Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Tread carefully with director fee increases

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Protest and poor performance will make pay a major issue. Photo / Martin Sykes
Protest and poor performance will make pay a major issue. Photo / Martin Sykes

Director fee increases are expected to be a major issue at upcoming annual meetings. This is because a number of companies are asking shareholders to approve substantial fee increases even though many of these companies have had disappointing sharemarket performances.

In addition, the Occupy Wall St campaign shows there is increasing opposition to excessive corporate remuneration.

In light of this, shareholders have to ask themselves what is the appropriate remuneration for non-executive company directors.

Do we need fee increases to attract better quality directors or will high fees encourage directors to stay well beyond their use-by date?

Skellerup, which will hold its annual meeting next Wednesday, is proposing a 48 per cent fee increase for non-executive directors, from $320,000 to $475,000 (see table).

The company gives the following reasons for the proposed increase:

* Fees have not been raised since September 2006.

* The proposed increase is based on advice received from outside consultants and reflects remuneration paid to directors in similar-sized NZX-listed companies.

* Skellerup wants to raise its fees to attract "the highest quality directors".

The Skellerup board is light at present with only four non-executive directors: chairman Sir Selwyn Cushing, Elizabeth Coutts, John Thomson and Dr Ian Parton. Cushing was paid $130,000 for the June 2011 year and the other directors between $65,000 and $75,000 each.

A $475,000 fee level seems to be reasonable for a company with major international operations but why doesn't Skellerup have a bigger and stronger board? That is the question shareholders should be asking next week.

Another issue of contention at the Skellerup meeting will be the proposed issue of 1,947,533 partly paid redeemable ordinary shares to chief executive David Mair on extremely favourable terms.

These are being issued to "align the interests of Mair with those of Skellerup's shareholders and to provide to Mair incentives and rewards reflecting the performance and success of Skellerup".

Mair has made a big difference at Skellerup but the issue of shares to executives on favourable terms does not necessarily align their interests with shareholders.

Most executives can walk away from these schemes, as did Tim Miles at PGG Wrightson, while shareholders have to take their losses on the chin. Freightways is seeking a 29 per cent increase in director fees, from $336,000 to $434,000.

The notice of meeting states that the "increase is based on independent advice that has considered market evidence, the increasing workloads and responsibilities of directors and the fact that the directors have not received an increase in fees for four years".

Freightways, like many other New Zealand companies, seems to pay its directors more than has been approved by shareholders. The company has maximum approved fees of $336,000 yet non-executive directors received $370,850 in the June 2011 year and $402,208 in the previous year.

Freightways' directors should probably be paid less than similar-sized NZX-listed companies because it has limited overseas operations and fairly uncomplicated New Zealand operations.

The proposed 7 per cent increase for Port of Tauranga directors was struck before the Rena ran aground on the Astrolabe Reef. This disaster illustrates that directors often have to spend considerable time on extraordinary issues and usually receive no additional payment for this.

There will be considerable opposition to the proposed Nuplex increase, from $1 million to $1.5 million, because the fee structure is high, the company has performed poorly since the last increase four years ago and the arguments in favour of the latest proposal are weak.

Nuplex last increased its director fees at the 2007 annual meeting, from $650,000 to $1 million, and since then it has had a negative gross sharemarket performance of 74 per cent while the benchmark NZX-50 Gross Index has been down just 23 per cent.

The company argues that the proposed fee increase is "to reflect increases in the Consumer Price Indices (CPI), as well as market trends, in New Zealand and Australia over the next three to five years".

The proposed rise will also facilitate the appointment of additional directors.

Two points need to be made about these arguments:

* Companies should ask for more modest fee increases each year or every second year instead of anticipating increases in the CPI, or changes in market trends, over the next three to five years.

* Nuplex doesn't have to seek a $500,000 increase to facilitate the appointment of additional directors.

The best argument in support of the Nuplex fee increase, which is not raised in the notice of meeting, is that the company has a complex international operation that requires specific expertise at the board table.

Nevertheless the directors of the company, which has a share market value of just over $500 million, are well paid with chairman Rob Aitken receiving $287,300 for the June 2011 year and the other non-executive directors between $144,900 and $167,700 each. Nuplex needs to apply for smaller director fee increases on a more regular basis instead of going for substantial rises based on weak arguments.

Michael Hill International is seeking a 44 per cent increase, from $395,000 to $570,000.

The company gives a number of reasons for the proposed increase including:

* The appointment of an additional director in February effectively increased the original approved pool from $395,000 to $474,000 because under NZX Listing Rules, the size of the approved fee pool automatically rises when extra directors are appointed.

* The proposed increase reflects the company's goal to be a truly international company.

It also reflects "the general movement in the costs of living and to build in an allowance for fluctuations in the Australian dollar". This is because the company has two Australian-based directors.

The interesting point about the resolution is that it could be easily defeated by shareholders because the directors, who own 63.8 per cent of the company between them, cannot vote on this issue.

Fletcher Building will be putting a 33 per cent increase, from $1.5 million to $2 million, to shareholders at its annual meeting on November 16. As the notice of meeting has not yet been released it is difficult to assess the reasons for the increase.

Finally, Kathmandu is proposing a 33 per cent increase, from A$600,000 ($773,000) to A$800,000, at the company's annual meeting to be held in Auckland on November 18.

The notice of meeting states "the company has less than A$100,000 of headroom in the total pool available to pay non-executive directors. The lack of headroom thus restricts the ability of the company to add another non-executive director to the board and the increase of A$200,000 proposed will enable the board to appoint a further non-executive director if this is considered to be appropriate".

This explanation is correct because under NZX Listing Rule 3.5.1 a company may increase the size of the directors' pool, without seeking shareholder approval, when an additional director is appointed but there is no ability to do this under ASX Listing Rules.

Thus Kathmandu, which is listed in Australia and New Zealand, needs shareholder approval to pay additional directors but this would not be a requirement if it was only listed on the NZX.

Disclosure of interest: Brian Gaynor is an Executive Director of Milford Asset Management. bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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