Franking robbery, East West trust breach, ASA's 10 point governance reform plan, BHP bonuses, John Gay and Australia's debt

August 25, 2013

Dear 17,500 Mayne Report readers (including 500+ Federal election candidates),

The Australian Shareholders' Association has today released its 10 point plan for corporate governance reform which it hopes both sides of policies will embrace during the next Parliament. Here is the text of the press release:

ASA calls for Federal governance reforms

The Australian Shareholders' Association today called on both sides of Federal politics to embrace corporate governance policies which protect and empower investors whilst facilitating growth and prosperity for the broader economy.

ASA chairman Ian Curry said that Australia's uniquely heavy emphasis on equity market investing through compulsory superannuation and the 6 million direct investors meant that the “rules of engagement” should be taken more seriously by both sides of politics.

“Australia has well regarded rules for share market investors and we welcome recent changes such as the ‘two strikes' executive pay reforms,” Mr Curry said. “However, ASA has identified a number of additional improvements and is calling on both Labor and the Coalition to implement further changes.”

“Transparency and disclosure are the lifeblood of public trust in equity markets, but there is also the issue of treating retail investors fairly when compared with larger professional investors.”

“ASA was concerned when selective institutional placements diluted retail investors by billions of dollars during the GFC so we'd like to see the selective placement cap cut to 10% to better protect the property rights of retail investors.”

Mr Curry also called for some important voting reforms such as removing the exemption for Managing Directors from the voting cycle, requiring better disclosure of how retail investors vote their shares and giving shareholders the ability to veto inappropriate acquisitions.

“Investors need to more actively vote their shares but they should also be asked by boards to approve more related party transactions and takeover deals,” Mr Curry said.

“Over-priced takeovers and unfair capital raisings are the two biggest ways investors have lost out in recent years and ASA has identified some specific changes to improve the system.”

Mr Curry also said that reforms were needed on executive pay, including Federal Parliament replacing the ASX Listing Rules as the determinant on questions of which incentive arrangements must be approved by shareholders.

However, he also called on the Coalition to maintain Labor's reforms on executive pay, particularly as they relate to the “two strikes” regime and shareholder approval of termination payments to senior executives.

The ASA's 10 specific reform proposals are as follows:


1. Excise the ASX Listing Rules on executive pay and put them into the Corporations Act to make the issue accountable to Federal Parliament. Also require shareholder approval to be sought for the total dilution that flows from equity-based executive incentive grants.

2. Removal of the exemption of a Managing Director from the three year board electoral cycle.

3. Introduction of shareholder approval for material transactions on the purchaser side (threshold to be if enterprise value of an acquisition exceeds 40% of market capitalisation).

4. Proxy disclosure on all resolutions should also include the outcome from a voter perspective, as well as votes (similar to current schemes requirement). This better captures the sentiment of retail investors.

5. Selective placement cap to be reduced from 15% to 10% of shares on issue in order to reduce future retail dilution as occurred during the GFC.

6. Shorten minimum time frame for entitlement offers to 10 working days and mandate a single book build for the shortfall to pick up qualifying institutional, ineligible foreign holders and retail non-participants.

7. Broaden the disclosure and shareholder approval requirements for related party transactions involving directors, senior executives and substantial shareholders.

8. Legislative reform for an interested party to be able to appoint a scrutineer or independent observer in contested corporate situations, including director elections.

9. Mandate for APRA or ASIC regulated fund managers and super funds with more than $100 million invested in the Australian equity markets to publicly disclose their voting record on ASX-listed companies.

10. Prohibit cash political donations directly funded by ASX-listed companies.

If you'd like to join the ASA, click on the link below:

How the franking credit issue blew up in Tony Abbott's face

Shadow Treasurer Joe Hockey says the issue has been around forever, but the first time the ASA became aware of the $1.6 billion annual hit that Australian-based investors will face from Tony Abbott's $5.5 billion paid parental scheme was when Guardian Australia's Lenore Taylor called last Tuesday afternoon for some comment on this story.

After a quick chat with ASA chairman Ian Curry we quickly swung into action, providing commentary to Guardian Australia and The AFR and then speaking to Radio National's Fran Kelly on Wednesday morning. This Crikey story on Wednesday explains why the scheme is so politically and economically reckless.

