Superannuation trustees should try harder to prevent members’ money being pumped into the inflated salaries of executives and directors of underperforming companies, Dean Paatsch, the director of RiskMetrics in Australia, told Superratings’ 2009 Day of Confrontation last month. Presenting his personal views, not those of RiskMetrics, Paatsch said that despite a few notable exceptions, the industry’s actual engagement with companies fell short of its rhetoric, verging almost on indifference: “We speak far too much and act far too little,” he said. The founding head of the Australian Institute of Superannuation Trustees said he retained his faith in the trustee system, but that judgments about governance, sustainability and risk were still peripheral within it.
Paatsch admitted that professional governance advisors, such as RiskMetrics, were part of the problem. “We’re part of the giant delusion in which activity is confused with results,” he said. “The professionalisation of the governance function means it is in danger of becoming an administrative task, remote from the business of managing money. This is what happened in the US and the results are all too apparent… If the next phase of governance activity for super funds is to be more successful, it must be more holistic. It must be part of your mainstream approach.” Super funds’ passivity was demonstrated when Macquarie was removed as the manager behind Macquarie Airports, Paatsch said. A vote of 50 per cent against the manager would have seen them removed with no payout, yet they won 75 per cent of the vote, entitling them to $345 million, or eight years’ worth of fees, ostensibly ensuring a mechanism to prevent triggering a debt provision clause. According to Paatsch, the major reason why Macquarie was allowed to receive this outcome was because shareholders could not propose a credible alternative.
“Why weren’t [super fund CIOs] in a room together negotiating a better outcome for investors with the independent directors of Macquarie Airports? “The frontline defence against the destruction of shareholder value remains a competent board. Yet investors, including super funds, are seemingly incapable of distinguishing between good and bad directors at the ballot box.” Leaving governance to funds managers was not effective in itself. During the passage of companies such as ABC Learning, Babcock & Brown and Allco to the corporate graveyard, shareholder value wasn’t just destroyed, but legally “dispersed into the endless conga line of middle-men hungry for their fee”. He said the average incumbent non-executive director won 96 per cent of the vote, making re-elections for directorships the “easiest electoral office in the world”. This would not change unless investors, super funds included, put forward nominations of directors they approve of. Proxy advisors themselves needed to expand their remit to make recommendations based on director competence, Paatsch said.