Devon Funds Management has called for NZ to follow Australia by giving shareholders greater power over executive remuneration.
In a recently-published article the Auckland-based boutique firm says it is “strongly supportive of shareholders having the ability to have a say on pay as this increases the transparency of remuneration arrangements and performance targets”.
“Australia introduced the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, better known as the ‘two strikes law’ to give shareholders a say on executive pay,” Devon says. “We would like to see the same framework introduced in NZ.”
While it’s a perennial topic, the corporate remuneration issue has flared up again following the revelation Fonterra boss, Theo Spierings, was paid a whopping $8.32 million for the 12 months to the end of June this year. Spierings payout, comprised of a $2.46 million base salary (plus $170,000 in benefits) as well as short- and long-term incentives of $1.83 million and $3.86 million, respectively.
Devon says the mega milk company payout was indicative of wider trends both in NZ and offshore where ever-increasing executive remuneration packages rest on flimsy fundamentals.
Fonterra is a private co-operative with a separate listed entity, the Fonterra Shareholders Fund (FSF), giving investors access to income flowing from the dairy giant.
According to the Devon article, Fonterra justified Spierings’ outsized pay by following “the well-trodden route of employing consultants to conduct a benchmarking exercise and providing some vague commentary around performance targets”.
“Objective measures that can be viewed by external parties, like the FSF share price or the Milk Price paid to farmers don’t show any positive multi-year trends so it is hard externally to ascertain if the payment is justified or not,” Devon says.
The manager cites other recent NZ examples of Fletcher Building and Sky City where outgoing chief executives received handsome departure payments despite presiding over ugly results.
“It is also disturbing to see CEO’s who perform poorly getting handsome rewards on exit, whereas underperforming workers just get sacked,” Devon says. “Sometimes it seems that CEOs just can’t lose – perform well and get well paid, perform poorly and get a great exit package.”
Chief executive pay in the NZX top 10 companies has doubled since 2007, even among some “natural monopolies” such as Auckland Airport. But the NZ CEO remuneration inflation was part of a seemingly inexorable world-wide shift.
“… the trend in executive remuneration for large listed companies is very clear in NZ and globally – it is an upwards spiral,” Devon says. “In the USA, executive remuneration has increased at about 10x the rate of inflation over the last 30 years… returns that should be divided more equally amongst the workforce or paid out to shareholders are going to senior managers.”
Devon says shareholders need to pose a number of questions to corporates on executive pay, including:
- Are the payments fair and do they represent value for money?
- Have the payments driven tangible results that can be observed by stakeholders?
- What is the real market value for the executive (ie what is their replacement cost?)?
- Do the payments encourage the wrong sort of behaviour (for example, short term profit maximisation or underinvestment)?
- Should executives who have failed to deliver value be paid as if they had on the way out the door?
- Are the remuneration structures fair to shareholders or do they transfer value to management regardless of whether they do a good job or not?
- Are we paying entrepreneurial salaries for managerial roles?
Devon also says the evidence suggests that NZ corporates should be more supportive of home-grown leaders rather than shipping in global counterparts to helm the country’s biggest companies.
“By and large NZ companies that have grown and promoted their own management talent internally have done well, whereas very expensive imported talent has found it more difficult,” the article says.
Founded by Paul Glass, Devon currently manages more than $2 billion across a range of retail funds and institutional mandates. The group recently teamed up with JMIS to launch a back-office shared support business, Investment Services Group.