30/11/2011 - 11:16

Institutional investors’ lazy ways will hurt

30/11/2011 - 11:16


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In time, faceless proxy vigilantes could destabilise boards to suit their own agenda.

In time, faceless proxy vigilantes could destabilise boards to suit their own agenda.

HIGHLY paid fund managers are supposed to be smarter than most people, but after this year’s annual meeting season it’s clear for all to see that they are not.

In a demonstration that nothing has been learned since the same managers accepted, without question, the investment recommendations of ratings agencies, this time they have accepted, without question, the voting recommendations of proxy advisers on directors’ pay.

Protests about excessive pay are perfectly valid, especially when the pay pendulum swings into the obscene category, which it has at some companies.

However, rather than do their own homework and make a personal appearance at an annual meeting on behalf of the people whose funds they are paid to manage, an embarrassing number of institutional investment firms simply follow the advice of proxy firms and vote against remuneration reports.

That’s how companies such as casino operator, Crown, copped a 55 per cent vote against its remuneration report on how much directors get paid. Bluescope Steel was hit with a 38 per cent negative vote, Pacific Brands 53 per cent, and Emeco 26 per cent.

The importance of those numbers is that, under new laws, the entire board of a company can be forced to stand for re-election (a so-called spill) if a vote of more than 25 per cent rejecting a remuneration report occurs in two consecutive years.

The reason for the two-strikes rule is that the Australian government, and its corporate cop ASIC, reckon that the pay directors were awarding themselves had fallen out of balance with community standards, which in some cases it has.

One cause of directors indulging in a pay feast is that ASIC itself had made life much tougher for those at the top, especially non-executive directors, which the regulator reckoned should be spending more time looking over the shoulder of management than occupying an over-stuffed leather chair at the club like the good old days.

Despite their good intentions the outcome of these changes to the law has been less than perfect, and potentially damaging to the interests of everyone involved – companies, shareholders, investment funds, and the investors they are supposed to be working for.

What’s happened is that the fund managers, pleading pressure of work, have not been doing their job. Rather than speaking on behalf of the money (and people) they represent they have simply signed a proxy form and handed it to an advisory firm, which has used it to whack a company board around the ears by voting against a remuneration report.

Sound familiar? It ought to, because the fund managers in question are the same people who used the services of ratings agencies to direct money into sub-prime mortgages and other dodgy investment assets because they were told it was a good thing to do – without doing their own homework.

In effect, institutional investors have abrogated a key responsibility and empowered faceless proxy firms and other professional stirrers, such as the Australian Shareholders Association, to fill a vacuum and claim to be serving a community good.

The problem with the proxy professionals and the ASA is that they do not have skin in the game. They are generally not shareholders of a company being targeted. They have simply built themselves a convenient power base from which to snatch a headline.

Directors, ASIC and the government itself share the blame of creating a new breed of professional lobbyists who, in time, potentially will have the power to destabilise a company by forcing a change of control at board level and installing people of their choice.

In time, proxy wars could even prove useful in a corporate takeover, or in the revival of an almost forgotten moneymaking scheme known as ‘green-mail’. The best player of that game, who would be having a field day with the new remuneration laws if alive today, was Robert Holmes a Court. He would be having a fine time using the law to frighten takeover targets into submission.

When we get to next year’s round of annual meetings we will know if the power pendulum has swung too far away from incumbent directors in favour of the faceless proxy vigilantes.

Dealing in dominos?

GOLD bugs, those enthusiasts who reckon gold is headed for $US5,000 an ounce or more, would be wise to take note of what happens to a precious metal that flies too high, incurs a sudden loss of support, and crashes to the ground.

Palladium, the fourth member of the globally-traded precious metals family after gold, silver and its close relation, platinum, has crashed from $US840 an ounce in early August to recent sales around $US594/oz – a 30 per cent fall in four months.

Generally regarded as an industrial metal rather than a commodity collected by investors and speculators, palladium is a victim of the deteriorating global economic outlook, especially for car sales because its major use is as a catalyst in exhaust systems.

There are specialist palladium funds operated by investment firms such as ETF Securities, which has reported a significant withdrawal of funds as investors rush to garner cash from wherever they can.

The worrying question is whether the exit from palladium is a commodity equivalent of the exit from weaker economies such as the run on Greece, which led to a run on Italy, and whether palladium today could be silver tomorrow, and gold the day after. Incidentally, a 30 per cent fall in the gold price (such as that just incurred by palladium) would knock $US500 off the price.

Deere John

CONTINUED strength in the soft commodity sector, which has lifted the price of wheat, corn and other grains is flowing through into two other components of the US rural economy, and perhaps pointing to better times ahead in rural Western Australia.

John Deere, the world’s biggest maker of farm tractors, has surprised investors with a 25 per cent boost in sales for the year ended September 30, matching a sharp rise in farmland values which are also up by 25 per cent on a year ago.

C’mon over

WHERE are the Kiwis going? That’s a question which has the government of New Zealand foxed after the latest data revealed the first net fall in migration (more people leaving than arriving) since 2001.

One possibility, given that it happens every time the Australian resources sector booms, is that towns like Kalgoorlie, Port Hedland and Karratha are overflowing with Kiwis chasing fat pay packets and a dollar worth $NZ1.31.


“All power is delightful, and absolute power is absolutely delightful.” 

Kenneth Tynan


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