Restaurant Brands' decision bodes well for shareholders

Restaurant Brands' annual meeting was a watershed event.

It was the first time that a shareholder's motion had appeared on the formal agenda and then been approved by the meeting.

This could have significant implications for corporate governance in this country. Shareholder-sponsored motions may now become a common feature of company meetings.

Under the first schedule of the Companies Act, any shareholder may give written notice of a matter that person wishes to raise for discussion or resolution at a shareholders' meeting.

Any topic can be raised or proposed and the sponsoring shareholder has the right to include a statement of not more than 1000 words with the notice of meeting.

As long as the proposed motion is received at least six weeks before the meeting, the company foots the bill.

If the motion is received after this time, the shareholder pays for printing and mailing.

Graeme Bulling, a Restaurant Brands shareholder, gave written notice of a motion for this week's annual meeting. He proposed a change to clause 100 of the company's constitution relating to directors' retirement allowances.

Clause 100, which is consistent with the listing rules of the Stock Exchange, states that payments to a retiring director may be made only if the payment is either authorised by shareholders, or the amount of the remuneration does not exceed the total remuneration of the director in any three years selected by the company.

Directors with only three years' service could receive an additional three years' payment when they retired.

Mr Bulling argued that the annual remuneration of directors had to be ratified by shareholders but they had no say over a retirement allowance as long as it did not exceed the three-year threshold.

He proposed that a director should be paid no more than 10 per cent of the total remuneration received during his or her term of office, and that the payment must be authorised by all shareholders at a meeting of the company.

If Restaurant Brands chairman Bill Falconer had retired at the end of last year after his four years' service, he could have received up to $180,000 as a retirement allowance without any need for shareholder approval.

Under Mr Bulling's proposal, Mr Falconer could be paid a maximum of $23,000 and this amount would have to be approved by shareholders.

Mr Bulling sponsored the motion because of the poor performance of Restaurant Brands and the excessive payment made to directors of Contact Energy, of which he is a shareholder.

Restaurant Brands was floated in 1997 at $2.20 per share and, except for a brief period, has traded well below the issue price even after adjusting for a one-for-12 bonus last March.

The company has substantial pizza operations and has added the Starbucks coffee chain. But KFC still contributes 88 to 90 per cent of earnings before interest and tax and its sale levels have been fairly static over the past four years.

Wednesday's meeting was given little indication that there would be any immediate improvement in the group's overall trading performance.

Contact Energy's latest annual report revealed that two directors, Andrew Thomson and Brian Wood, were paid a retirement allowance of $65,000 each. These payments compared with annual directors' fees of $29,200 and there was no explanation in the report of how the $65,000 was derived.

If Mr Bulling's motion starts a trend, then the remuneration excesses at Contact Energy could adversely affect a large number of company directors.

Mr Falconer took a refreshingly open-minded approach to the resolution. He argued that directors' retirement allowances were usually related to their term of office.

They could receive up to three years' earnings but in his experience directors would receive the full amount only if they had served for 10 years or more. A director who had served only six years would normally be paid only six-tenths of the maximum allowable amount.

This might be true in some circumstances but the payment to the two Contact Energy directors was well in excess of Mr Falconer's formula.

The chairman added that he had some sympathy with the motion because there was no place for individuals whose main reason for joining a board was for its generous retirement allowances.

Before calling for a show of hands, Mr Falconer confirmed that the directors were making no recommendation on the proposal. He also announced that 6.1 million proxy votes supported Mr Bulling, 532,000 were against and 21.1 million proxies were undecided and held at the discretion of the chairman.

Mr Falconer could have called for a poll, voted the undecided shares against the motion and defeated Mr Bulling.

He declined to take this option and the motion was carried by a show of hands.

The outcome was a big surprise because the chairman had sufficient votes to defeat Mr Bulling but he decided not to use them.

The directors were caught in an awkward position because Restaurant Brands has not performed. If they had cast the undecided votes they would have been the principal beneficiaries of this decision.

For example, if David Irving retires immediately, his maximum potential retirement fee has been reduced from $120,000 to $14,000 and Victoria Salmon's has fallen from $144,000 to $17,000.

Under Mr Falconer's years-of-service formula, Mr Irving would have been paid a retirement allowance of $48,000 and Ms Salmon $57,000 before Mr Bulling's motion was approved.

More importantly, all retirement payments must now be approved by shareholders. In the past this was not required as long as the three-year threshold was not breached.

The Restaurant Brands outcome shows that it is important for shareholders to choose the right motion and company. A poorly performing company is more vulnerable because directors are usually on the back foot.

One can confidently predict that a shareholder will propose a resolution relating to directors' fees at next year's Contact Energy annual meeting if the company's share price performance does not improve.

Mr Falconer also told Wednesday's meeting that AMP Henderson's private equity fund wished to nominate two new directors after acquiring a 22 per cent shareholding.

At present, the group has five directors - four non-executives collectively paid $180,000, and chief executive James Collier.

If additional directors are appointed, the board may increase the total amount that can be paid to directors without the authority of shareholders. This enables the company to pay the additional directors an annual remuneration not exceeding the average amount paid to each non-executive director, excluding the chairman.

Mr Bulling argued that Restaurant Brands had not performed and that existing directors should take a pay cut to accommodate the new directors. He proposed a motion from the floor based on this opinion but it was defeated by a show of hands.

At the end of a democratic meeting, Mr Bulling was a happy man, even though he finished with a win and a defeat.

But his victory cannot be understated - it was a watershed event that should encourage other shareholders to become more active on corporate governance issues.

* Disclosure of interest: none.

* bgaynor@xtra.co.nz