The surprising thing is not that unions have been concerned about and talking about corporate governance for the past few years, but that it has become a big talking point relatively recently says ACTU Senior Industrial Officer Linda Rubinstein.
For many investors, critical examination of the way companies manage themselves and their relations with others was not a key question in the 1990s when everywhere they looked they saw up.
Not that there was any excuse for it, even then. I am starting to develop an interest in these behavioural theories of investment – where you examine why investors, including institutional investors, hold the beliefs they do. Amnesia seems to me to be an interesting topic for examination. After all, we are still dealing with the consequences of the corporate collapses of the 1980s, which pushed up some of the same issues – the cult of the CEO and with what happens when large public companies engage in complicated and even shady dealings assisted by the negligence of directors and auditors. Although those events prompted a wave of inquiries and new corporate regulation, the bull market of the 1990s saw much of the usual triumph of hope over experience.
So why were unions concerned about corporate governance when our members’ superannuation savings were doing well? It might be said that we grizzled about CEO salaries because of class envy and because we wanted to talk up our members’ case for a rise. And we called for independent directors because we wanted to have a shot at the executives whose companies employ our members.
At one level, there is truth is those propositions. Of course there is. We spend our lives trying to defend our members’ jobs, and improve their wages and working conditions. I’ll admit it gets up our noses when people on millions of dollars a year prophesy doom if people on $35,000 get another $20 a week.
But that’s not what it’s all about. It would be stupid for unions to work hard to make sure that members get their super, and not care what happens to it. Given that we negotiated for workers to defer some wage increases in order to save for retirement, we have an obvious responsibility to make sure that the money will actually be there.
And as our members’ superannuation savings started to grow we, together with superannuation funds themselves and other institutional investors, started to figure out that this was an issue too important to simply leave to the regulators.
Of course we have a general interest in companies being well managed and successful. It is, after all, our members who, by and large, are the major victims of badly governed companies. When a company goes belly up, the first thing that happens is that people lose their jobs. The second is that, in many cases, they don’t receive their entitlements – their accrued annual leave, long service leave and redundancy pay – that’s taking a big financial whack, not counting super. In Australia, workers directly involved don’t generally suffer more of a hit to their super than anyone else, unlike the US, where Enron employees not only lost their jobs but around half of their retirement savings that had been invested in the company. Incidentally – this is why we don’t get all that excited about employee share ownership schemes – it all depends on who your employer is.
Badly managed companies will make bad decisions which will end up with operations closed down and workers sacked in the interest of cutting back.
Self-interested executives driven by options packages will treat workers with the same contempt they treat others involved with the company – including the long-term shareholders who are left after they take the money and run.
Obviously all this affects share prices, and superannuation returns. But it does more. If mismanagement, greed and looking after your mates are allowed to become acceptable values, then we all lose out. Working people share the same interest as everyone else in a society, including corporations and investment markets, which are governed honestly and competently in the interests of all stakeholders.
So, how much of a problem is corporate governance? It’s getting more of a run now, not only because if some spectacular US and Australian collapses, but because our first experience of falling markets for some time has concentrated our minds.
Whether or not it can be quantified, there is fairly widespread evidence of governance deficiencies, apart from the most horrible examples, like Enron, HIH, OneTel and the rest, which showed not only how greedy and irresponsible were some executives, but so were those who supported them – the banks and the auditors – when it might have been thought that they were protecting shareholders and others relying on them. Some companies went into international markets they knew very little about, and have been forced to make costly retreats. Quite a number have turned over CEOs seen by the markets to have failed (although not unrewarded). There is not always reason to be confident that company boards know what’s going on – sometimes because the directors tell us that they were misled too.
Not only is there growing interest in the issue of how companies govern themselves – there is a growing view that regulation alone is not enough – investors, particularly institutional investors like superannuation funds, who hold shares on behalf of very large numbers of individuals, have a responsibility to keep watch on the companies in which they invest. You’re well aware of the comments which have been made by politicians from all sides, and the various guidelines drawn up by – most recently the ASX. Superannuation funds are expecting their fund managers to be more active in governance issues, with exercise of proxy votes one way in which this can be done.
And, there is some early evidence that it might be working. Undoubtedly as a result of these concerns, an analysis by Corporate Governance International found a significant increase in the level of proxy voting in 2002 to 41% compared to previous years, although it is still well below levels in the UK, where it is 55% of shares voted and the US where it is around 80%. Given the recommendations of the UK Newbold Committee that trustee boards should be required to develop a policy position on voting and disclose it in their statement of investment principles, it cannot be long before Australian trustees will face similar obligations. The Labor Party has committed itself to encourage the incidence of proxy voting, including consideration of making it mandatory should other measures not be effective.
Executive remuneration has been one of the key issues – partly because of public horror at the size of the packages received by some CEOs, particularly when it would seem entirely undeserved if the pain suffered by shareholders, employees and creditors is anything to go by. More sophisticated questions are also being asked about the purpose of incentive-based remuneration. Are the incentives the right ones? Are options encouraging a rise in the share price over two or three years, irrespective of what happens later, the kind of strategy that is in the company’s interests? Does a focus on cost-cutting above all else represent the kind of investment in the future that investors want to see?
