Australia: Harvey Norman AGM; Strike 2 In The Making?

Last Updated: 28 November 2019
Article by Alex Co

Shareholders have braced themselves for the upcoming Harvey Norman Annual General Meeting (AGM) to be held on November 27, 2019. The meeting will not be taken lightly following the shocking results of the 2018 AGM.

Votes against remuneration report in 2018

Majority of the shareholders voted against the adoption of the remuneration report, resulting in 50.63 per cent of shareholders disapproving the resolution earning the company a first strike. Not only did a large percentage of shareholders vote against the remuneration report, but an average of 27.76 per cent opposed the re-election of the following directors: Non-Executive Director Mr. Michael John Harvey, Non-Executive Director Mr. Christopher Herbert Brown, and Executive Director and Chief Operating Officer (COO) Mr. John Slack-Smith. An average of 17.5 per cent of shareholders also voted against the grant of performance rights under the Harvey Norman 2016 Long-term Incentive Plan to the following Executive Directors: Executive Chairman Mr. Gerald Harvey, Chief Executive Officer Ms. Kay Lesley Page, Executive Director and COO Mr. John Slack-Smith, Executive Director David Ackery, and Executive Director and Chief Financial Officer and Company Secretary Chris Mentis.

Questions over what will happen at 2019's AGM

Harvey Norman is now in hot waters, especially if majority of the shareholders continue to vote against the adoption of the remuneration report in the 2019 AGM, leading to a spill resolution.1 The Corporations Act 2001 has been amended to include a "two-strike" rule. A company will be given a first strike if 25 per cent or more vote against the remuneration report. Until the next AGM, the company is required to review and respond to the shareholders' growing concerns regarding executive pay.2 The next AGM will determine whether a company gets a second strike. This occurs when 25 per cent or more shareholders still vote against it. During the same AGM, shareholders will establish whether directors need to stand for re-election. If 50 per cent or more shareholders vote for to pass a "spill" resolution, a "spill" meeting will be held within 90 days.3 Proxy advisors Ownership Matters and CGI Glass Lewis have advised investors to vote against the remuneration report and face a spill resolution to effectively improve its corporate governance. However, KPMG partner and adviser, Stephen Walmsley claims that the proxy advisers are "irresponsible" to advocate for a spill resolution as it may4 negatively affect the strategy and market value of the company.

ASX's Corporate Governance Principles comes into question

Minority shareholders are dissatisfied with the number of independent directors present in the board. The board is currently composed of: Executive Chairman Gerald Harvey, Chief Executive Officer Katie Page, Executive Director and Chief Financial Officer/ Company Secretary Chris Mentis, Executive Director and Chief Operating Officer John Slack-Smith, Executive Director David Ackery, Non-Executive Director Christopher Brown, Non-Executive Director Michael Harvey, Independent Non-Executive Director Maurice Craven, Independent Non-Executive Director Kenneth Gunderson-Briggs and Senior Independent Non-Executive Director Graham Paton.

There are 10 board members and only three of which are independent. The company disregards the 4th edition of ASX's Corporate Governance Principles and Recommendation that states majority of board members must be independent.

Data from CGLytics suggests that only 30% of the Harvey Norman board members are independent.5 Independent directors are vital members of the board because they provide more transparency to shareholders and fill the gap of skills required by the company.6 The lack of independent directors poses a huge problem for minority shareholders especially when the board of directors have a total of 56.9 per cent stake in the company, making them the majority shareholders.7 This gives a disadvantage to minority shareholders that want to voice concerns regarding re-election of directors and the adoption of the remuneration report.

Proxy advisory firm Ownership Matters even goes so far to propose the voting against the re-election of non-Independent Directors to force the company to make board changes. In the Harvey Norman 2019 Annual Report, the company responded to the reason behind appointing fewer independent directors, stating that each executive director (including non-executive directors that are not independent) still provide quality independent judgment to the issues that arise.

