Telstra shareholders hit back

Ross Greenwood speaks to Australia and New Zealand Research boss at Institutional Shareholder Services Vas Kolesnikoff after  Telstra (ASX:TLS) shareholders have put the company’s board on notice during its annual general meeting over executive pay.

Introduction: Telstra shareholders hit back

Ross Greenwood: Great to have your company here news around Australia. I told you earlier about Telstra shareholders today, in a record 62% vote against the executive pay that was put before its annual meeting in Sydney today. Something odd happened today. What happened was a very long meeting. It’s started I think, at 9:30 and it would have finished at maybe at 1:30 close to two o’clock and at some point the chairman John Mullen announced, no it would have been maybe quarter past, 20 past 12 and there’s 600 people in the room. 500, 600 people in the room, and he announces, “Oh, the meeting will continue but just to let you know lunch will be served from now outside.”

Three-quarters of the people stood up and walked out. I could not believe it, seriously, they just stood up and walked out. Anyway, notwithstanding that let’s go to what took place here which was important that significant vote against the pay deal because Telstra shares have halved, pretty much halved over the past year. You’ve had of cutting the dividend, 8000 jobs lost. The company is smaller.

Now it was explained by John Mullen, well hey that doesn’t mean the executives are doing a bad job they are meant to be doing a great job but the shareholders believe that they should actually get a decent deal. John Mullen also pointed out that this is exactly the same pay deal that came up last year that was accepted now rejected because of course circumstances of the company have changed.

He also indicated that when the NBN is eventually rolled out, Telstra, its profit could have halved from its peak to its trough because of the impact of the NBN. Well, hey, they must have known this was coming and then finally, there was a whole situation about executive salaries in Australia. Here is what John Mullen, the chairman of Telstra had to say about that.

John Mullen: I do personally believe that executive salaries are too high across the board in Australia but changing this takes time and needs to be embraced by all of corporate Australia, not just one company or one industry as the marketplace for talent is international and is industry agnostic. I’m old enough to remember when the CEO just earned a big salary and that was it. Then over the years, stakeholders felt the compensation had to be variable and depend on performance and so the schemes became more and more complicated.

The end result of this is that although no doubt well-intentioned by all concerned, we’ve ended up with a situation where pretty well everybody’s unhappy. No two shareholders seem to agree on what is the best solution so many do not feel that their interests are being properly protected.

Ross Greenwood: That’s John Mullen, the chairman of Telstra. I do personally believe that executive salaries are too high but that no two per shareholders seem to agree on what the best solution is. Well, I can tell you that today in this annual report that the shareholders had to vote on, the area when it came to executive remuneration was 21 pages, 21 pages like a contract and the shareholders got to make head or tail of that.

Well, somebody who would have read this is Vas Kolesnikoff, who is the head of Australia and New Zealand research at Institutional Shareholder Services, ISS, which makes recommendations to large shareholders in how they should vote on these types of things, is online right now. Many thanks for your time Vas.

Interview with: Vas Kolesnikoff, Australia and New Zealand Research Head, Institutional Shareholders Services 

Vas Kolesnikoff: Hello Ross.

Ross Greenwood: The 62% vote against almost a record vote against a pay deal, do you believe that’s because the pay deal was so poor that that deserve this type of vote?

Vas Kolesnikoff: Well, it certainly is one of the bigger ones I think in 2016 got 49 and something percent. Look the bottom line is shareholders look at this and they say, “We’ve lost half our money. The company isn’t traveling as well, lots of people are getting fired. We’ve got the concerns over the NBN, over profits, over revenues, bonuses don’t seem to be changing.” It’s a reasonableness testing and here the shareholders have spoken 62% against.

Ross Greenwood: Okay, they’ve spoken 62% against. You recommended that they should vote against this particular pay deal. What were your grounds for doing so?

Vas Kolesnikoff: Well, first of we don’t recommend against the company easily. We like to think that companies and boards deserve the benefit of the doubt. There are various technicalities in this space that we can talk about but I won’t bore you with that. The bottom line here is and it comes out in the board discretion to reduce bonuses by 30%. What that means is if they didn’t exercise their discretion to reduce the bonus based on their calculation of their matrix of performance targets and whatever, the bonuses this year would have been well larger than last year.

