Newsletter No 15


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Newsletter No 15

  1. 1. ISSUE NO.15 September 2003 "CORPORATE CITIZENSHIP" A NEWSLETTER OF THE AUSTRALIAN COUNCIL OF SUPERANNUATION INVESTORS ANNUAL GENERAL CONTENTS AUSTRALIAN MEETING POSTPONED CORPORATIONS ANNUAL GENERAL MEETING Due to existing commitments of POSTPONED......................................1 RESPONDING TO ACSI ACSI’s accountant and auditor it AUSTRALIAN CORPORATIONS CONCERNS will not be possible to have the RESPONDING TO ACSI ACSI has written to the final accounts available for the CONCERNS........................................1 chairpersons of ASX/S&P 200 AGM as planned for Monday 29 DIARY NOTE.....................................2 Companies, introducing ACSI, its September 2003 at 5.00pm. ASIC’S SCORECARD ON THE members and objectives. We have As such the new date and time for INDEPENDENCE OF also introduced the ACSI corporate AUSTRALIAN INVESTMENT the AGM is now Wednesday 19 BANK ANALYSIS.............................2 governance guidelines that outline a November from 5.00pm – basis on which ACSI members will 7.00pm in the IFS Boardroom, ASIC RELEASES DRAFT SRI apply scrutiny on listed GUIDELINES.....................................2 Level 29, 2 Lonsdale Street, corporations in the best interests of Melbourne and will include a FINANCIAL REPORTING protecting their equity investments. SURVEILLANCE PROGRAMME..3 guest speaker. Followed by an Our overriding objective in this informal dinner for those able to PROFIT WARNINGS AT RECORD LEVELS..............................................3 regard is to lay the foundation on attend. Details of the dinner and which there can be constructive speaker will be forwarded shortly. OVERSEAS DEVELOPMENTS......3 dialogue with these companies in We hope many of our members the future. will be able to join us at the AGM. As many of you would be aware, ACSI launched its Voting Alert Service this year to assist trustees to identify contentious corporate governance issues in the ASX/S&P 100 and to vote where possible on resolutions that relate to these issues. It is evident however that not all issues actually get to the shareholder floor. For example, a number of corporations do not have audit committees that are comprised of genuinely independent directors or continue to pay directors non-superannuation related retirement benefits despite growing concerns that such payments may be an obstacle to a director exercising independent judgement in light of protecting their own position and a retirement pot.
  2. 2. ISSUE NO.15 September 2003 Therefore, ACSI has written to all The ASIC study did not identify buying and selling of shares companies who have had an AGM/ US style failings in Australia. In following internal analyst EGM to date in 2003, outlined our the US, brokers including JP recommendation. particular concerns on a specific Morgan, Citigroup and UBS The report concluded that “most of issue and invited feedback and Warburg paying out $2.4bill(Aus) the problems centred on investment clarification from the Company. to settle claims by investors for banks’ reliance on analysts to We will in ensure that all members conflicted broking research identify- and manage - potential are given an overview of this practices of the 1990’s following conflicts of interests themselves. feedback. Attached at Appendix A investigations into practices that This was unacceptable and is a summary of feedback we have revealed that broker stock undesirable from the perspective of received to date. ACSI will review recommendations were inflated to sound practice”. these responses and make further attract “lucrative investment recommendations to subscribers on banking businesses from The ASIC study will be taken into these companies where appropriate. companies”. account in the Federal Government’s considerations for The ASIC study identified the most changes to the existing regulatory significant ongoing concern as DIARY NOTE framework applying to analysts “continuing reliance on investment through CLERP 9. ASIC however ACSI’s 2004 Annual Conference banking staff to identify conflicts of provides a cautionary note that will be held on 18 June 2004 at the interests themselves and while international and domestic Sofitel in Melbourne. importantly on staff integrity to regulations were needed to promote manage and disclose these consistency in application, there conflicts. There is a risk that was a danger of “regulatory expectations of staff and ASIC’S SCORECARD ON overload” with overly legalistic and management will be different and THE INDEPENDENCE OF rule based responses. consequently without documented AUSTRALIAN INVESTMENT and tested guidelines and The Federal Opposition have cited BANK ANALYSIS procedures, outcomes will be in the report as evidence of the failure ASIC has recently released a report inconsistent and pose a threat to the of self-regulatory systems whilst that was critical of how investment analyst, the bank and its investors.” the Government has applauded the banks have failed to put adequate ASIC regard this risk as industry that was “addressing these measures in place to reduce the unacceptable and undesirable from (identified) issues”. scope for potential conflicts of the perspective of sound practice. ASIC RELEASES DRAFT SRI interests of research analysts that More specifically, it found that GUIDELINES they employ. investment banks do not have systems in place to prevent the On 3 September ASIC released This follows a survey of eight misconduct that was involved in the draft guidelines for the inclusion of unnamed investment banks in flawed company research that information relating to labour Australia. applied in the United States. standards and environmental, social The report identifies that in the and ethical factors in the product context of an investment bank, ASIC also found that