David Murray says directors shouldn’t be made to invest in their own company





AMP chairman David Murray says directors shouldn’t be compelled to buy shares, despite the growing push for board members to hold at least the value of one year’s director’s fees to better align them with investors.

Four of AMP’s directors – Mr Murray, John O’Sullivan, John Fraser and Andrew Harmos – own share parcels worth between $5090 and $6363. That puts them among the 161 shareholdings held by non-executive directors worth less than $50,000, according to exclusive analysis by The Australian Financial Review of 3511 share parcels held by directors and senior management.

Although that figure represents just 4.6 per cent of the share parcels, for some fund managers a low value shareholding – especially when there is more than one director on the same board – is a potential concern. 

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Among the market’s top 300 companies, there are 36 companies where two or more directors hold less than $50,000 worth of shares, as of November 16. The analysis did not include directors who hold no shares at all. As well as AMP, these include struggling companies Viva Energy, Myer and recently collapsed RCR Tomlinson. Both Viva and Myer have policies to encourage directors to buy shares equivalent to one year’s fees over a set period.

Skin in the game

Allan Gray’s head of equities, Simon Mawhinney, says his fund likes to see directors with skin in the game.

“I think reluctantly [from boards] there has been a move towards minimum shareholding requirements, which seems to be becoming more normal than abnormal,” he says.

Allan Gray's head of equities, Simon Mawhinney, says his fund likes to see directors with skin in the game.
Allan Gray’s head of equities, Simon Mawhinney, says his fund likes to see directors with skin in the game.

Brook Mitchell

“We certainly push for this where it doesn’t exist, we are very strongly supportive of ensuring investment alongside the shareholder does happen. Where it doesn’t we are happy to vote against the rem reports.”

AMP chairman David Murray, who has just 2500 AMP shares, says he is supportive of directors owning shares but it’s not always that straightforward. 

“I’m sensitive to the idea it should be encouraged,” Mr Murray said. “I think they should be encouraged but not compelled, personal financial situations are all different. If you hire someone as a director they should be good enough to do the job anyway, you don’t know their financial situation. I don’t think it necessarily follows someone is a better director because they own the stock.”

In Mr Murray’s case, and other new AMP directors, AMP’s constitution requires directors to own a minimum 2500 shares after 60 days. But because the board was considering the sale of the life business at the time they were appointed, new directors were considered “insiders” and only able to buy shares from another director who had the same knowledge, a problem that directors say occurs frequently.  

John Green, QBE chairman and a director of Challenger, who has taken large stakes in companies of which he is a ...
John Green, QBE chairman and a director of Challenger, who has taken large stakes in companies of which he is a director, says the cost for directors to own shares is greater than the average investor because of the liquidity and concentration risks.

sasha@sashawoolley.com

Insufficient holdings a problem

Mr Mawhinney says that the levels of directors’ shareholdings are significant, whatever the reasons.

“That [AMP] board has insufficient holdings in the company shares, it’s a problem,” he says. Mr Harmos has bought more shares since the analysis was done.

“RCR is probably the same, it seems that company has had a very disengaged board for a long time. Were the board more engaged it’s quite possible its problems might have been avoided, and they would have been engaged if they had more to lose financially.” 

Ownership Matters' Dean Paatsch says he has been suggesting for 10 years that a way to avoid trading with insider ...
Ownership Matters’ Dean Paatsch says he has been suggesting for 10 years that a way to avoid trading with insider knowledge is to acquire shares the day before joining a board, with the company funding the purchase from the director’s future salary.

Rob Banks

Directors fees for S&P/ASX 300 boards can pay from $75,000 to upwards of $200,000. For directors who sit on additional committees, including audit, there are extra fees. While it might seem a lucrative role, particularly as most directors sit on more than one company board, non-executive directors say their fees need to be considered alongside the workloads, increasing risk of being a public company director and what they may have earned elsewhere in the corporate world.

There are just six directors who own two parcels or more of shares worth less than $50,000 in their companies. 

These include JoAnne Stephenson, a professional director, who owns less than $50,000 worth of shares in Myer, which she joined in 2016, Asaleo Care, which she joined in 2014, and Japara Healthcare, which she joined in 2015. Ms Stephenson is also a director of Challenger. 

Another professional director who holds two parcels of shares worth less than $50,000 in her companies is Arlene Tansey, a director of Primary Health Care and Aristocrat Leisure. 

Ms Tansey was questioned about her Primary shareholding at the annual meeting last week, and bought more shares on Wednesday. Jane McKellar also has small parcels of shares in Automotive Holdings Group and GWA Group, and Keith Gunderson-Briggs owns shares worth about $30,000 in both Harvey Norman and Australian Pharmaceutical Industries.

