Strikes demonstrate the need for effective communication

Published at Apr 28, 2016, in Features

About a week ago, Woodside Petroleum (ASX:WPL) recorded a first strike on its remuneration report – despite the level of pay for its chief executive actually decreasing over the previous year.

A strike is recorded when 25% of shareholders vote against a remuneration report – two in a row and the entire board can be spilled with fresh elections held.

Suffice to say, WPL won’t want another strike recorded next year.

Pay strikes are usually reserved for smaller companies who spend more money on remuneration and ‘administration’ than actual company activity – the thing it hopes to make shareholder money with.

Strikes have happened to larger companies before – but it is odd to see a blue chip company receiving one.

To be fair, it’s in the oil space, and in recent years shareholders have seen a great deal of wealth wiped off.

Santos (ASX:STO) came pretty close to receiving a strike in 2015 having seen 23.5% of shareholders vote against its remuneration report.

If you look at the performance of WPL against the oil price though, it’s held up pretty well.

The price of oil has gone down about 20%, while WPL shares have gone down 22.85% over the past year – it’s not ideal to be below the underlying commodity, but it’s within the ball park.

There are two sides to this story.

When the vote was received, Chairman Michael Chaney not-too-subtly noted that about 75% of the votes against came from overseas shareholders – which goes to one of the points on strike votes which has yet to play out.

The fear is that institutional investors, which on a per-member basis may represent less than 1% of the register but hold 10% of the vote, could use their power to effectively force a board spill – and then put up their own nominees in the resulting chaos.

If you play your cards right, it’s a pretty easy way to effectively take over a company without having to actually pay for the right to take it over (or raise the alarm for the Australian Foreign Investment Review Board coincidentally).

It’s a fear which has been fanned by the boards of under-performing junior stocks for years, with the tune a common one from companies which may be acting more as neat way to draw a wage for the board and its mates rather than create shareholder wealth.

On this front, the ability for Australian shareholders to actually have some way to protest various board shenanigans is vital. Even more vital is the ability for this protest vote to actually mean something.

What’s the saying? You get more with a kind word and a gun than just a kind word?

If done correctly, the strikes on remuneration can force a board to take a good, hard look at what it’s paying out and make sure it doesn’t repeat the same trick the next year. Nothing like the prospect of losing your board position to make sure you actually do something.

The reason why the Australian Shareholders Association voted against Woodside’s remuneration report had to do with the “very generous” structure of long-term incentives – according to The West Australian.

That report also noted that major proxy advisor ISS had urged clients to vote against the report due to a $2 million short term bonus to CEO Peter Coleman – on the back of a hefty write down of its stake in the Wheatstone project.

Undoubtedly, tracking the long-term, short-term, and options on the table to all members of the board can be a confusing game.

It’s actually pretty easy to figure it all out if you have time to sit down and pour through the remuneration statements, but to be honest, who has time for that?

Investors are only likely to see the headlines – that board members are telling investors to give them more LTIs and STIs even if the company underperforms. There may be a good reason to do that, but it doesn’t look great on the surface.

In all, it’s why communication is key.

Being able to simply explain to shareholders what the board should be paid and why it should be paid is shaping up as a crucial skillset.

It’s not enough to stick the information in a report and put it up for a vote – a company needs to be constant and clear in communicating its goals with their shareholders and be willing to take a haircut on pay if it doesn’t meet those targets.

You may still have rogue shareholder groups trying to co-opt the strike provisions, but if you’ve clearly communicated with your shareholders all this time – then any subsequent board spill is likely to be resolved in the incumbents’ favour.

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