The Labor Council of NSW is committed to campaigning around this issue, following release of a report it commissioned showing an inverse relationship between company performance and executive remuneration over around 24 times average earnings, or $800,000 per annum. This starts to make the idea of denying tax deductibility to remuneration packages over $1 million seem very sensible indeed.
Recent research commissioned by ACSI (Australian Council of Superannuation Investors) has found evidence of some changed practices in relation to governance. 92.6% of the top 100 companies have remuneration committees – up from 66% in 1995, while 45.6% have an independent chair, compared to 36.7% in 2001. Significantly, three quarter of top 100 companies with share options schemes disclosed their value, up from half a year ago.
It’s hardly surprising that unions, representing millions of superannuation investors, are calling on companies to lift their game, and on regulators and fund managers to make sure they do.
And how should that be done? There are a few ways.
To start with our always more upfront great and powerful friend – in the US there is a growing trend towards legal class actions on behalf of investors, including superannuation funds, against companies and their directors and executives for damages resulting from their fraud or negligence. CalPers suing AOL Times Warner re an alleged $1.7 billion of overstated advertising revenue. How successful these will be in actually obtaining benefits for investors remains to be seen, but at least one of the firms – Milburg Weiss, who was represented and spoke at the last CMSF conference – is seeking Australian investors amongst super funds here to join their US actions. For various reasons, including our differing legal systems, I’m not sure how effective such an approach would be in Australia, but legal action is always a possibility, not only against the companies, in the search for the long pockets (with something still in them) but against the advisors and find managers who failed to see the warning signs.
The Slater & Gordon ad threatening to sue employers who pushed workers into RSAs had a big effect on the subsequent choice debate and the issue of employer liability.
Not investing in companies with poor governance is another option, although probably practical only in the worst of cases. Companies which look as if they might go bad do not attract investment, but in most cases the issue is not avoiding the worst, but improving the majority. The knowledgeable getting out quietly while there is time may avert disaster for their funds, but it does nothing to improve the system and prevent future collapses of this kind, nor of course does it help the small investors and creditors who aren’t in the know. Responsibility needs to go further than that.
Trustee boards and fund managers have their main role to play in trying to achieve better governance. In addition to increasing their level of voting, investors and their fund managers have become far more prepared to question and oppose CEO remuneration packages where it is felt that they are not justified by the person’s performance. Some companies are rethinking their policies on these issues, and withdrawing proposals although others remain mystified as to why this could be seen as an issue of relevance to shareholders.
Apart from voting, significant investors can engage with companies to ensure that they make the changes needed in relation to governance and behaviour. Although we engage with companies all the time in the interests of our members’ working conditions we would be interested to know from you about the process of dealing with the companies in which you invest.
Finally, there is regulation. This is important, and has played a role, although some, like Henry Bosch, argue that the biggest improvements of recent years have occurred as a result of shareholder activism rather than legislative change. We support the Labor Party’s proposals for increased penalties for breaches of the Corporations Act, improved disclosure of executive remuneration and directors’ interests and relationships, as well as measures to improve independent functioning of auditors and analysts. Disclosure is a key – investors need to have access to information, as do directors, analysts and auditors. But even more it is about vigilance – asking the questions and insisting on the answers – which is as important as having the regulation in place.
Behaving honestly and transparently – the core of the governance issue – is both an ethical and a practical issue: that is, it’s the right thing to do and it’s in the interests of the company. Along the same track, there is growing acceptance of the idea that good corporate citizenship or social responsibility is also good for the bottom line or, at the very least, that investors concerned about risk management need to take issue like environmental behaviour or workplace occupational health and safety into account.
Chris has talked about unions wanting to bring employees’ issues to the attention of a company’s shareholders, as they do with its customers and other stakeholders. Effective campaigning means plugging into the issues which concern your audience. For example, the Financial Services Union’s primary concern is that when banks close branches and cut staff some of their members lose jobs, while others get stressed out managing increased workloads and furious customers, while valiantly continuing to try and cross sell. There is no doubt that public hostility to the big banks is growing, fuelled by these cutbacks and by a seemingly callous attitude to the vulnerable, particularly in rural areas, together with steadily rising fees. These are issues for shareholders, and it is reasonable that they are taken into account by fund managers and others advising large investors.
Similarly, if a union has a concern about sloppy health and safety at a company, this could be a pointer to disaster of the sort that occurred ay Esso’s Longford plant, or could indicate other deficiencies in management and performance. Not to mention the risks coming from a greater preparedness by governments and courts to slate responsibility back to companies and directors for the consequence of failing. The Transport Workers’ Union campaign to highlight health and safety issues at Boral to shareholders, amongst others, is about linking ethical and performance issues in a way which is clearly relevant.
Decent treatment of workers, including the right to bargain collectively through a union, are also key elements of a company’s commitment to decent standards of behaviour.
Union corporate campaigning aimed at shareholders, including superannuation funds, is part of out overall strategy. We do not expect investors, or fund managers or super funds, for that matter, to do our job for us, nor do want to do the job of trustees. We do not seek to reward or punish those who take particular positions on issues at company AGMs or otherwise. We do believe that these issues are important. We note that ideas of corporate responsibility are being taken more seriously, and Sharan will say more about that. In the end, a case has to be made out, just as it had to be with issues relating to CEO remuneration or independent directors.
Presented at the Fund Managers’ Seminar by ACTU Senior Industrial
Officer, Linda Rubinstein.