Stephen Goddard owns less than $50,0000 worth of shares in GWA Group, Nick Scali and JB HiFi. Of those, Mr Goddard was appointed to both GWA and JB HiFi in 2016, and Nick Scali this year.

Others with smaller shareholdings have been more recently appointed to company boards. Gai McGrath, who was appointed to boards in 2017, 2018 and 2016, holds less than $50,000 worth of shares in Genworth Mortgage Insurance, Investa Office Fund and Steadfast Group. Ms Kendall, appointed to Nine in June 2017 and Vicinity Centres in December 2017, also held just under $50,000 worth of shares in both companies, though she sits on two other boards.

Viva Energy, which has lost 22 per cent of its value since its July listing, is an example of a company with a number of directors with smaller shareholdings. Although it should be noted, that by definition the value of an underperforming company’s shares are worth less.

Two directors of Viva Energy, which warned in November its earnings wouldn’t meet prospectus guidance,  hold less than $50,000 worth of shares. Viva requires directors to hold one year’s worth of their salary in shares within five years of the listing date.  

​In Viva’s case, two of its directors Arnoud de Myer and Jane McAloon both own $41,900 worth of shares. 

That compares to director’s base fees of $165,000. Each non-executive director received $100,000 for their work ahead of the IPO, as well as fees for consulting services. Mr De Meyer received $77,000 and Ms McAloon $49,500 for consulting services, according to the prospectus.

“We consider that the policy is consistent with much of market practice, including by allowing for a period of time to accumulate shares,” a Viva spokesman said.

Directors and investors agree there’s also a danger in being too prescriptive, with concerns a minimum shareholding requirement may hamper new director recruitment and the drive for more board diversity, as well as cap directors’ expectation for how much they should think about investing in their companies.

​”If it’s a well-settled board, we do ask why you haven’t received part of your fee in shares, or used your personal holding or stake to indicate an alignment of interest. We do worry about it,” says Fidelity International’s head of capital markets and corporate governance Jenn-Hui Tan.

“For non-executives, we’re feeling our way around it. There are two ways we encourage non-executives to buy shares, salary sacrifice or taking their pay and buying on open market.”

“There is a problem with being unduly prescriptive, I think an absolute monetary threshold isn’t the right way to think about it.

Mr Tan said the market had not focused on non-executive shareholdings because balancing “other considerations around … objectivity and board diversity” was challenging.

John Green, QBE chairman and a director of Challenger, who has taken large stakes in companies of which he is a director says the cost for directors to own shares is greater than the average investor because of the liquidity and concentration risks. 

“Some directors don’t have the cash, you don’t want a world where a really really good person who is not wealthy can’t be a director because they can’t buy shares. On the other hand if someone needs the money they are less likely to be a good director – for example, if you need the money from your directors’ fees to survive, you are less likely to be independent when a control transaction occurs. The truth is somewhere in the middle.”

​Two of the Navitas directors weighing up the merits of BGH’s takeover offer left themselves open to one of the oldest criticisms in the book: they don’t have enough skin in the game. 

Lisa Paul, who was appointed to the board in February 2016, and Diana Eilert, who was appointed in July 2014, both have shareholdings in the education company worth less than $50,000. Their annual fee is about $120,000 each.

Janette Kendall, a director of Vicinity Centres, Wellcom Group, Costa Group and recently retired from Nine Entertainment, agrees there can be challenges for directors to own stock, adding that boards she sits on are discussing whether there are more effective ways to allow directors to buy on-market, but says she broadly agrees with the concept. In the US, management and directors can nominate the amount they wish to buy or sell at the start of the year, and that is done on-market for them in a blind trust.

“If there is an expectation for directors to have skin in the game, let’s have that discussion,” she says.

“But there is a contradiction: it’s seen as good corporate governance to have independent directors, at the same time there is this push for directors to have more skin in the game.”

ASX Corporate Governance Principles define an independent director as one that is not a “substantial security holder” and “can and will bring an independent judgment”. 

​​Ownership Matters’ Dean Paatsch says he has been suggesting for about 10 years that a way to avoid trading with insider knowledge is to acquire shares the day before joining a board, and with the company funding the purchase with the director’s future salary. But he says in ten years, no-one has expressed much interest in the idea.

“The rule of thumb after three years is if you haven’t managed one year’s worth of fee in stock, you’re just not trying very hard,” he says, noting the vast majority of directors want to buy shares. “Basically, it’s about looking at the exceptions, not the rule,” he says.

He added that options don’t align with shareholders’ interest. 

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