remuneration disclosure statements of investment conflicts of interests can arise practices of investment banks that products, as required under recent between “the independence and applied to research analysts, reforms to the Corporations Act. objectivity of analysts’ research comprised of a mix of base salary The guidelines are a non- and the independence of the and incentive components/bonuses. prescriptive, principles-based investment banking function”. This caused a potential risk that approach. “may result in a remuneration An inherent reason for this is the policy more closely aligned with The guidelines state that where underlying “sell side” nature of the investment banking revenues than product issuers do intend to have research analyst’ role who is research performance”. regard to some or all of these expected to assist and generate considerations, they must tell objective investment strategies of The research also found that “there consumers which matters they take the investment bank client’s whilst were some concerns that account of and how. Where there is also assisting in securing revenue investment performance will no set approach, this must also be for the investment bank by playing remain one of the criteria for made clear. ASIC will undertake a a role in investment banking evaluating analyst performance, review of the final guidelines in transactions. In other words, there which could generate a conflict of 2006. ASIC is inviting submissions is a bias towards “buy” interest”. on the draft guidelines by recommendations by these analysts Other key areas of concern Wednesday 15 October 2003. particularly in circumstances where included the lack of policing and Submissions should be sent to the dual roles and potential guidelines that could apply to staff For a conflicts are not handled properly. regarding to their own trading,
  3. 3. ISSUE NO.15 September 2003 copy of the guidelines visit new standards include requirements Kodak Establishes Governance that banks physically and Position administratively separate their FINANCIAL REPORTING investment banking and research Kodak announced in the beginning SURVEILLANCE of August that it had appointed its units in a move to create firewalls PROGRAMME first chief governance officer that ensure the two do not (CGO). The CGO will be On 4 August 2003 ASIC communicate.2 responsible for helping Kodak announced details of its financial Attorneys allowed to whistle blow comply with new federal and state reporting surveillance programme mandates, as well as those imposed for 2003-2004. ASIC will review The American Bar Association by the New York Stock Exchange. the financial reports of 440 listed (ABA) has approved a rule that Kodak is one of only about 60 US Australian entities for their allows, but does not require, companies to have appointed a compliance with accounting attorneys to blow the whistle on CGO, but the trend towards standards. corporate clients who are suspected creating such a post at listed of committing fraud or other The review will cover compliance companies in the US is clearly financial malfeasance. Opponents with all accounting standards, but accelerating.5 of the rule contended that the new will be constantly monitored to rule contradicts the profession's UK respond to market circumstances single most sacred ethic - attorney- and any indications of Revised Combined Code issued client confidentiality. The inappropriate reporting trends. The proponents, who pushed the The Financial Reporting Council programme reinforces the legal measure, argued that the public has finalised the new Combined responsibility of Boards to ensure good outweighs such professional Code on Corporate Governance. compliance with accounting values, particularly considering the The new Code is based on the draft standards. Performance in this area countless investors who were revision of the existing Code that is being monitored, and abuses of devastated by Enron and other Derek Higgs suggested in his report the requirements will be liable for scandals.3 on non-executive directors enforcement action. The published in January. surveillance program will also Views on Sarbanes-Oxley result in an increased focus on The Code’s overall aim is to In the midst of the Australian auditor compliance. enhance board effectiveness and to debate about the value of regulatory improve investor confidence by PROFIT WARNINGS AT and guidance reforms on corporate raising standards of corporate RECORD LEVELS governance, a survey has been governance. The main features are: conducted in the US on this very A recent survey by Ernst & Young new definitions of the role of the issue. The survey was sent to 1,912 has shown that Australian listed board, the chairman and the non- chief executives, chief compliance companies issued 117 profit executive directors; more open and officers, and general counsel warnings in the second half of the rigorous procedures for the seeking views in relation to 2003 fiscal year, up 52% on the appointment of directors; formal Sarbanes-Oxley at the end of first half, and up 33% of the evaluation of the performance of September and elicited about a 10% previous corresponding half. boards, committees and individual response rate within one week. The Fifteen percent of the top 200 ASX directors; as well as enhanced initial results have revealed that listed companies issued profit induction and more professional 75% of respondents feel they are warnings in the second half, up development of non-executive now exposed to greater liability, from 12% in the first half. This is in directors. and 93% said the cost of contrast to the UK where profit compliance would certainly As with the existing Code (similar warnings for the same period were continue to rise over the next year. to the ASX guidelines), in order to at a record low.1 Seventy-two percent said they meet their