Telstra is bracing for a first strike at its annual general meeting on Tuesday with the majority of industry superannuation funds to vote against the troubled telco’s executive pay report.
Almost all industry funds, including the $140 billion juggernaut, AustralianSuper, will vote “no” when Telstra’s executive remuneration report is put to a vote, The Australian Financial Review understands.
The protest over bonuses paid to chief executive Andy Penn will set a combative tone for the AGM season, which kicks off unofficially this week and runs until the end of November.
The Financial Review can also reveal Tabcorp will face a sizeable vote against its remuneration report over merger bonuses paid to management. A number of blue chip companies will also hold meetings this week including Cochlear, EBOS, CSL, Origin, and Aurizon.
Remuneration reports detail salary and bonus for each executive and must be put to a shareholder vote at each AGM. A “strike” occurs when more than 25 per cent of votes are cast against.
Telstra’s report provides for Mr Penn to receive 66 per cent of his target bonus despite a plunge in shareholder value.
He is due to get fixed salary of $2.3 million and bonus payments totalling $2.1 million.
Shareholders think that’s too generous given the telco’s share price has fallen nearly 40 per cent across 2018.
Major proxy advisers have confirmed they will recommend voting “no” to Telstra’s Executive Variable Remuneration Plan, which Telstra has previously conceded will deliver a “material” vote against the report.
The Financial Review has learned that the Australian Council of Superannuation Investors (ACSI), is taking the same approach, although it would not confirm as much publicly.
Sources said the collective “no” vote by industry funds was enough to almost guarantee the 25 per cent of votes required for a successful first strike.
Gambling giant Tabcorp faces a possible strike on Wednesday, as key proxy advisers ISS and Ownership Matters, and retail shareholders take exception to one-off bonuses paid after the company’s $11 billion merger with Tatts. Chief executive of the combined group David Attenborough received a $630,000 merger bonus, including $315,000 in cash, with his pay jumping from a maximum package of $6.25 million to a maximum $8 million package next year. His reported pay this year was around $4 million.
“Companies are asking for shareholders to take all the risk on an M&A [transaction], but then give themselves massive pay rises,” ISS Australian head Vasili Kolesnikoff said.
The Australian Shareholders Association agreed saying it “does not support these discretionary awards outside the normal remuneration framework. If the merger is successful, executives will benefit through the future STI and LTI awards.”
Ownership Matters and CGI Glass Lewis are also understood to be taking issue with the re-election of Tabcorp director Steven Gregg, also chairman of Caltex, given he sat on Tabcorp’s audit committee during a $45 million settlement with AUSTRAC over money laundering breaches and an ongoing Australian Federal Police investigation into a Cambodian payment.
Tabcorp pointed to comments by chairman Paula Dwyer at the time of Mr Attenborough’s new package to say it is “competitive, contemporary, and strongly aligned to long-term shareholder value creation”.
The meetings occur against the backdrop of the banking royal commission, which has exposed poor corporate culture and fuelled debate about executive pay, director accountability and “social licence” to operate.
Most observers anticipate a higher incidence of strikes against remuneration reports this year.
Investors in Telstra are agitated about its new executive pay regime – a “single variable remuneration structure”.
It combines short and long-term incentives into a single appraisal based on 12 months’ performance as measured against both financial and non-financial metrics.
There are concerns the model removes some of the more difficult long-term hurdles required to win bonuses.
Early adopters including QBE, AMP and MYOB have already received protest votes.
NAB, JB Hi-Fi and iScentia face resistance at their AGMs in coming weeks.
Rio Tinto abandoned its proposal for a similar pay scheme due to a lack of shareholder support.
ACSI chief executive Louise Davidson said banks and other companies cited by the royal commission would need to have taken decisive action on executive pay.
“We would certainly expect to see a consequence for executives who have had oversight of areas where there has been outrageous conduct,” she said.
Ms Davidson said members were keeping a close eye on the new breed of pay structures but would not comment on individual companies.
“We will vote against them if we don’t think they have sufficiently rigorous performance hurdles,” she said.
ACSI will also target bonuses that appear too easily won.
“We think that bonus payments are too persistent, not just in financial services but generally,” Ms Davidson said.
“There remains an attitude that bonuses are paid as a matter of course and you have to do something really bad not to get your bonus.”
At Telstra, the board has discounted the bonuses of all executives by 30 per cent in recognition of the company’s difficult year.
But a spokesman conceded the company nevertheless faced a “material vote”.
“We are aware a number of proxy adviser firms have recommended against Telstra’s remuneration report and a number of investors have also indicated a vote against,” he said.
If a company receives two strikes, shareholders at the same meeting will vote on whether to spill the board, which means all directors would need to stand for reelection.
In 2016, 11 ASX 200 companies received a first strike on its remuneration report but only five did so in 2017.
Ryan Wade, the chief operating officer at Computershare-owned proxy advisory firm Georgeson, does not expect a repeat the “benign” 2017 season.
“Firstly, there may be a protest vote against boards from investors concerned over the corporate governance issues that have come out in the financial services sector,” he said.
“Secondly, the introduction of new pay models by companies attempting to simplify executive remuneration targets and measures.”
Mr Wade said proxy advisers had taken issue with combining short and long-term incentives to calculate a bonus determined by performance over one year.
“Investors are also increasingly concerned where remuneration structures include non-financial measures that are subjective and do not sufficiently align executive incentive with shareholder returns,” he said.