Corporate governance in practice: three test cases

Melbourne 22 October 2003

A series of extraordinary but unconnected events over the past two weeks has provided the severest test yet for Australia's new corporate governance regime. They have also provided a fascinating case study of how corporate governance works in practice in the major OECD countries outside the United States which have, for the most part, opted for a semi self-regulatory approach rather than the stiff legislation of the US.

Those who doubt the effectiveness of codes rather than laws can draw some comfort from the outcome of a series of shareholder revolts involving three significant global players - The News Corporation, controlled by Rupert Murdoch, the pensions giant and life assurance group, the AMP Society, and the wine producer and distributor Southcorp, whose labels are best sellers in Europe, Asia and North America.

Perhaps the most significant event occurred at the annual meeting of The News Corporation at its home base in Adelaide when Rupert Murdoch backed down on a proposal to issue more than three million share options to senior management with no significant performance hurdles to overcome. That Murdoch, who in the past has often been accused of being deaf to shareholder concerns, bowed to criticism with a smile rather than a snarl, was a victory for the corporate governance code. He could, as he has done before, have used his own voting power to crush the objections of lesser shareholders to the options, but did not do so, confining himself to expressing surprise that his ears did not prick up to the well-publicised revolt prior to the meeting.

"I was surprised that people didn't tell us this feeling (against the options) because we are very, very conscious of shareholder mood", he told a news conference. Murdoch's retreat from an unpopular move meant that the annual meeting proceeded with its usual calm, unlike the Southcorp meeting, also in Adelaide, where angry shareholders used unconventional methods to express their displeasure as they attempted to oust Bob Oatley, founder of Rosemount Wines, as deputy-chairman of Southcorp. The company's share price has crashed following a $A 923 million ($ 646m) loss and the decision to pay no final dividend.

A typical comment was:" why don't you do what the Brisbane Lions (a poor performing football team) did and take a pay cut themselves and get the company back on track?" But despite all but a smattering of the 850 shareholders hurling insults at the board and raising their voting cards against Oatley's re-election, a subsequent poll saw institutional investors crush the revolt after Oatley had pointed out that as the biggest shareholder he was the biggest loser. The institutions accepted the arguments of the newly-appointed chief executive John Ballard that the company was now on the right track. Unsatisfactory for the small shareholders, but if the big investors believed that it was arguable the correct result.

The other event has been the approval of the break up of the AMP Group, with the creation of a new British company called HHG which will own AMP's hived-off British assets. This is a deal of such complexity that it would take too many web pages to explain it, but the salient point is that it is costing AMP's shareholders $A289 million ($ 202m) to achieve it. Apart from the high sums going to investment advisers, $A 38.4 million (S26.8m)in cash is going to AMP executives who are staying on with the new company, and another $A18.6 million ($13.02m)is going in redundancy costs.

It all squares with the corporate governance codes, of course, but it has left shareholders perplexed and the financial press fuming. The Australian Financial Review, the nation's daily business paper, noted that 'long term shareholders have watched the $A10 billion ($7bn)that was put at management's discretion when the company floated five years ago disappear" The Age's Alan Kohler, perhaps the most respected columnist in Australia was scornful of the 'retention' payments "aimed only at keeping everyone in place until the demerger because they only bind executives for six months.

"This will surely have the opposite effect of retention", said Kohler. "Suddenly these executives will be less in need of a job than ever.

"They will be able to finance a two-year sabbatical in Italy while the children are young, rather than continuing to work long hours for the AMP only to realise when the children are grown up that it is all too late and they barely know them".

So three cases - in the first of which a media mogul who likes his own way was persuaded to observe the code. In the second the institutions overrode the interests of small shareholders to uphold poor performance - not ideal but not a breach of the rules. And a third where management - with the help of 'advisers' - seeks to do things its way, and where the codes cannot effect change, should change be considered desirable.