Harvey Norman board tilt

November 28, 2020

Stephen Mayne ran for the Harvey Norman board at the AGM on November 27, 2019. Here is a summary of the issues.

Harvey Norman's record breaking run of protest votes against directors

No other major public company has managed to notch up 10 straight years of protest votes where at least one of the directors has suffered an against vote exceeding 20 per cent. And this is because Harvey Norman has five executives on the board and has only appointed 1 new director over the past 12 years.

Here is the full potted history of protest votes at Harvey Norman when Gerry has studiously ignored:

2020: the biggest protest vote was 29.5% against finance director Chris Mentis. Gerry got back with 94% in favour and the remuneration report protest was only 11.5%, although it would have been more if they hadn't withdrawn a controversial LTI grant to the 5 executive directors. See voting results.
2019: a massive second strike of 47.5% but then only 8% of voted stock following through supporting the spill, although Gerry was able to vote on this resolution, but not the rem report. The biggest director protest was 28.3% against executive director David Ackery and there was only a 9% vote against CEO Katie Page. The external candidate Stephen Mayne received 8.24% support. See voting results.

2018: 50.6 per cent against the rem report where Gerry couldn't vote and up to 27 per cent against the various directors. Notice how they deliberately muddy the waters by not identifying what each resolution was about in the voting results.

2017: 23.3 per cent against the rem report with 15 per cent opposing Gerry's re-election and the biggest protest of 28.12 per cent going against finance director Chris Mentis. See results.

2016: No protest against rem, less than 10 per cent against Katie Page and Ken Gunderson-Briggs but executive director David Ackery was opposed by 24.6 per cent of voted stock. See results.

2015: Just 5 per cent against rem report and 7.5 per cent against Gerry's son Michael Harvey. The biggest protest was 23.3 per cent against John Slack-Smith, followed by 20.4 per cent against Chris Brown. See results.

2014: A record 75.8 per cent against the rem report or some 282.4 million votes, the biggest against vote in the history of Harvey Norman. Chris Mentis suffered a protest vote of 29.67 per cent. See results.

2013: John Slack-Smith and David Ackery both attracted protest votes of around 27.8 per cent with no other meaningful protest votes on the day. See results.

2012: Chris Brown suffered the biggest protest of 27.1 per cent, with 22.8 per cent against Chris Mentis and 14.5 per cent against Gerry's son Michael Harvey. See results.

2011: Almost 10 per cent against Gerry and Ken Gunderson-Briggs with the biggest protest of 31.55 per cent reserved for executive director David Ackery. See results.

2010: The biggest protest vote of 21.1 per cent was against John Slack-Smith. See results.

2009: Biggest protest was 24.8 per cent against Arthur Brew with Chris Mentis just behind on 23.8 per cent. See results.

2008: The last time no director suffered a 20 per cent plus protest vote with the biggest against vote being 15.15 per cent for David Ackery - see results.

The challenge for this upcoming first ever contested board election at Harvey Norman will be to persuade the proxy advisers and institutions who consistently vote against the non-independent directors to vote in favour of the first ever independent external candidate for the board. A result in double figures would be excellent in the circumstances but it is hard to predict what the proxy advisers will advise. Whatever happens, you can be sure Gerry Harvey will probably ignore the protest vote, although if he gets a second strike on the remuneration report that will be a rare event indeed, triggering a vote to spill the whole board.


After years of warning Gerry Harvey about his appalling governance at Harvey Norman, I've finally decided to have a tilt at the board to see if that will get the dinosaur to implement some reforms. The last straw was yet another capital raising which was designed to deliberately shaft retail shareholders.

First up, full marks to Gerry for publishing the submitted platform in full (see page 9) rather than imposing censorship as others issuers have none, most notably Rupert Murdoch at News Corp in 2002 who refused to even tell the shareholders how old I was. Here is the full text of the Harvey Norman platform in the notice of meeting:

"Stephen Mayne, age 50. BCom (Melb). GAICD.

