Dear Mr Seymour,
I’d like to respond to your Chairman's comments on corporate remuneration following Watpac’s Annual General Meeting earlier this week. First of all, well done for responding to the 'no' vote, and publishing your comments for shareholders and the public to view. In your opinion the pay to your executives and directors is modest, and you clearly feel strongly that the criticism of the remuneration report is unwarranted. For the record, we voted our funds' modest holding in favour of the report, and were also surprised to see the 34% vote against its adoption.
However I do take issue with two of your statements. The first concerns your comment that the workload of the Directors has increased as the company has grown in size and scope, whilst their remuneration has been flat. The implication is presumably that the Directors have been a little unfortunate not to have received a pay rise as their duties became more onerous.
To me this is a flawed approach to the remuneration of executives and directors. Whilst you rightly point out that staff and turnover have increased markedly, as a substantial shareholder you would also be aware that on measures relevant to shareholders over the last five years, Watpac has performed poorly. The remuneration report summarises this nicely:
Apparently we are supposed to feel sorry for the CEO, whose pay package was cut from $1.4m to $1m?
In the last five years net profit has declined 50%, the share price has gone backwards and the return on capital employed has declined from 28% to 6%. When you consider that the company has invested heavily in its growth over this period, the obvious conclusion is that the return on this investment, of which the directors approved, has been dismal. At this level of seniority, you don’t get paid for working hard, you get paid for results, and Watpac has not been delivering.
My second objection is to your criticism of the ‘two strikes rule’, whereby two consecutive 25% ‘no’ votes on a company’s remuneration report will trigger a spill resolution in which directors are required to stand for re-election.
With respect, this law is not discriminatory. It applies in the same way to every company. The issue here is not that 8% of shareholders are having a disproportionate impact, it is that, excluding 29m shares held by directors and executives, only 27m shares voted for the remuneration report and 15m against, which means 102m didn’t make the effort to vote at all.
Shareholders of the company clearly feel disengaged, as demonstrated by the fact that both you and the Deputy Chairman received a similar number of votes against your own re-election. I’ve argued previously the ‘two strikes rule’ is really a toothless tiger because it gives shareholders no rights that they didn’t already have. If the 8% of shareholders who voted against the remuneration report want a board spill, they already have the voting power to call one within 2 months through s249D of the Corporations Act.
I had to chuckle at your comments that the ‘rules must be amended otherwise you run the risk that good business people will be reluctant to take on these roles going forward’. The managers and directors I’ve met over the years were, for the most part, possessed with a robust constitution and healthy sense of self-confidence. I would suggest the risk of them changing careers en-masse over an unfavourable remuneration vote or two is remote.
Finally I’d like it noted that Watpac’s Annual General Meeting was not webcast, nor was the CEO’s address released, and our own attempts to meet with management on a recent trip to Brisbane were cancelled at late notice. Instead of whinging about the new legislation, you should be thinking about what the board can do to engage with shareholders, explain your remuneration structure and encourage them to vote (see IAG's recent efforts if you are looking for an example).
Perhaps next time you send us a letter, you might even include some contact details. It makes it a touch easier for your shareholders to communicate.
(02) 8305 6050
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