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.
Referring to the tilt made by Media Super chairman Gerard Noonan to become chairman of Fairfax, another speaker at the conference, shareholder activist Stephen Mayne, exclaimed: “Where have you been all these years? Finally a trustee is running for a board position on an agenda of change.” Mayne emphasised that it would be beneficial for trustees to have “face time” with company directors. “The face time is the most valuable thing you can get. If you talk with someone for an hour you get an idea of whether they’re a good operator or not.” Failing this, super funds should back domestic activist funds that seek to unlock greater shareholder value for investors by improving the governance and strategy of investee companies. “All of the successful activist funds in the Australian market are offshore funds. Why does an industry with $1 trillion, which is happy to take on risk in equities, not supporting an activist manager? “In the absence of doing it ourselves, without an allocation to activist funds no one is shaking the trees.”
Mayne pointed out that activism – instigated by funds themselves – could be one method of capturing the attention of disengaged members. “You complain about lack of member engagement. Young people have executive pay on their mind and are engaged on climate change. What would the damage be for a super fund to get loud and proud and shake the trees on these issues?” He pointed out conflicts of interest in the governance models of retail super funds. The big banks, which own the retail funds, are essentially the issuers of debt and equity into companies. On the topic of super fund governance, Paatsch noted the need for effective oversight of the performance of representative fund trustees, since members can’t vote trustees on or off boards. He stressed that they needed to subject themselves to the same standards of accountability as investee companies. “If you were more inclined to lead by example, in risk transparency, governance or sustainability, then your calls for improved behaviour in corporate Australia might have more gravitas.” But he reinforced his respect for the achievements made by the industry superannuation movement. “I don’t think funds need to apologise for their occupational heritage.
Most funds’ extraordinary track record of value delivery speaks for itself…But funds should be prepared to be more transparent and vigilant about the accountability mechanisms that will keep them focused on members.” He gave credit to super fund efforts to improve their engagement on governance – proxy voting policies and internal governance resources, and the “raging success” of the Australian Council of Super Investors – which, at the margins, worked to make investors’ voices heard on matters like executive pay. Mayne laid down a challenge to the trustees in the room: to engage Transurban on the re-election of chairman Laurie Cox, who was also chairman of ABC Learning during its demise. “How long can the chair of ABC Learning remain as the chair of Transurban?” he asked. “Do the private engagement, and if it doesn’t work, be prepared to go public because it’s a very effective way to effect change.”