Giving ANZ both barrels in 2001

January 14, 2008

The media failed to report most of it but there was plenty of lively discussion at the ANZ AGM in December 2001. This was first published on Crikey.

Banks really should have their AGMs in their home cities because ANZ has a massive 181,000 shareholders so its Sydney attendance rate was a pitiful 0.0138 per cent or just 1 attendee for every 784 shareholders.

The NAB, by way of contrast, pulled a big audience of more than 1000 shareholders in Melbourne but it does have a larger base of about 290,000 shareholders and many people were interested to hear more about the $3.6 billion Homeside debacle.

The ANZ story was pretty uneventful as all the key numbers were pointing in the right direction but this did not stop the need for a few pertinent questions.

The formal addresses were punctuated with a feel-good video that even showed CEO and folk guitarist John McFarlane dancing in his Sunday civvies.

When it came to questions, Roger Nadir got up first and asked chairman Charlie Goode if there was any chance of further capital gains tax relief. Given that Charlie is a Liberal Party bagman in Melbourne, he is well across politics and speculated that the Howard government had squandered the surplus so more tax cuts were highly unlikely.

Steve Schander got up next with the tale of his troubled ANZ travel insurance claim in New York which did not interest the meeting too much as he reeled off about 15 names of ANZ people who apparently wanted to deny him access to health care in a New York hospital.

Shareholder Genevieve Rush then asked an excellent question about ANZ's large and unsecured Enron exposure. Charlie had revealed during his chairman's address that ANZ was exposed to the tune of $US120 million and expected to lose the majority of this.

Charlie stressed that on a $185 billion loan book the odd big disaster will always bite you. As to the lack of security, he quoted Enron's high credit rating, revenues of $183 billion, rave revues in Fortune magazine and market capitalisation of $US88 billion. It seems ANZ lent on Indian and US power stations with no security at all on the strength of this but Charlie told shareholders the ANZ's exposure was less than 2 per cent of Enron's total debt facilities. The press have been quoting debt figures of $US40 billion, but Charlie's 2 per cent line suggests Enron had approved bank facilities of more than $US60 billion.

The NAB's exposure to Enron peaked at $600 million two years but they sniffed the breeze and wound this back to $200 million which is still a big hit to take. It is ironic that the Enron losses for Australian banks will probably be greater than any other collapse, with the possible exception of Pasminco.

CEO John Macfarlane was keen to stress the loans were made by ANZ's successful global structured finance division so, unlike other banks, lending Enron money to build power stations was a core business for the ANZ.

The polite representative from the Australian Shareholders' Association, Stephen Matthews, got up next and queried the very high non-audit fees paid to KPMG with a follow up question about credit cards.

Credit cards were the story of the day and the main thing the press were interested in after the revolutionary Reserve Bank recommendations to open up the system, but this barely got a mention during the AGM.

The audit question was a taster for things to come and Charlie said the $20 million figure paid to KPMG last year would probably halve this year because they have now sold their consulting division.

Unfortunately, the concise annual report which was provided at the AGM did not reveal the audit figures but Charlie said only $3.8 million of the $20 million was for audit work with the rest relating to tax, due diligence, privacy laws, staff, the New Zealand division and other projects.

A fifth generation ANZ customer and former bank manager Eric Harvey got up next and blasted the bank based on a report in the Sydney Morning Herald that a manager had been sacked for criticising the bank.

He wanted to know if the bank supported freedom of association and Charlie replied that as a union leader she was not allowed to criticise the bank and had a conflict of interest.

Roger Nadir jumped up again for a second silly and equally brief question as to whether ANZ felt like buying the Bank of Adelaide which got the standard brush off.

Crikey's first question went to the role of Charlie Goode as an independent director of Air New Zealand. Afterall, we'd seen the precedent of Mark Rayner quitting as NAB chairman after Pasminco collapsed because he chaired that company too. And Air New Zealand CEO Gary Toomey felt it appropriate to quit the ANZ Bank board on October 8 so why should Charlie have been allowed to stay on as ANZ chairman?

I asked to hear from the deputy chairman on this but the bank does not have one so Charlie handled it himself and simply said he was one of 13 directors of Air New Zealand, didn't sit on the audit or finance committee and was only on the board for 12 months and that he started after the Ansett acquisition so it was losing money when he joined and still losing money when he quit 12 months later.

It looked like the bank had pulled a swifty on Gary Toomey's retirement because he took leave of absence on September 20 and then formally resigned on October 8.

This meant the payout did not have to be disclosed in the annual report for the year to September 30 but chairman Charlie was good enough to disclose that he got a $98,000 payout which is certainly on the low side.

Director retirement payouts

Director payouts are a big issue for Crikey next year. These people should not be getting big lump sum payouts because it works like a good behaviour bond when directors need to be free to resign on matters of principle, like Caroline Hewson has just done at the AMP in protest at Paul Batchelor's takeover aspirations.