What that then tells us is the performance targets seem to be misaligned here if the shareholders can be losing money, if the company is not traveling to the standards that it should. The profitability is going up tremendously to be awarding those types of bonuses. We’re not saying the executives are doing a really poor job, they’re just misaligned with the results, that’s the bottom line here, they’re misaligned with results. We just can’t keep on handing out bonuses without their performance of shareholders they’re expecting.

Ross Greenwood: It’s an interesting thing Vas, do you think these deals are getting too complicated? Should it be as even the chairman suggested go back to a fixed salary, most of the workers are on a fixed salary and you could give a few options out there if the person wants to buy the options up and take them up. Is that really ultimately the way you try and simplify this because it just seems every company is getting caught up with this type of thing.

Shareholders don’t know it of course when the annual report comes out will report these massive numbers that the chief executive may potentially earn but the truth is you don’t know for three or four years whether they were going to get even a cracker of that.

Vas Kolesnikoff: Well, that’s exactly right. There’s annual remuneration reports, are very complicated. There’s no doubt about that and they’re getting more complicated every year, besides that there’s pressure on chairman to justify the bonuses but then on the other side he’s got staff and executives wanting bonuses. I personally do not see a time where bonuses will go and you’ll see the CEO of Telstra getting a base salary of $10 million or whatever it is. End of the day shareholders want to see performance and they want to see performance targets that are aligned with shareholder outcome, we’ll pay you a bonus if you achieve a good result for us.

I think bottom line with Telstra it was caught in a really difficult situation. There are various things here that just didn’t make sense including paying bonuses to people that are leaving, that’s one thing. You’ve just mentioned that Telstra was firing people, there are two executives that are leaving and they’re actually getting bonuses for leaving. There are various aspects here which are quite problematic and complicated and shareholders do have an idea but a lot of the time this is a reasonableness test. Is the bonus earned here? I think 62% of shareholders thought it wasn’t.

Ross Greenwood: There’s another issue and that is let’s say, for example, Telstra is a company going through a transformation. It may be a smaller company in the future than it is today but ultimately the chief executive, that executive team they’ve got to stick around to see the good times come. That ultimately is one of the tests of their strategy to see whether they can see through the strategy and ultimately not have the board push them out the door.

Vas Kolesnikoff: Look and that’s exactly right. It’s a chicken and egg scenario. Shareholders want to save some money in their pockets, on the other side executives– and don’t forget okay, you got executives earning a million, two million dollars a year here, they’re not struggling financially. Okay, are they working hard? Should they get a bonus in a year where the company hasn’t done well for shareholders? You’re exactly right at the point of the fact that, yes there is a growing movement remuneration consultants et cetera that are saying, “Okay, this is what other companies are paying.”

Those executives are looking thinking, “Okay, there’s bonuses paid over there, I’m not getting one over here.” It is a very difficult position there’s no doubt but look bottom line is shareholders expect to see something in their pockets and Telstra’s performance and potentially the shrinking of the company and profits are weighing on it and investors are concerned.

Ross Greenwood: There you go Vas Kolesnikoff, the head of Australia and New Zealand research at Institutional Shareholder Services ISS which is one of those key organizations that voted against that Telstra pay deal. Vas as always appreciate your time here on the program tonight.

Vas Kolesnikoff: Thank you, Ralph.

Ross Greenwood: There you go, Vas Kolesnikoff. I want your calls on this because now bear in mind, even if you’re still walking away four, five million bucks a year, as the chief executive of a company as big as Telstra, and even near the basic salary I think was going up by 2.8%. I think that the staff because this well the protests outside come with the unions and so forth, they were saying that well, under the enterprise binding agreement, they were being offered one and a half percent or something of that nature. That’s where the brawls come, the penis test in all of this and also one of the problems is long term short term.

You put the strategy in place, it might be a ten-year strategy but you might not be around to see the end of it. It was pretty hard but as I said once you start having shareholders trying to work out 21-page documents of what the chief executive contractors was, that makes it almost impossible for anybody to get a sense of reasonableness.

 

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Image source: 2GB

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