Tenure reveals a stale board

The board also appears to be stale. The average tenure of the board directors is 20 years. For some time now, corporate governance stakeholders; governance experts and shareholders alike have paid substantial attention to the issue of board refreshment or entrenched boards. Usually, when a board is stale, there is the concern that they may lack new perspectives, become complacent which may affect the long-term performance of the company as well as provision of effective oversight and management.

One more independent director added to the board

In March 2019, the company added John Craven who was an independent director to the board. This was the first time in 14 years that the board had appointed an independent director to its fold since Graham Paton joined the board in 2005.

Data from CGlytics shows that although there are 10 board members, most of their skills are concentrated on three areas: finance, advisory and technology. This shows that the composition of the skills matrix is not balanced between the members and is not aligned with the skills that the company requires. Having a skill such as risk is a vital key competency a board needs, especially in turbulent times that may make or break the company.

SOURCE: CGLYTICS.

What is the proxy advisors view?

Because of the criticism and frustration of stakeholders, proxy advisors such as ISS Governance and Ownership Matters encourage investors to vote for the appointment of self-elected Mr. Stephen Mayne as a director. Mr. Stephen Mayne is a journalist and a shareholder activist that constantly offers himself up for election on boards.8 Executive Chairman Gerald Harvey has urged Australian regulators to question the credibility of the proxy advisors that advise shareholders to appoint someone who has no experience in the retail industry.

9Different proxy advisory firms Ownership Matters and CGI Glass Lewis are also recommending against the re-election of Chief Executive Officer Katie Page.10 The company is being questioned by the Australian Securities and Investment Commission regarding the high increase in pay for Ms. Page despite the decrease in the Total Shareholder Return (TSR) of the company.

Where does Harvery Norman's CEO Pay for Performance rank?

The CGLytics Relative Positioning Pay for Performance tool compares Harvey Norman's CEO pay with that of the industry peer group's three year TSR. The performance evaluation shows that it is misaligned. The company's total realized pay is in the 45th percentile while the three-year TSR ranks in the 15th percentile and shows that the CEO is compensated more than the increase in TSR.

Changes in remuneration was included in its 2019 Annual Report, changing the short-term incentive financial metric from return on net assets to earnings per share adjusted for the after tax effect of property increments decrements. The short-term incentives will be measured 50 per cent on earnings per share adjusted for the after tax effect of property increments and decrements and 50 per cent as non-financial conditions. Short-term incentives will still be given in cash except when the executive directors have shares lower than the benchmark level. The STI pool will also be increased to the maximum level at 120%.

As to whether, these changes have the potential to avert a potential revolt at the upcoming AGM, it remains to be seen.

Footnotes

1. https://aicd.companydirectors.com.au/resources/all-sectors/director-remuneration

2. https://www.smh.com.au/business/companies/what-is-the-two-strikes-rule-20121008-278us.html

3. https://www.smh.com.au/business/companies/push-to-oust-katie-page-from-harvey-norman-board-gets-fresh-support-20191118-p53bny.html

4. http://www.mondaq.com/australia/x/161828/Directors+Officers+Executives+Shareholders/Remuneration+Reform

5. https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf

6. https://www.afr.com/rear-window/the-woke-joke-is-on-harvey-norman-shareholders-20191118-p53bqp

7. https://www.smh.com.au/business/companies/harvey-norman-set-for-fiery-agm-as-investors-arc-up-over-directors-pay-20191118-p53bmg.html

8. https://www.smh.com.au/business/companies/rubbish-going-on-gerry-harvey-calls-for-probe-as-proxy-firms-back-outsider-for-board-20191115-p53axz.html

9. https://www.smh.com.au/business/companies/push-to-oust-katie-page-from-harvey-norman-board-gets-fresh-support-20191118-p53bny.html

10. https://www.channelnews.com.au/harvey-norman-debt-up-share-value-down-questions-over-directors-pay-agm-set-to-be-a-circus/

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