Another day, another round of shareholder fury. Yesterday, it was the turn of share registry Computershare to feel the brunt of shareholder anger. While the company’s remuneration report was opposed by 23% of proxy votes received, it was Computershare’s controversial deferred long-term incentive plan that aroused the most substantial protest. In total, Computershare’s plan to grant 1.4 million options to selected executives was supported by only 38% of proxy votes received, it was only passed after executive directors Chris Morris and Tony Wales used their large shareholdings to support the grants.
Shareholders were also unhappy with the re-election of long-time Computershare executive director Penny Maclagan. Maclagan, who joined the company in 1983 and is Morris’ sister, received an unusually high 33% protest vote from institutional holders. This level of protest is usually reserved for former Allco directors (even former ABC Learning chairman David Ryan only received a 29% protest vote at Lend Lease last year despite chairing ABC’s audit committee for the past four years).
However, it was controversial long-term incentive plan that most infuriated institutional holders. Performance shares are an insidious device because unlike share options, they have no “strike” or “exercise price”. Therefore, while “premium price” options require share price appreciation for the instrument to have value (admittedly, that appreciation could be short-term or the result of earnings manipulation and doesn’t result in any “downside risk”), “performance rights” are little more than free shares gifted to managers or directors (they are also referred to as ZEPOs or zero-price options).
Because performance rights have value even if a share price drops, shareholders will usually demand that boards attach strict performance hurdles to be satisfied before the executives are able to exercise the performance rights. Otherwise, the farcical situation could result in which executives receive millions of dollars of equity “incentives” while shareholders have endured years of negative returns.
In Computershare’s case, half of the performance rights granted to senior executives are subject to an “earnings-per-share” hurdle. While EPS hurdles aren’t perfect (EPS is able to manipulated by executives and can provide a shorter-term focus) they are better than noting. (The company also allows full vesting of incentives upon a change-in-control that is not supported by shareholders). The bigger issue for shareholders, however, was the other half of the rights, which were not subject to any performance hurdle at all — the managers simply needed to hang around for five years.
Under the plan, Computershare managing director Stuart Crosby is able to receive 450,000 performance rights if he remains at Computershare for five years. Therefore, even if the company performs horribly (and misses EPS targets), but Crosby keeps his job for five years, those rights may be millions of dollars
In response to criticism of the plan, outspoken Computershare founder and executive chairman Chris Morris claimed that the performance rights were really a retention plan, rather than a performance scheme:
I think it’s ridiculous to think performance bonuses make people work harder. What has more money done? It’s caused crashes, with people during their performance.
In a sense, Morris is probably correct. Finance companies proved that bonuses don’t necessarily result in sustained long-term performance. Although that raises the question: If money doesn’t motivate executives — why does Computershare need to give them millions of dollars worth of free shares?
In relation to the substantial “against” vote, Morris told Fairfax that he was “committed” to the plan despite the protest and that “most of (the protest vote) was from a number of institutional investors who are forced to follow the proxy advisers”.
Morris was either being ignorant or deceptive. While many institutional shareholders receive advice from firms such as RiskMetrics or CGI, that advice consists of a lengthy report describing the resolutions proposed, along with a non-binding suggestions as to support or reject the resolution. In many cases (probably the majority), institutional shareholders will completely ignore the recommendations of their proxy advisers — in the event that the views of the advisers are followed, that is usually because the their reasoning is more convincing than that provided by the company. (For instance, last year, RiskMetrics strongly recommended against the re-election of ASX director Russell Aboud, who subsequently garnered 91% of votes in his favour — clearly indicating that institutions are not “forced” to follow the advisory group’s recommendations).
Computershare shareholders were also angry at the company’s resolution relating to board discretion over termination payments. Almost 40% of votes opposed the plan, which gives Computershare the ability to make a termination payment above the one-year limit prescribed by new federal legislation.
While Morris may not believe it, it may be possible that institutional shareholders were simply unhappy that their monies were being handed to wealthy executives with absolutely no alignment to the company’s actual performance or shareholder returns.
Good report Adam. I’ve often wondered about these incentive plans. I know they are there to combat the “agency problem” and aligh the performance of managers to the goals of board and the shareholders but there must be better ways of doing this than blanket share options.
I’ve wondered why they don’t use an alpha measurement (based on the returns of the company vs the returns of the market as a whole). That way the execs will be amply rewarded when they produce “better than the market” returns, rather than be rewarded just when the share price goes up and down (which could just be when the whole sharemarket is booming or busting)