Investors Voice article on governance

The global credit crunch has exposed corporate governance at a lot of Australian companies as woefully inadequate. This is especially so for MFS, Centro, Allco Finance Group and ABC Learning — the four leading lights that imploded spectacularly after the market started falling from its peak in November last year. These four sprawling empires all featured dominant CEOs or executive teams with opaque corporate structure.
and a ferocious record of deal-making.

After the great credit crunch and asset deflation of 2008, anyone who had borrowed big in 2006 and 2007 to buy assets was left high and dry in the brave new world. Corporate governance doesn't matter too much in bull markets when everyone is making money, but it is vital when things go bad. And when it came to the crunch in recent months, investors were not told the truth in time.

After previously denying MFS needed to raise capital, co-founder and former CEO Michael King suddenly revealed on 18 January that he was looking to raise $550 million. King and MFS were both finished from that moment on.

Centro had a mind-boggling 283 controlled entities and 53 associates. The unaudited full-year profit, released on 9 August 2007, claimed that current assets were $1.3 billion and current liabilities just $656 million. Then the broader Centro empire confessed in December 2007 that it was unable to refinance $3.9 billion in current liabilities. This huge figure included corrected classifications in the parent company accounts plus the consolidation of debt held in other vehicles.

In terms of how we should respond to this, the Centro auditors from PwC should be sued for giving the company a clean bill of health, and it is appropriate that the company be sued in a class action. In my view the directors should also be sued. Instead, all we have so far is a new chairman and CEO, both promoted from within. You have to ask yourself what value auditors serve when ABC Learning, Allco, Centro and MFS were all given a clean bill of health in their 30 June accounts. As for refreshing these troubled boardrooms, Allco, Centro and ABC Learning have all failed to attract credible new non-executive directors so far in 2008, although they have apparently been trying.

Allco's delayed December half-year result released in late February claimed a net profit of $87.4 million and a balance sheet with equity of $2.4 billion. In truth, the business was probably worthless back then and we'll only see the $1 billion-plus loss declared in August.

While institutional shareholders are now starting to vote in large numbers against remuneration reports and specific CEO incentive packages, very few individual directors are being removed. Indeed, the average ASX300 director in recent years has been re-elected with more than more than 95% of votes in favour. It's time for a new deal in which poorly performing directors are weeded out of the system more quickly.

For instance, Justin Gardiner was chairman of the HIH Insurance audit committee when it collapsed in 2001, yet he has only just retired from the Austar board and remains a director of Hutchison Telecommunications. The same goes for long-serving Centro Property Group chairman Brian Healey, who finally resigned from the board six months after the implosion but stubbornly remains a director of Incitec Pivot, despite being 73.

One part of the problem is that the big banks and listed financial groups such as NAB, CBA, ANZ, AMP, AXA, St George and Macquarie, which control much of Australia's $1.2 trillion superannuation pool, are run by the same group of directors who sit on the boards they invest in.

What James Hardie attempted to do with its asbestos liabilities was an absolute disgrace, but did AMP campaign to have chairperson Meredith Hellicar drummed off all her boards? No, they supported her standing for another term on the AMP board at the 2006 AGM and she was duly re-elected with 98% of the votes in favour.

Good governance relies on some very simple principles. Shareholders need to appoint boards that have a majority of independent directors who can both advise and supervise management. When something goes wrong, investors need fast and accurate information and then swift remedial action from the board, who are their agents.

The ability to appoint and remove directors is the single most important right that investors have, yet rarely do they exercise these powers, instead allowing a self-perpetuating small group of interconnected directors to dictate who sits on which boards.

Australia has not been served well by the old boys' network of directors, which has largely lost control of our huge resources dowry.

If we had a stronger culture of shareholder pressure, maybe great assets like the North West Shelf, the Kalgoorlie Super Pit and all the legendary Mount Isa mines would not be dominated by foreign investors.

As far as small shareholders are concerned, it is important to make contact directly with companies that you invest in and attend the AGM, in order to ask questions and keep the board and management on their toes. AGM attendances have been falling in recent years and we've got some corporate types calling for them to be abolished. It's time for retail investors to rise up as a group and engage more effectively with those who look after their savings, whether they're financial planners, stockbrokers, fund managers, superannuation administrators or even the directors of big ASX-listed companies.

Stephen Mayne is a shareholder activist who publishes the corporate governance ezine www.maynereport.com. He can be contacted at stephen@maynereport.com.

Copyright © 2022 The Mayne Report. All rights reserved

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