favour, recalling the joke of Russians under Stalin about the man who broke into the Kremlin and stole the results of next year’s election.

Australian businesspeople are apt to stress their weighty responsibilities and the importance of accountability. Yet the burden imposed by shareholders is light indeed. In most meetings, in fact, the show of hands is altogether unnecessary, the big funds having already signed their proxies and the smaller ones along mainly for the sandwiches. Gadfly shareholders are not unknown: Jack Tilburn in days of yore; Stephen Mayne of Crikey more recently. But sooner or later, everyone starts looking at their watch ... hmm, that afternoon tea smells tasty, doesn’t it? At their last annual meetings the directors of One.Tel and HIH were re-elected without a murmur, despite having brought their companies to the brink of self-destruction. The board of James Hardie Industries remained intact until the Australian Securities and Investment Commission commenced civil proceedings against several directors last February.

Boards don’t even turn their directors over from time to time pour encourager les autres. To be sacked by your peers you’d probably have to be caught in flagrante with the chairman’s wife. On the board table. During the board meeting. Yet everyone accepts the cosy myth that all Australian public-company directors are up to the mark, unwaveringly vigilant, coping with their workloads, adequately prepared to supervise management, sufficiently informed about the markets in which they operate to critique decisions. Imagine if universities began passing every student or factories started reporting zero defects. Where there are no failures, the criteria for success is either insufficiently demanding or the supervisory mechanism is inadequate. And both are in evidence in annual meetings.

Since 1 July 2004 an amendment to the Australian Corporations Act 2001 has required listed-company accounts to incorporate a section known as the remuneration report, disclosing the relationship between performance and payment, and to put this section to shareholders for approval at the annual meeting. “The vote is a mechanism for shareholders to directly and clearly communicate their views to the board of directors at a company general meeting,” stated Treasurer Peter Costello proudly in his second-reading speech. “It will assist directors to more accurately assess the opinion of shareholders on remuneration than would otherwise be possible from discussion and comment at a general meeting alone.”

Then the catch: “The vote does not detract from the authority and responsibility of directors to determine executives’ remuneration and the vote is advisory only.” That is, companies weren’t bound to do anything their shareholders said; they weren’t bound to do anything at all. Pay was just too emotive an issue to be left to the discretion of those who were, well ... paying it. Instead, the calculation was better left to remuneration committees comprised of the recipients’ professional colleagues, and salary consultants wheeled in to make it look like the work of the most arcane science.

The effect on executive pay? Prepare to be amazed: it has continued to soar. Chief-executive remuneration at the companies that compose the Business Council of Australia has risen almost 600% since 1990. “If executive pay is any guide, CEOs themselves seem to be the only thing worth investing in on the stock market,” notes Dean Paatsch of the governance-advisory service ISS Proxy. “It’s a one-way bet: guaranteed double-digit returns, unlimited upside, zero risk and highly tax-effective.” And the BCA, which resisted even an indicative vote all the way, has since embraced the notion, bogus democracy being so much more respectable than brazen dictatorship.

Shareholders had only one binding remuneration vote available: Australian Stock Exchange Listing Rule 10.14, effecting long-term incentives, either the issuance of new shares or the purchase of existing shares on-market. Having shown no particular zeal about enforcing the rule, the ASX changed it at the end of 2005 to exempt on-market purchases from any need for approval, even if made using the company’s money - essentially making it voluntary to seek shareholder consent to equity grants. The Australian Council of Superannuation Investors sought the rule’s partial re-introduction in February, proposing the requirement of “shareholder approval of any acquisition of securities by a director outside of a genuine salary-sacrifice arrangement”. The ASX Regulatory and Public Policy Unit purports to be considering the issue.

Companies first started exploiting the change last year, so look out in the next couple of months for more cases of, to paraphrase John Kenneth Galbraith, warm personal gestures by individuals to themselves. In remuneration circles, this is now known as ‘backing the truck up’, with nobody driving a bigger unit than Telstra’s chief executive, Sol Trujillo. He is poised to drive off with $15.5 million at the end of the financial year, if Telstra’s shares have sustained a rise for the period of $1. Mind you, Trujillo gets around in a ute today compared to the King Krunch he was driving in July 2000, when he left the American telco US West with almost $90 million. And don’t expect much of the Telstra annual meeting on 7 November beyond furious agreement.

If you stand very still and inhale deeply, too, you might pick up just the faintest whiff of hypocrisy, with Australia’s corporate bosses demanding greater latitude to hire and fire, the freedom to hold the incompetent to account and the flexibility to harness labour to its maximum advantage, all the while embedding themselves in control more deeply and less answerably, coming and going more or less as they please. Think of it this way: were Australia a corporation and John Howard its chairman, he would not merely be looking forward to a job for life, but everyone who disliked him would have left.

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