obligations under the OVERSEAS favour increased scrutiny of Listing Rules, UK listed companies DEVELOPMENTS corporate governance, while 60% will have to describe how they said the reforms already go too far. apply the Code’s main and USA The positive news is that fifty-four supporting principles and either percent said they believed the Act confirm that they comply with the CalPERS introduces new had boosted investor confidence in Code’s provisions or provide an investment standards the US.4 explanation to shareholders. The CalPERS have introduced new new Code emphasises that investment standards for the 90 companies and institutional brokers and investment banks with investors should enter into dialogue 2 which the fund does business. The ‘The Corporate Library’, August 13 - based on trust and mutual August 19, 2003, Vol. 5, No.26 3 1 ‘The Corporate Library’, July 30 - August See Footnote 1 4 5 12, 2003, Vol. 5, No.25 See Footnote 1 See Footnote 1
  4. 4. ISSUE NO.15 September 2003 understanding. Companies should participants. A requirement for give helpful and informative director certification was dropped explanations, and institutional in favour of a code of practice, investors should take a considered which recommends a list of approach when evaluating them. appropriate training courses for directors. Requirements for the The code also advises that at least independence of directors and audit half the board in larger listed committees are also included in the companies be independent non- new rules.8 executive directors, with a definition of independence of non- executive directors; the separation of the roles of the chairman and the chief executive to be reinforced; and that a chief executive should not go on to become chairman of the same company. The new code comes into effect on 1 November.6 Company turns on Investor Apathy Unilever PLC has written to 10 institutional shareholders to ask them why they did not vote at its last annual meeting. Unilever's move contradicts conventional wisdom suggesting that companies are happiest when shareholders are This newsletter is correct to the best of silent. "In the current corporate our knowledge and belief at the time of governance climate we wondered going to press. It is, however, written whether this was for policy reasons as a general O'Sullivan it is Michael guide so recommended President that specific or whether there were technical professional 29, 2 Lonsdale Street advice is sought before Level reasons," said a representative of any action is taken MELBOURNE VIC 3000 Unilever. Unilever has since Tel: (03) 9342 1450 discovered that three of the 10 Fax: (03) 9342 1499 actually did try to vote, but the Mobile: 0418 996 359 Email: balloting process had gone awry. The company said it is eager for institutional directors to register Phillip Spathis their opinions and added that it Executive Officer "would welcome the chance to talk Level 29, 2 Lonsdale Street this issue through." Hopefully this MELBOURNE VIC 3000 is a sign of things to come.7 Tel: (03) 9657 4375 Fax: (03) 9657 4378 NZ Mobile: 0417 501 065 Email: New Zealand Exchange corporate governance rules In the first week of August the NSX published its final version of proposed revisions to its corporate governance rules for listed companies. The revisions were made after a consultation period on earlier proposals by industry 6 ‘UK Financial Review Council issues governance code’,, 03 September 2003 and < ion419.html> 7 8 See Footnote 1 See Footnote 2
  5. 5. 5 September 2003 APPENDIX A ACSI – ENGAGEMENT Company: AMP ACSI Company provides retirement packages to non-executive directors at the end of their Concern: tenure (in excess of SG). Response: Board has reviewed non-executive director remuneration arrangements. One-third of non-executive director fees will be paid as AMP shares. Directors with existing cash based retirement benefit will have arrangements frozen from 25 March 2003. The Board is made up of a majority of independent directors. AMP considers that all member of each committee of the Board are independent. ACSI has asserted that Ian Reynard (who retires on 31 August 2003) is not independent on the basis of related party disclosure. AMP asserts that $104,811 of legal fees paid to the legal firm Allen Arthur Robinson in 2002 is not ‘material to AMP or to Allens Arthur Robinson’, and therefore not an impediment to independence. ACSI In accordance with ACSI guidelines Mr I Renard would not be defined as Concern: independent on the basis that he is a former partner of a legal adviser to AMP. As such the audit committee is not wholly comprised of independent non-executive directors. Response: The Board believes that each of the non-executive directors is independent. As such, the Board’s standing Committees: Audit and Compliance, Nomination and Remuneration are all composed entirely of independent non-executive directors. The Board do not consider that the $104,811 paid in legal fees to Allens Arthur Robinson during 2002 to be material to AMP. Mr I Renard retired from the Board on 31 August. AMP Directors’ Report for half year 30 June 2003 asserts “AMP endorses the 10 essential Corporate Governance Principles and already follows most of the Best Practice Recommendations. Company: CSR ACSI Chairperson of the Board is also the Chair of the Remuneration and Nominations Concern: committee. Response: The CSR Board has reduced to 5 non-executive directors and one executive director following the de-merger with Rinker. The audit committee comprises of two non- executive directors and the chairman. The combined remuneration and audit committees comprises of the other two non-executive directors and the chairman. The chairman does not chair either of these committees. CSR contends that the committee structure “is a sensible one given the size of the board and that it is consistent with ASX guidelines”.