This formal ASA press release slamming the first ever proposed differential rate on Australia's dividend imputation system went out on Wednesday afternoon and our position is perfectly clear: the double taxation of investors is wrong and should be immediately reversed, something the Greens have now promised to negotiate when the bill hits the Senate.

The sensible compromise here would be for Tony Abbott to announce he'd consulted widely and to allow the levy to be included in franking credits. The $1.6 billion hole could be funded by introducing some form of means testing as well as a cut in the maximum payment to less than $50,000.

Here's hoping Tony Abbott comes to his senses before polling day, rather than having to face the ignominy of a backbench revolt when the legislation comes before Parliament.

The world's most generous PPL scheme in the middle of a "budget emergency" is just ludicrous - and the main rationale appears to be that Tony Abbott is concerned he has a problem with female voters.

Australia's public debt continues to soar

It was very strange to hear Reserve Bank governor Glenn Stevens make the following statement in 2010: "There is virtually no net public debt in the country at all in contrast to much of the developed world."

The Federal Government's own debt management website puts the gross debt figure at $269 billion and the bond issues are continuing at a rapid rate.

Both sides of politics try to quote a net debt figure which includes the $80 billion-plus in assets held by the Future Fund. But this is dubious double counting because Future Fund reserves are specifically set aside to pay for public service superannuation liabilities which are still more than $50 billion unfunded.

If anyone needs assistance on Federal debt questions, this list tracks all bond and treasury note issues by the Labor Government up until 2011. The numbers have only accelerated since then. For instance, here are the last 4 bond issues during the election campaign:

Friday, August 23. 2013: $800 million 5 year bond offer expiring in January 2018. Average yield 3.198% and was 3.74 times subscribed.

Wednesday, August 21, 2013
: $800 million 12 year bond offer expiring in April 2025. Average yield 4.168% and was 2.27 times subscribed.

Friday, August 16, 2013: $800 million 4 year bond offer expiring in February 2017. Average yield of 2.87% and 3.4 times subscribed.

Wednesday, August 14, 2013: $800 million 10 year bond offer expiring in April 2023. Average yield of 3.835% and 3.21 times subscribed.

As you can see from this announcement, there will another $800 million tender for 11 year sovereign debt next Wednesday.

Amazingly, people like Julia Gillard's former economics adviser Stephen Koukoulas claim on Twitter that not only is this surging debt no problem, but that Australia hasn't issued any foreign debt since Paul Keating abandoned the practice in 1987.

This is too cute by half. Sure, the Australian Office of Financial Management is not issuing any paper denominated in other currencies, such as the Yen, Euro or US dollar. But close to half of Australia's sovereign debt is foreign-owned. What matters is where the cash goes when a bond is redeemed and that is currently all over the world.

If Australia's AAA credit rating was suddenly down-graded because a Prime Minister admitted we had a "budget emergency" on our hands not befitting one of the top 10 countries in the world for government fiscal responsibility, then foreign demand for our bonds would reduce, the dollar would come under further pressure and the price of our new borrowings would rise.

And just how much are we hoping to borrow in 2013-14? This is what the Rudd government discloses on the AOFM website says: "Treasury Bond issuance in 2013-14 is expected to be around $60 billion. After accounting for maturities of $23 billion this represents net issuance of $37 billion. Tenders will continue to be held on Wednesdays and Fridays with details of the bond lines and amounts to be offered in a particular week announced at noon on the preceding Friday."

Whilst the Coalition is clearly superior at managing a government budget from the perspective of keeping a lid on debt, Labor folk aren't the only ones telling porkies on this issue.

Tony Abbott was quite misleading when he claimed at his campaign launch in Brisbane today that the Federal government "had $50 billion in the bank" when John Howard left office. Truth be known, the Howard Government still had $58 billion in bonds outstanding, plus unfunded public service superannuation liabilities of more than $50 billion. Let's hope the Costello-era accounting rorts are not continued by Tony Abbott and Joe Hockey in the period ahead.