Stephen Mayne is a Walkley Award winning business journalist, entrepreneur, shareholder advocate and former local government councillor at the City of Melbourne, where he chaired the Finance and Governance committee for 4 years from 2012 until 2016.

He is a well known advocate for good corporate governance who publishes the corporate governance ezine www.maynereport.com and has served two terms on the board of the Australian Shareholders' Association as well as serving as ASA's Policy and Engagement Coordinator in 2012-2014.

In addition, Stephen worked as Communications Adviser for The Alliance for Gambling Reform for two years until July 2019 and is currently freelance writing on business and ethics for www.crikey.com, a business he founded in 2000, and Alan Kohler's Eureka Report under the www.investsmart.com.au brand.

Mr Mayne owns the world's biggest small portfolio of shares (almost 500 ASX listed stocks worth about $25,000) and has participated in 300 capital raisings since 2009. He has been repeatedly disappointed by the structuring of Harvey Norman capital raisings in recent years and offered to withdraw his 2019 nomination for the Harvey Norman board if the directors agreed to compensate non-participating retail shareholders in the recent $173 million capital raising by auctioning off the shortfall to the highest bidder in an institutional bookbuild. The board refused and thousands of non-participating retail shareholders were instead diluted without compensation, the latest of multiple poorly structured capital raisings by the company in terms of how retail shareholders were treated.

If elected, Mr Mayne will advocate for board renewal, more age and gender diversity on the board, the recruitment of a new independent chair, full consolidation of the franchise network in the accounts and valuation disclosure of individual properties in the $3 billion property portfolio, similar to what listed property trusts do.

Whilst advocating for reform and modernisation, if elected Mr Mayne also undertakes to work constructively and collegiately with the board and management team to maximise shareholder value in an environment of heightened governance and transparency. He believes this would help address the governance discount attached to Harvey Norman shares by investors, plus attract new retail and institutional shareholders onto the register.

Shareholders have been long crying out for board reform at Harvey Norman given the lack of independent directors. Indeed, here is a summary of 10 years of substantial protest votes against the excessive number of executive directors at the company, extracted from this recent column I wrote for Alan Kohler's Eureka Report:

There was also this piece for The Eureka Report on September 24.

Harvey Norman nominations committee refuses to meet with external candidate

The vast majority of public companies have never had to deal with managing a contested election for the board. Australia simply doesn't have a culture of external candidates. Instead, directors wait to be invited on and then shareholders simply rubber-stamp the decision of the board.

Having nominated for 50 public company boards over the past 20 years, I've seen it all in terms of standoffish engagement with companies and dodgy electoral processes.

Hopes weren't high when the tilt at the Harvey Norman board (see previous column) was lodged but after requesting engagement with the nomination committee, it was still a surprise to receive an email last week stating that “the Company's Nomination Committee has declined your request for a meeting.”

The nomination committee only met once in 2018-19 (see page 28 of the latest 4E). The 2017-18 annual report claimed it would, where necessary, get involved in “undertaking appropriate checks, including character and qualifications, of any potential candidate”.

The nomination committee only comprises non-executive directors but none are independent. It is chaired by Graham Paton, who has been a director since 2005 and is therefore not independent based on the Australian Shareholders' Association guideline (see page 6) that independence is lost after 12 years of service. Despite this, Harvey Norman baldly states in its annual report that “Graham Paton is an independent director”. If so, surely he would want to meet with a challenging independent candidate, or at least put in a call.

The two other members of the nomination committee are Chris Brown, long-term company lawyer, and Ken Gunderson-Briggs, a director since 2003.

Therefore, not only does Harvey Norman have no independent members of its barely functioning Nomination Committee, it isn't even fulfilling its promised remit of “undertaking appropriate checks, including character and qualifications, of any potential candidate.”

