Telstra and Tabcorp investors have each delivered first 'strikes' against the firms' remuneration reports at recent AGMs with almost 62% of investors voting against the remuneration report at Telstra, and 40% voting against the remuneration report at Tabcorp as well as delivering a strong protest vote against the reelection of Tabcorp board member Steven Gregg (over 40% against his reelection). A brief overview of the comments made by the Telstra and Tabcorp Chairs in relation to the remuneration is below.
Telstra Chair's comments on remuneration
As previously reported in Governance News on 15 October there was considerable disagreement among Telstra investors ahead of the AGM with proxy advisers Glass Lewis, ISS and Ownership Matters each issuing recommendations against it, on the basis that they believed the board had not reduced executive bonuses sufficiently in light of the company's performance.
- Executive remuneration is too high: Mr Mullen said 'I personally believe that executive salaries are too high across the board' adding that any change would require a wholesale change across all companies and would take considerable time. He went on to say that Telstra had already made inroads in this regard citing the fact Telstra CEO Andy Penn's remuneration had decreased 50% over the past two years in line with company performance and that CEO remuneration at the company had progressively decreased over time with the current CEO's predecessors receiving higher salaries than the incumbent and his successor likely to receive a lower salary than the current CEO.
- The 'strike' is a disappointment to the board: Mr Mullen acknowledged the level of dissatisfaction with the remuneration report, adding that the 'first strike' is 'deeply disappointing' to the board. He said that the board and remuneration committee had spent considerable time and effort trying to get remuneration 'right' and went on to stand behind the company strategy, to defend management's performance and the time and effort, and the approach taken by the Telstra board and remuneration committee in relation to executive remuneration. 'I am very willing to apologise if, despite our best efforts, we have not been adequately transparent in our remuneration disclosures, or we have missed enhancements that could make our structures better. If anyone has a better solution, we would welcome it. However I cannot apologise for continuing to do what we believe is the right thing for the company and the right thing for shareholders in the long term' he said.
- Shareholder dissatisfaction does not reflect poor management performance, but rather declining share price? 'If we call a spade a spade here, the bottom line is that it would seem that for many shareholders, if they see the value of their shares diminish, then they consider that management has performed badly and should not receive any of their variable compensation, irrespective of whether management have done a good job that year or not' Mr Mullen said. Mr Mullen went on to say that if correct, it means 'that we can make all the changes we like to the [remuneration] scheme and we will never please everyone. This I believe is over simplistic and simply wrong. The share price cannot be the only metric by which we evaluate management performance.'
- Incentivising executives to perform strongly in bad times: Mr Mullen also expressed the view that incentivising executives to perform strongly in bad times assumes greater significance.
- Going back to fixed salaries? Mr Mullen said that if we are 'moving to a world where variable compensation is seen principally as a bonus for positive share price development' then 'why do we need complicated remuneration structures at all. Maybe there is a case for doing away entirely with all these complex schemes and just go back to a fixed salary commensurate with the difficulty of the role with maybe one half in cash and one half in shares locked up for five years. No metrics, no adjustments, no exclusions, or adjustments and no complicated tables'.
- No change at Telstra for now: Having said this, Mr Mullen said that immediate change was not possible. 'Next year is also going to be a difficult year for Telstra as everyone knows, but we cannot change direction every time a proxy advisor or shareholder finds a new fault with our approach and we cannot say to management that there will be zero available remuneration this year even if you do a great job. We will listen we will consult yet again, and we will do everything we can to amend and enhance our remuneration policies where it is demonstrated that we can do better, but we cannot compromised on doing what we think is right for the long term health of the company and for you and our shareholders' Mr Mullen said.
Tabcorp Chair's comments on remuneration
Over 40% of shareholders voted against the remuneration report at Tabcorp and in addition, over 40% voted against the reelection of director, Steven Gregg.
Changes to the structure of merger completion awards in response to shareholder feedback
In her address, Tabcorp Chair Paula Dwyer acknowledged the concerns expressed by some shareholders concerning remuneration adding that 'It is clear these concerns relate principally to the Merger Completion Awards granted to management' with some shareholders expressing a preference for the awards to be conditional on the achievement of the 'combination' of Tabcorp and Tatts becoming effective.
She commented that:
- The one-off awards were in 'recognition of management's extraordinary efforts over a prolonged period to successfully negotiate' a strategically complex transaction in addition to their existing duties.
- Ms Dwyer also said that in response to shareholder feedback, the board would change the structure of the payments. A 'synergy based performance measure' (the achievement of 'synergies and benefits from the combination of Tatts and Tabcorp at the end of FY21) would be applied and the vesting period for the restricted shares granted to key management personnel under the merger completion award would be extended from two to three and a half years.