Peter Costello used to falsely claim Canberra's finances were somehow equivalent to the financial metrics on display at the City of Melbourne.

The City of Melbourne actually has real money, about $100 million, in the bank, plus we have no debt and fully funded staff superannuation. If only Peter Costello and Tony Abbott would stop pretending the Howard years produced an equivalent outcome. Yes they inherited $96 billion of outstanding bonds and about $69 billion of unfunded staff super. They left $58 billion bonds and about $50 billion in unfunded super, largely thanks to selling the Commonwealth Bank, Telstra and various airports.

There was also far too much middle class welfare entrenched during the Howard years, but nothing quite so extravagant as Tony Abbott's reckless paid parental leave scheme.

City of Melbourne set for East West tunnel debate

After a one hour briefing from officers on Tuesday, the City of Melbourne will finally take a position on the East West tunnel project at Tuesday night's council meeting.

The full agenda is available here but the officer report on the East West tunnel won't be published until it is finalised either tomorrow or Tuesday. Item 6.7 is described as "East West Link preliminary assessment".

The Sunday Age splash today was the best coverage yet on how we finished up in a position where the much more important and economically beneficial Metro One train tunnel under Melbourne has been side-lined for the Abbott-Napthine tunnel.
It really is quite extraordinary that one bloke in Sydney seems to have unilaterally decided which infrastructure project the Victorian government will commence first, even though his decision has caused a Julia Gillard carbon tax type breach of electoral commitments.

Was Mr Abbott aware that Victorian Transport Minister Terry Mulder said the following in January 2011: ''We went to the election to say that we had no plans for the tunnel. And that is our policy.''

How on earth can Mr Abbott actively campaign for such a major broken promise by a Coalition government in Victoria when last Wednesday at the Brisbane Broncos he declared that the "trust deficit" is a bigger problem than the budget deficit.

Today's campaign launch was all about restoring trust. Does he really want the Victorian government to be so fundamentally untrustworthy to switch from promising train projects and then delivering new roads?

We'll have to see how the politics falls at council on Tuesday but I'm certainly minded to support a form of words that asks Mr Abbott to untie his $1.5 billion so that a true economic analysis can be conducted to decide whether it's road or rail that gets his handout.

And even if the money does come, surely Mr Abbott agrees with the proposition that the Napthine government shouldn't sign a a $6 billion contract to break a specific election promise just weeks before the 2014 Victorian election.

Just like with any increase in the GST, such a proposal needs a fresh mandate before it can proceed.

Australia's most open and transparent council to reveal 20 most valuable property holdings

Item 7.1 on the City of Melbourne agenda tomorrow night is another transparency measure that reads as follows:

That Council:

1. Includes, as a new transparency measure, in the 2012-13 City of Melbourne Annual Report an additional page of disclosure above and beyond statutory requirements, which details the name,
location and latest valuation of the 20 most valuable property assets, owned or controlled, by Council.

2. Requests that where land is held on multiple titles or parcels, management are to present a consolidated valuation for the single property in the disclosure statement referred to in (1) above.
Individual buildings, such as Council House 1 and Council House 2 within the Town Hall precinct, are to be valued separately.

Assuming this is supported by the colleagues, this will be a first for an Australian council and something that others should follow.

As chair of the Finance and Governance committee, I'm not yet aware of the figures and will be as interested as anyone. However, there is no reason why it can't be shared with the wider public too.

The Mayne Report Rich List

BRW magazine does a great job with its various Australian Rich Lists but we've broadened their efforts to track any Australian who has ever been worth more than $10 million. We've got more than 1500 names with those who've fallen back below $10 million now italicised. Below is our latest new entry:

Andrew Mackenzie: the new BHP Billiton CEO has already made a fortune from working for the company since 2008.

BHP bonuses - time to stop rewards when shareholders lose money

BHP Billiton is to be commended for running a long-term incentive scheme with a 5 year performance period. Many in the market run three year schemes, the ASA argues for a minimum of 4 years and BHP Billiton is the market leader with 5 years.

The ASA also likes the fact that BHP relies on relative total shareholder returns and that this is benchmarked against a peer group of global resource stocks. After recent accounting and valuation controversies at the likes of Cochlear, JB Hi Fi and Nufarm, Relative TSR has shot ahead of EPS to be the preferred LTI metric.