So far my entire engagement has been with Valerie Salamie, PA to the Chief Financial Officer, Chris Mentis, who himself shouldn't be on the board, let alone doing the job of the so-called independent directors by engaging with an external independent candidate for the board.

The AFR's Rear Window column recently covered the Harvey Norman board tilt in response to the last edition of The Mayne Report and flights have been booked for what should be a lively AGM in Sydney on November 27.

What the various proxy advisers are saying

Fast forward to mid-November and the various proxy advisory firms have released their voting recommendations:

First up, this is what Ownership Matters had to say:

While Mr Mayne is not a board endorsed candidate, the Harvey Norman board would benefit from adding an independent director. Mr Mayne has outlined that his intention with respect to HVN's board includes a desire to move the company forward in its disclosure and financial accounting.

In the HVN notice of meeting, Mayne has indicated that he will push for consolidation of the franchisee network accounts to provide investors with a more accurately representative picture of the business. This is not an insignificant step for the company but is one that would assist the accounting to reflect the business' profitability.

He also has indicated a desire to push for disclosure of the property portfolio and valuations that underpin its accounting value. The property portfolio represents 53% of gross assets at Harvey Norman, and underpins $2.5 billion worth of NTA, which is $2 per share.

While this circumstance of recommending a non-board endorsed director candidate is considered unusual, the policies outlined above are in the best interests of minority shareholders and should be supported. Mayne points out that HVN shares trade at a "governance discount" and that additional transparency and governance improvements may attract new shareholders. It is unlikely that this resolution will be passed in light of the ownership structure and as implied by the 'non board endorsed' nature of the resolution.

The Australian Shareholders' Association decided to abstain in the end and made this comment in its voting report:

It is unusual for ASA to vote for a candidate not endorsed by the board. However, this board is much in need of a courageous and independent voice who understands the concerns of small retail shareholders. On balance we will be abstaining from voting on this resolution.

The world's most powerful proxy adviser, ISS, came out in support and made these comments:

A vote FOR the election of Stephen Mayne is warranted given the long-standing governance issues and the need for increased independence on the board and long-term board renewal.

ISS' Australian Benchmark policy generally recommends against shareholder-nominated candidates who lack board endorsement and do not present conclusive rationale to justify their nomination, including unmatched skills and experience, or any other specific reasons. However, candidates who can demonstrate a clear ability to contribute positively to board deliberations and address governance concerns held by shareholders may be supported.

The company has had long-standing governance deficiencies in its board structure that deviates from Australian market practice and investor expectations. The vote results at the 2018 AGM indicate that minority shareholders possess these concerns. Whilst the board made an attempt to address certain governance issues through the appointment of Mr Craven, the absence of any further discussion regarding the renewal process for this entrenched board remains problematic and concerning for shareholders.

Mr Mayne's appointment would represent an increase to both the independence level of the board and an increase to the non-executive directors' component (currently the executive component represents 50 percent of the board). It is uncommon amongst larger ASX 100 companies to have a board with such a high number of executives. Mr Mayne also possesses expertise in corporate governance which appears to be much needed on this board, and an ability to contribute an independent eye to board deliberations. The increased level of independence and governance knowledge would act for the benefit of non-associated shareholders at the company with improved accountability and oversight of the management team.

In this case, support for the election of Stephen Mayne is warranted despite being a non-board endorsed nominee, on the basis of his contribution to the independence of oversight in decision-making.

Harvey Norman launches pre-emptive strike via News Corp

This, along with the Ownership Matters recommendation against managing director Katie Page, sparked outrage from Harvey Norman, so Gerry Harvey and Katie Page reached out to The Australian's columnist Janet Albrechtsen and requested she unload on their behalf.

Janet duly delivered, along with this page 1 news piece in the paper, which together presented a highly distorted view of the situation, as you would expect from News Corp.

There was no disclosure of Harvey Norman's big advertising relationship with News Corp, nor Gerry's personal relationship with Rupert over the years.