Chairman Charlie was quite proud of the fact that the ANZ retirement scheme was introduced in 1980 and provides for a maximum payout of 3 years pay if you have served 8 years. He stressed that it is lower than the other major banks and most major companies.

Charlie collected $239,000 and has been on the ANZ board since July 1991 so if he retired tomorrow he'd get a lump sum of $717,000.

This compares favourably with the outrageous $1.47 million lump sum that ousted NAB chairman Mark Rayner collected and the $1.1 million that ousted Woolworths chairman and ANZ director John Dahlsen picked up last year.

The problem with John Dahlsen

Crikey referred a couple of times to problems with John Dahlsen. First there is the loyalty issue and fellow ANZ director Roderick Deane would be acutely aware of this because he still sits on the Woolies board.

Dahlsen fell out with Woolies CEO Roger Corbett and rather than going quietly with his $1.1million cheque in the back pocket, equivalent to 5 years his annual fee, he decided to join the board of The Warehouse Group, a large New Zealand retailer which is planning to compete with Woolies in the Australian market.

Dahlsen was also involved in a push to increase retirement payouts at Southern Cross Broadcasting from a maximum of 3 years pay to 5 years. Thankfully this resolution was withdrawn after complaints from institutional shareholders but it looked terrible to boost the director payouts just weeks before closing regional newsrooms in Canberra, Darwin, Alice Springs, Townsville and Cairns.

My other concern about Dahlsen was that he chairs the ANZ audit committee. Many Victorians would remember that he spearheaded the committee that recommended the neutering of the powers of Victorian auditor general Ches Baragwanath for Jeff Kennett.

I asked whether someone with a proven record of winding back the powers of auditors should be heading the ANZ audit committee and chairman Charlie responded that his review was more about deciding whether to outsource auditing rather than an attack on auditing per se.

As an example of the potential for conflict, I raised the question over a banking fraud that saw partners at Mr Dahlsen's legal firm Corrs Chambers Westgarth suddenly discover that $1.5 million had disappeared from their accounts with the ANZ.

Charlie reported that Dahlsen was now only a consultant to the firm and therefore was not implicated in the loss but he'd offered to withdraw from any board discussions about who picked up the liability which in the end were resolved by ANZ management.

Weak ANZ board

When it came to the re-election of directors, I got up and said ANZ had the worst board of the majors and then spelt out exactly why as follows:

Chairman Charles Goode: baggage from his stint on the Air New Zealand and Pacific Dunlop boards.

Margaret Jackson: baggage from hedging blunders at the TAC which cost more than $200 million and even more baggage from her time as chairman of the BHP audit committee whilst it wrote off billions and 7-years on the Pacific Dunlop board as its shares plunged from $5 to about $1.

Jerry Ellis: major baggage from heading up BHP Minerals and then becoming chairman during the disastrous Magma Copper and HBI projects which together cost the company about $6 billion.

John Dahlsen: concerns as outlined above on loyalty, audit support and golden parachute payouts and the fact that when he joined the ANZ board in 1985 it was the biggest and best bank in Australia and now it ranks number four.

Dr Bruce Scott: too old too slow and been on the board since 1985 so must share the blame for ANZ's relative decline.

Dr Rod Deane: couldn't find anything bad to say about the former Telecom New Zealand CEO so thumbs up to him.

Insto donkeys vote back the baggage carriers

The two directors up for re-election were Margaret Jackson and Jerry Ellis and I got up and spoke against both of them, but much more emphatically on Ellis.

Amazingly, the ASA only complained about their workload and did not even mention Jerry's disastrous BHP record when it was the ASA that ran quite a campaign against him at the time.

The show of the hands at the meeting looked about line ball but Charlie declared it was carried and no-one complained.

The proxy votes were typically frustrating for anyone trying to get some accountability into the corporate directors club. Jerry Ellis polled 578 million in favour and only 5.82 million against meaning he was supported by almost 99 per cent of the shares.

Margaret Jackson was comfortably re-elected from the floor and also received an even more resounding endorsement with 610 million in favour and only 1.3 million against.

McFarlane's options

Your typical big bank CEO holds options over about $90 million worth of shares and is about $15 million in front and John McFarlane is in line with this.

He was issued another 3 million options at the AGM on top of the 2.5 million that he already owns so with options over 5.5 million shares these have a current market worth of $96 million.

How a bloke who earns $1.5 million a year could ever finance the purchase of $90 million worth of bank shares without selling some of them straight away is beyond Crikey and this was the tenor of my complaint at the meeting.

We've already seen ComBank CEO David Murray dump $15 million worth of shares this year and NAB CEO raise $5.6 million. The financial exposure is so large that these CEO tend to exercise and sell very quickly because they can't afford to carry the risk.

Charlie said they had deliberated structured the latest issue of options to John McFarlane so they expired after his contract finishes and therefore would not be taking out huge loans to exercise whilst still running the bank.

John McFarlane is an excellent banker and the best thing the ANZ has got going for it but the quantum of his options package is still excessive so you can expect to bankers like him continue to gouge customers and slash staff because they have such a huge personal financial encentive to do this.