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Vas Kolesnikoff is the Chief Executive of the Australian Shareholders’ Association. He holds Bachelor of Economics and Master of Applied Finance degrees, and qualified as an Associate of the Institute of Chartered Accountants in Australia. His career has been with KPMG, and investment banking at Macquarie Bank, Merrill Lynch and Westpac Institutional Bank.

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Vas's View
disco stu
post Posted: Dec 6 2011, 12:38 PM
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Does the ASA have any view as to the automatic delivery of any uncast shareholder votes to go to the MD who then gains proxy rights over all those uncast votes, enabling him/her to vote as they please? Is there a valid argument that these proxy votes should instead be cancelled?

The current set up is akin to allowing the encumbered US president to allocate every uncast vote by eligible US voters to his own side.

Vas's View
post Posted: Nov 28 2011, 11:32 AM
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As of 1 July 2011, new ‘two strikes’ legislation has come into effect which has created significant debate in business and investment circles. It also has significant consequences for SMSF trustees, with many of you owning companies for the long-term.The legislation states that if 25% or more of the shareholders of a company vote against the remuneration report of executives in two consecutive years, thereby incurring ‘two strikes’, then within 90 days of the second strike, the board of that company must answer to shareholders and stand for re-election.

This legislation has been enacted because there have been many instances of shareholder disapproval of boards and management on the issue of company performance and paying executives for it. However, the resolution relating to the remuneration report is only of an ‘advisory’ nature at AGMs, such that, it is not binding on the company and many boards have generally ignored the shareholders’ votes. This new legislation, which the Australian Shareholders’ Association (ASA) was instrumental in driving, now creates a consequence for boards who ignore the vote of a significant percentage of the owners of the company. All shareholders finally have an incentive to cast their votes to influence the decisions in the company.

The issue of executive remuneration is not singular and without consequence, as it has wide-ranging implications for investor returns.

It is one of the measures of appropriate governance in existence in a company, and demonstrates how a board, which represents the owners of the company, puts in place appropriate rewards. This is to ensure the company performs to its maximum potential, with regard to safeguarding investors’ interests and maximising returns.

The ASA and numerous other governance experts point out the perils for investors where poor governance leads to poor results. Executive remuneration in a company goes to the heart of what outcomes shareholders seek to reward. ASA policies require alignment of executive remuneration with investors’ interests and returns with a long-term perspective; that is, investors must see outperformance before bonuses or incentives are paid to executives. Most superannuation and savings plans involve long-term investments and when we see reward given for short-term risk taking, there is immediate concern for the longer-term consequences and potential loss.

The ASA is mindful in pointing out misalignment of executive remuneration with investors’ interests, which could potentially cause losses or sub-optimal results for investors. This year we have seen numerous examples, where any concept of executive entitlement to incentives or bonuses are not seen in the performance of the company or results for investors.

Let’s go through two examples, so that DIY super investors can see what they should be looking for:

  • The Fairfax Media (FXJ) share price in the last five years has fallen significantly from a high of $5 in 2007 to a low of 68 cents in August 2011, while dividends have fallen from 20 cents to five cents per share. In 2011, the company reported a $390 million loss. In the five-year period, executive remuneration has increased from $7.25 million to nearly $14 million. This company is not rewarding results.
  • This year, Leighton Holdings (LEI) reported a $409 million loss and conducted a highly dilutive $758 million capital raising to prop up its balance sheet after an urgent business review resulting in a $1 billion write-off against long term contracts. In the meantime, current and former executives received multi-million dollar one-off short-term related bonuses and payments, including to the CEO of less than one year, David Stewart, who will walk away with over $7 million. Again, there is a disconnect between company performance and executive rewards.
The ASA wants SMSF trustees to be mindful of all factors when picking their stocks. In the case of executive remuneration, you get out of your investment what you reward.

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