And so many other issues were ignored such as the $150 million Harvey Norman has lost on recent diversions into industries like dairy and mining camps and the huge under-performance compared with rival retailers like JB Hi Fi which floated at $1 and now sees its shares trading above $36.

There will be plenty of time to go through the detail of The Australian's distorted hatchet job, which includes completely overlooking the long term governance failures at Harvey Norman. However, as a start, here is a summary of Gerry's history in ripping off his retail shareholders, extracted from this Eureka Report column on October 22, 2019:

Harvey Norman capital raising finishes $7.8 million short

Gerry Harvey has notched up his trifecta of badly structured capital raisings with confirmation last week that Harvey Norman's $173.5 million 1-for-17 non-renounceable rights issue at $2.50 finished $7.8 million short.

Gerry and the other big shareholders all did the rationale things and took up their entitlement given that the stock was trading above $4 during the offer period.

However, the majority of the company's 15,000 retail shareholders (including me) did not bother to apply, partly because the 1-for-17 offer was such an immaterial amount to invest for many shareholders. Why would you bother?

When you have a controlling shareholder that dominates the board of a public company, there should be special laws which prevent minority shareholders from being exploited.

Harvey Norman provides the perfect case study of three different ways that retail shareholders can be shafted.

In 2014-15, Gerry personally under-wrote the heavily discounted 1-for-25 capital raising at $2.50, pocketing a windfall currently worth $2.3 million from the 1.46 million shortfall shares he alone was able to snap up courtesy of having a compliant board in place.

Last year, Harvey Norman invited everyone to apply for additional shares in that year's 1-for-17 offer at $2.50 but the board then banned anyone who held less than 300 shares from receiving any, thereby disproportionately benefitting Gerry and the other directors whilst falling foul of the ASX listing rules. Click here to read one of the classic Harvey Norman ASX announcements as the board ate humble pie and donated their ill-gotten gains to charity.

This year, Gerry just let the offer fall short with no under-writing or overs facility at all, so applications for 3.13 million shortfall shares just lapsed as retail investors collectively left $5 million in paper profits on the table. Given that Gerry personally owns 31.4 per cent of the company, his direct share of that upside from the retail dilution is $1.56 million.

What a sorry tale of bad practice and exploitation of apathetic retail shareholders. It should be illegal and these are the Corporations Law amendments that are required to stop rip-offs like this in the future:
  • Any entitlement offer which is priced at a discount of more than 10 per cent to the prevailing market price must be renounceable;

  • no director of a public company can personally under-write a capital raising unless it is priced by way of a bookbuild with full price discovery; and

  • retail investors must be offered the unlimited ability to apply for shortfall shares from other retail shareholders in a non-renounceable offer.
The simple solution is for all public companies to raise fresh equity through the PAITREO model, but as this list shows, we haven't seen one of those since Nufarm in September 2018.

Problems with the Harvey Norman financials

Harvey Norman refuses to consolidate its franchisees which means the accounts are not very transparent, something that auditor Ernst & Young has identified as a key audit matter.

There is also the issue of $608 million in loans owed to the company by the franchisees and whether these will be repaid in full. These are the second biggest asset on the books after the $2.5 billion property portfolio, which is not disclosed in any detail.

The 2018-19 accounts featured $75 million of what the company calls "tactical support" for its franchisees.

There was also the question of more than $150 million in losses racked up in non-core investments such as dairy and mining camps.

Links to other coverage

Finally, here are some links to various articles about Harvey Norman from over the years:

How Gerry Harvey crept up the register on back of retail shortfall
AFR, October 22, 2019

Harvey Norman dairy ventures ends in failure
ABC, March 26, 2018

ASA calls for Gerry Harvey to stand down
SMH, November 15, 2016

Gerry Harvey gets richer while small shareholders miss out
Crikey, March 26, 2015