  6. 6. Company: Coca-Cola Amatil ACSI The majority of the Board is not comprised of independent directors. Concern: Response: CCA’s Board has 4 independent directors, 2 executive directors, and 2 directors nominated by The Coca-Cola company. The Chairman is an independent director and has the casting vote in the event of a tied vote of directors and as a consequence the independent directors have a majority vote at board level. Therefore they believe the CCA satisfies the ASX guidelines in relation to the majority of board being independent. It has formed a related party committee comprising of the four independent non- executive directors to review transactions between the company and its related parties including the Coca Cola company. ACSI Company provides retirement packages to non-executive directors at the end of their Concern: tenure (in excess of SG). Response: As at 31 December 2002, entitlements to retirement allowances for non-executive directors has been terminated. Company: Macquarie Bank ACSI Non-executive directors receive share options. Concerns: Response: On non-executive remuneration, part of non-executive director remuneration can be taken in the form of fully paid ordinary shares, as they are also required to maintain a minimum shareholding of at least 4000 shares, which is equivalent to annual directors fees. The Bank has suspended the non-executive directors option plans and replaced this with contingent “additional remuneration” valued at 20% of fees and payable on meeting pre-agreed return over last 3 years at or above 65th percentile of companies in S&P/ASX Industrial Index.
  7. 7. Company: Macquarie Bank Cont… ACSI Mr Clarke is an Executive Chairperson. Concern: Response: With regard to the ‘independence’ of the executive chairperson, David Clarke, Macquarie considers that he is best placed to deal with Macquarie’s ‘complex and highly specialised’ activities, and this provides ‘significant advantages’ of ‘having executives in both setting and implementing strategy’. Therefore the existence of an executive chairperson according to the Bank, works well on a long-term basis. In addition, the Bank has nominated a range of checks and balances to heighten investor’s levels of comfort, including providing the check of management power, including: Separation of the role of a Lead Independent Director; The appointment of Lead independent Director; Having the majority of Independent Directors on the Board – when Catherine Livingstone joins the Board in November it will comprise seven independent directors and four non-independents; The Independent Directors meeting at least annually in the absence of the other Voting Directors and management; The delegation of certain responsibilities to Bard Committees, a number of which the Chairman is not a member; All Directors having access to other members of management in relation to the Board Committees of which they are members; The ability of Directors to seek independent professional advice for company related matters at the Bank’s expense; Appropriate induction procedures for new directors which ensure that they can fully contribute to Board discussions at the earliest possible time; and An annual assessment of the Executive Chairman and CEO by the Independent Directors. The Macquarie Board recognises that the ASX Corporate Governance Guidelines set out ‘best practice’, they implicitly recognise that ‘one size does not fit all’. Macquarie Board is made up of majority independent directors, which is further enhanced with the recent appointment of Catherine Livingstone. Kevin McCann has been appointed chairman of the Macquarie Board Governance Council.
  8. 8. Company: Macquarie Bank Cont… ACSI Independence of non-executive directors. In particular Non-executive director(s) Concern: serving on a board for more than nine years and where a material contractual relationship exists. Response: The Bank has submitted an extensive criteria of the definition of independent directors that includes: Is not a substantial shareholder of the bank or of a company holding more than ten per cent of the bank’s voting stock or an officer of or otherwise associates directly or indirectly with a shareholder holding more than ten per cent of the Bank’s voting stock; Has not within the last three years been employed in an executive capacity by the company or another group member or been a director after ceasing to hold any such employment; Is not a principal or employee of a professional adviser to the Bank and its entities whose billings exceed five per cent of the adviser’s total revenues. A Voting Director who is a principal or employee of a professional adviser will not participate in any consideration of the possible appointment of the professional adviser and will not participate in the provision of any service to the Bank by the professional adviser; Is not a significant supplier or customer of the Bank or its entities or an officer of or otherwise associated directly or indirectly with a significant supplier or customer. A significant supplier is defined as one whose revenues from the Bank exceed five per cent of the supplier’s total revenue. A significant customer is one whose amounts payable to the Bank exceed five per cent of the customer’s total operating costs; Has no material contractual relationship with the Bank or any of its associates other than as a director of the Bank; Is not a director of any of Macquarie Bank’s subsidiaries with the Voting Director’s ability to act in the best interests of the Bank and independently of management. Macquarie promotes renewal Board membership to ensure it objectively promotes the retirement of non-executive directors after 12 years compared to the 9 years promoted by ACSI. ACSI had asserted that Mr McCann, a partner at Allens Arthur Robinson should not be regarded as independent, in light of various contractual relationships between the two entities. Macquarie regards that Allens Arthur Robinson’s billings from Macquarie represent less than 5% of total billings that this is not an impediment to independents.