Response to concerns around director accountability
Ms Dwyer went on to say that proxy advisers and investors had raised concerns in relation the role of boards and director accountability in relation to both the AUSTRAC matter and the unsuccessful startup Sun Bets joint venture and that these issues were 'coming to the fore' in the voting on the remuneration report and the reelection of director Steven Gregg.
- In relation to AUSTRAC concerns she said: 'Given the acknowledgement of the regulator and the facts around Tabcorp Board accountability as approved by the Federal Court it is unfair and incorrect for directors of Tabcorp to continue to be targeted of failed accountability'.
- In relation to unsuccessful Sun Bets startup she commented that 'it is disappointing that a well-considered initiative although unsuccessful is used selectively or in isolation to discredit Tabcorp director performance' and further that 'It is critical for the success of Australian Businesses, the economy overall and in the interests of shareholders, that boards and management teams make considered investments to drive long term growth and shareholder value. In fact this is a key aspect of the board's role. Not all these bets will pay off. However, it does not serve the interests of shareholders for boards and management to do nothing for fear of retribution.'
New Diversity Targets announced: Separately, the Chair also announced that Tabcorp has put in place new diversity targets: at least 40% female NEDs by the end of FY23 and at least 40% of senior leadership roles filled by women by the end of FY21.
The two 'strikes' have received wide media coverage.
- Not about management performance, but rather about 'money'? In an article that appears to agree with the view of Telstra Chair John Mullen, the SMH suggests that the recent results are not principally motivated by community distrust in corporations, but 'mainly about money' in that shareholders seeing negative impacts on their investments as a result of corporate misbehaviour, expect that 'culpable executives will have their hip pockets hit'. The article goes on to suggest that shareholders are unconcerned with complex remuneration schemes 'But they do understand the notion of — we lose, you lose'.
- The start of things to come? The SMH suggests that the more than 30 ASX 200 companies hosting AGMs in the coming week are likely to also face pressure from smaller investors over executive remuneration in the wake of the strikes against Tabcorp and Telstra. The report also suggests that Qantas and Brambles are 'heading for showdowns with smaller investors' over the issue (though the article notes that proxy advisers have not recommended votes against the remuneration reports of either company).
- A possible trigger for change on remuneration? Australian Council of Superannuation (ASCI) CEO Louise Davidson has reportedly commented that the results are an indication of the level of shareholder dissatisfaction with bonuses paid regardless of performance and suggested that though the 'message' on executive pay had been slow to get through it is gaining traction due to poor company performance, stagnant wages, and the issues identified by the Financial Services Royal Commission. Ms Davidson reportedly also said that the results may signal that 'we are entering a period where there will be changes'. Separately, the Australian also reports that Morgan Stanley has suggested that the result at Telstra 'has the potential to prompt changes in practice'.
[Note: ACSI's latest report on CEO pay: CEO Pay in ASX 200 companies: ACSI Annual Survey of S&P/ASX200 Chief Executive Remuneration found (among other things) that average executive pay in 2016-17 was at its highest level in 17 years and that bonus payments 'resemble variable fixed pay' with CEOs appearing more likely to lose their jobs than their bonuses. See: Governance News 23/07/2018]
- Negative impact of proxy advisers/shareholders 'caucusing to undermine out leaders': The AFR reports that Tabcorp Chair Ms Dwyer has expressed concern over what she reportedly views as investors and advisers working together to undermine the company's leadership in a way that damaged the interests of shareholders. 'The maligning of people's reputation under the cloak of investors' rights to have a view is completely unreasonable…The secret is, what does a board do when something goes wrong? I think the Tabcorp board particularly has, unfortunately, a lot of experience in these things, and has acquitted itself very well' she is quoted as stating.
- Are boards out of step with shifting shareholder expectations? The AFR suggests that the fact that the board's decision to alter the structure of remuneration in response to shareholder concerns at Tabcorp was insufficient to address shareholder concerns as evidence of shifting shareholder expectations. More particularly the article suggests that the result at Tabcorp raises questions, about whether investor concerns are being raised in a reasonable way and whether boards are listening. In a 'world demanding greater accountability, faster than ever before, boards are likely to find they don't like the answers' the SMH writes. Citing the opening address by Tabcorp Chair Paula Dwyer as an example, The AFR suggests that 'there is a sense that chairmen are ready to stare critics down and effectively ask: What do you really expect from us?'.
[Sources: Tabcorp ASX announcement: Chairman's address 17/10/2018; Tabcorp results of AGM 17/10/2018; [registration required] The AFR 17/10/2018; 18/10/2018; 18/10/2018; Australian 17/10/2018; 18/10/2018; 18/10/2018; [registration required] The SMH 18/10/2018; 22/10/2018]