But there's still a major flaw in BHP Billiton's Friday's announcement that "only 65% of the potential bonus" from the 2008 LTI program would be issued by way of free shares.

And that is the fact that shareholders went backwards by 9.4% over the full 5 years. ASA firmly believes that long term bonuses should not be issued just because a company has lost less of the shareholders' money than their competitors, as was explained in this AAP piece published in The Australian.

We like relative TSR but this clause requiring a positive return should be included in all future LTI negotiations with senior executives. Let's hope everyone in the market gets that memo from now on.

The fact that BHP CEO Andrew Mackenzie was even entitled to $16 million worth of free shares after a negative performance over 5 years demonstrates how out of control executive pay had become leading up to the GFC. In the case of BHP, it's another blot on the copybook for former chairman Don Argus, along with a few other things outlined here.

John Gay and the joke $50,000 fine

The ASA issued this stern press release on Friday after former Gunn executive chairman John Gay was only fined $50,000 after pleading guilty to one count of insider trading. The key text was as follows:

ASA chairman Ian Curry said the modest $50,000 fine imposed by the judge was insufficient and the automatic 5 year ban from managing a company would not have much impact on Mr Gay.

“This was the first time that an ASX100 chairman pleaded guilty to insider trading and the judge missed a golden opportunity to send a wider deterrence message throughout the business community,” Mr Curry said.

“Insider trading is notoriously difficult to prove so this rare guilty plea from a high profile figure like John Gay should have been used to reinforce the message that insiders must be especially careful when trading shares.”

“A non-custodial sentence or some periodic detention would have been more appropriate, along with a much larger fine.”

John Gay was executive chairman of Gunns in December 2009 when he sold 3.4 million shares at 90c each despite the company being in possession of un-released information about the deteriorating position of the business.

Gunns subsequently collapsed as investors and creditors lost more than $1 billion. The $50,000 fine is only one sixtieth of the $3 million reaped by Mr Gay from the inappropriate share trade.

It is worth reading the full judgment from Justice Porter, who was appointed to the Tasmanian bench by the pro-John Gay Lennon government in 2007.

The laudatory stuff in the judgment about John Gay is quite over the top. This is a bloke who sued critics, banned journalists from shareholder meetings, thought it was fine to do renovations to the Premier's house, joined Rupert Murdoch in being the only executive chairman refusing to submit himself to the 3 year election cycle and ran a thoroughly unsustainable business with poor corporate governance and disclosure, not to mention the $1 billion-plus in losses suffered by investors and creditors.

This whole exercise does not reflect well on institutional governance in Tasmania.

Sign up for campaign and governance Tweets

Click on the image above to join more than 17,500 @maynereport followers on Twitter. We are regularly dropping out observations about journalism, politics, breaking stories, local government and shareholder activism and here are some of the more recent Tweets:

August 25
"Rudd's goose is cooked" splash in the News Ltd tabloids today was another outrageous distortion by an unethical non-citizen billionaire.

August 24
With Abbott increasingly looking like winning, surely the media should start focusing on how many seat he needs to control Reps without Nats

August 23
Paul Little & James Hird are both examples of the misguided messiah complex. Other directors, Essendon members and players should roll them.

August 21
The Brisbane Broncos are controlled by a New York media mogul worth $10bn. Why does he get $5m from Abbott govt given budget "emergency"?

August 21
Tony Abbott refused to mention the $1.6b govt saving on franking credits from Aussie investors when explaining PPL scheme funding in debate.

August 20
Abbott's claim that "levies don't get franking credits" is disingenuous. There has never been a levy associated with company tax like this.

From the Mayne Report email edition archive

The Mayne Report goes to more than 17,500 people but if you're a relatively new reader, here are some links to some of the more interesting email editions sent out over the past five years.


