Non-executive Chairman John Story (a director since January 1995) ‘was, until 30 June 2006, a partner of Corrs Chambers Westgarth Lawyers, which provided legal services to the Suncorp Group throughout the year. Mr Story remained as the non-executive Chairman of the Board of Directors of that firm until his resignation on 21 June 2007.’
Non-executive Martin Kriewaldt (a director since December 1996) ‘provided advice to AON Holdings Australia Limited and Allens Arthur Robinson Lawyers throughout the year. Those firms provided insurance brokerage and legal services respectively to the group.’
Non-executive Geoffrey Ricketts (a director since March 2007) ‘is a director of Spotless Group Limited, the parent entity of a company that provided catering services to the Group over the course of the year. The contractual arrangements between the Company and Spotless Services Australia Limited were in place prior to the date Mr Ricketts joined the Suncorp board. Mr Ricketts also acted as a consultant for Russell McVeagh, Solicitors (NZ), which provided legal services to the Suncorp Group throughout the year.’
In today’s complicated and interconnected world it’s unrealistic to expect that no directors of a large conglomerate like Suncorp should have any kind of relationship with any of the company’s suppliers, consultants or advisors. There’s bound to be some overlap. But shareholders should avail themselves of the information provided in today’s ‘age of transparency’ to collect and examine the relevant facts.
Once you’ve gathered the facts, you’re then in a position to make your own judgment as to whether the relationships the directors have with suppliers, consultants or contractors are appropriate. To do so, it’s worth trying to imagine which entity’s interests – consciously or subconsciously – the director is likely to fight hardest for.
Imagine the director had been a long-time partner at an accounting firm before joining the board. Because of a financial interest, or even simply long-established personal relationships, they may find it difficult to be necessarily assertive in certain situations where the interests of the company and the accounting firm collide. It behooves shareholders to consider such potential tensions within the boardroom and question exactly whose financial interests are likely to win out.
The trend towards increased ‘transparency’ has had unfortunate unintended consequences; self-interested executives in remuneration negotiations with the board, for example, can examine competitors’ packages. In a perverse way, such transparency has contributed to an upward spiral in compensation.
It’s not hard to picture the scene: Desirable executive in line for top job at Bank A points to exorbitant remuneration of executive at Bank B and says to the board ‘well, I obviously need to be paid more than her. You’ve conducted a “global search” and decided I’m the best in the business. It’d be unfair to pay me less than an inferior executive.’
Such logic places the directors in a bind and – in any case – it’s not their money. The board acquiesces; the media explodes in outrage (or at least, it does a few years later after the huge termination payment is made).
So shareholders need to use the information available to them as much as possible to their advantage. In a strange way, the flood of data and information seems to have led to a strain of ‘analysis paralysis’. The remuneration and relationships are disclosed and they’re legal. But there’s no reason shareholders can’t hold their directors and executives to a higher standard – asking direct questions at the annual meeting or, where they believe the situation is unacceptable, voting against a director’s re-election.
At The Intelligent Investor we’re hopeful that one by-product of this bear market bloodbath will be a surge in shareholder scrutiny and activism. Ordinary investors have suffered painful losses and, at the very least, they should ensure that their directors – appointed to protect their financial interests – are not unduly enriching themselves at shareholders’ expense.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.