Backing Rudd, Lachlan Murdoch, Bob Brown media debate, Manningham governance, Gunns, Darebin, Lend Lease and St Kilda AGM appearance
Monday, February 20, 2012

The OZ goes mad, Murdoch piracy, AFR, pokies double rate, Gina unfit for Ten, council super blowout, BoQ rip-off, power speech and AGM mini-season
Wednesday, April 4, 2012


Murdoch special, media inquiry, pokies, Manningham win, Zara, secretive Shortenite councillors and a Vodafone take-down
Thursday, September 15, 2011

Elected to ASA board, pokies, Rio, Santos, RHG, Hartigan, Manningham, capital raisings and Rich List
Thursday, May 19, 2011


Election wash-up, Mayne Report strategic review, Manningham, Ten, Gina, Falloon for Fairfax, Orica AGM, ABC year-ender, Cornwall, Rich List and then some
Friday, December 17, 2010

Woolies anti-pokies campaign speech, Manningham mayor boxes on, campaigning for women, Bob Brown, pokies forum, HTVs, Rich List and then some
Thursday, November 18, 2010

Paperlinx, Packer, Murdoch, Manningham, pokies, Rich ex wives, foreign takeovers and much more
Saturday, October 23, 2010

DJs, legislate women on boards, ex Lib goes no pokies, preferences, Pratt-Shorten, Labor's debt, AG's report, Manningham council audio and then some
August 3, 2010

Director rankings, Rio, Westfield, New Matilda, MAP, Manningham, Paatsch, state election, Darebin, Moreland, rich list, pokies and much more
June 9, 2010

Political donations, Stokes, Westfield tower, Richard Colless, Manningham nursing home, state debt, Rich List, Grand Prix and more
February 23, 2010


Woolies, Higgins, Manningham, upcoming elections, Fairfax, Centro, Rich List, Rams, Fitzie and much more
December 6, 2009

Seven AGM, crazy Perth visit, Fairfax, Telstra, Transfield, capital raisings and much more
November 9, 2009

News Corp AGM, Packer, Fairfax, James Strong, Woolies, Eastern Golf, Kohler-Gatto and much more
October 20, 2009

Bad Bendigo, Mark Day, Manningham, pokies, NAB, Asciano, Rich List, Paladin, hostile EGMs and much more
September 15, 2009

Macquarie AGM, Melbourne's decline, Asciano EGM, capital raisings, Goyder's pokies, speeches, fire, AGM diary and much more
July 28, 2009


Collingwood AGM, Rizzo survives, ANZ shareholders MIA and Qantas delusions
December 19, 2008

ABC Learning, CBA's Centro brutality, sworn in, pokies, PacBrands and SPP plays
December 10, 2008

After 37 straight defeats, the drought is broken
December 1, 2008

71% backing at Centro, $11bn backing at BHP and huge Qantas protest
November 28, 2008

BHP backflip after $7bn backed our tilt
November 26, 2008

Combank's $700m ABC Learning debacle
November 13, 2008

Computershare AGM, Seven wash-up, audio highlights and ABC Learning chair under pump at Lend Lease
November 11, 2008

Round 10 with James Packer, BBI, Allco and ABC Learning
November 6, 2008

Toll board skewered over $55m executive rort
October 30, 2008

Transurban shareholder revolution - chairman almost defeated
October 28, 2008

A huuuuge day for Australian corporate governance
October 22, 2008

Rupert's accountability dodge, Macquarie's Italian hit, Babcock funds revamp, and rich lists.
October 20, 2008

Rupert runs scared after just 3 of our 8 questions
October 20, 2008

BHP and Woolies tilts, AFIC push on Stan Wallis, ASX-Kohler yarn and new Rich Listers
September 26, 2008

Risk Metrics nails Macquarie and Babcock
September 18, 2008


Fortescue Metals AGM: time for Twiggy and FMG to grow up
Sunday, November 8, 2007, 10.30pm

How $5bn worth of votes backed us against Rupert's dodgy gerrymander
Saturday, 20 October, 2007, 7.20am

That's all for now.

Do ya best, Stephen Mayne

* The Mayne Report is an email newsletter which seeks to promote transparency and good governance in the corporate, political and media worlds. It is published by Stephen Mayne, the founder of, Policy and Engagement Co-ordinator for the Australian Shareholders' Association and chair of the Finance and Governance committee at the City of Melbourne. To unsubscribe from this email list, click here.