Corporate Governance Takes a Back Seat?

Lowy familyPeter, Frank & Stven Lowy (Picture: James Croucher Source: TheAustralian)

It’s common to come across clients who have a strong preference towards property investing over share investing. The aversion to shares is borne from the daily volatility that shares exhibit instead of perhaps a more logical reason to shun shares – questionable corporate governance practices. The current Westfield Trust debacle provides a fine discussion point on this.

One benefit of property is that even with a property manager you are still in an informed and powerful position to act and be involved in the management of the asset. With shares, not so. Since the mid 19th century when shareholders were given limited liability, people have been prepared to invest in companies which they personally have very little, if anything, to do with. However, when you need to rely on someone else to handle your business, governance issues arise. Corporate governance is centred around the way power is exercised over entities, and shareholders delegate this power to the directors.

Unfortunately, despite the focus it has enjoyed over the last two decades, I believe corporate governance is failing. One reason is undoubtedly because our money is invested in companies through third parties, and this extra tier, or tiers, makes us further removed from the supervision of our representatives – the directors.

Australians have approximately $1.84 trillion invested in superannuation. After deducting the $520 billion in self-managed super funds we are still left with over $1 trillion being invested through intermediaries. Do Australians have a right to assume that these intermediaries will do the right thing for them? You would assume so, but I have seen little evidence of fund managers and super funds getting actively involved in using their proxy votes to good effect.

In the United States fund managers are required to disclose annually the fund’s complete proxy voting record for the most recent 12-month period. One can only wonder when Australians will be granted this level of transparency. Instead we get, if we’re lucky a Proxy Voting Policy which usually states that voting will be made “on a company-by-company and resolution basis, whilst preserving and increasing the value of the investment in the best interests of unit holders”.

Fortunately there has been a decent flicker of hope. UniSuper has come out swinging and are being very vocal in their opposition to the proposed Westfield Retail Trust (WRT) merger with Westfield Group. This is the merger in which it is proposed that Westfield Group will contribute just 31 per cent of the shopping centre assets but end up with 48.6 per cent of the merged company, to be named Scentre. It is worth noting at this point that the Lowy family sold their entire holdings of Westfield Retail Trust a year ago but retain 8% of Westfield Group. It is also worth noting that even with a relatively minor 8% holding the Lowy family essentially control Westfield Group (it’s always been a family affair), and that Westfield Group effectively appoints the Directors of Westfield Retail Trust.

Dick Warburton, the chairman and independent director of Westfield Retail Trust was a Reserve Bank of Australia director at the same time Frank Lowy was there. Mr Warburton is a strong advocate of this deal and took the unprecedented step of suspending a recent shareholder meeting once it was clear not enough votes were in favour of the deal. In his scathing review of this incident, The Australian’s John Durie called this “a mockery of procedures”. Another independent director Michael Ihlein is chair of the Australian Theatre for Young People, which have Westfield as a supporter and partner. Another independent director, Sandra McPhee, was deputy president of Arts Gallery of NSW at the same time Stephen Lowy was president. These facts do not lead to a conflict of interest as it is perfectly reasonable to assume that it is through this contact with the Lowy family, and Westfield Group, that the independent directors were recognised as being talented and hard workers.

I see the main corporate governance issue arising because the directors of Westfield Retail Trust are appointed by the Responsible Entity which is controlled by Westfield Group. In light of the directors, whether labelled as independent or not, being appointed by Westfield Group I struggle to see how they can satisfy the ASX’s ‘Corporate Governance Principles and Recommendations’ definition of an independent director, “free of any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the independent exercise of their judgement.” If Westfield Group are appointing the independent directors to their $150,000 part-time positions, $300,000 for the chairman, how can they be independent in these negotiations?

The directors of Westfield Trust are unanimously pushing for the deal to occur. There are however many people are not.

Respected finance columnist Terry McCrann has this to say on the proposed merger, “Westfield Retail Trust has demonstrated in the most emphatic fashion that security holders should stick with their rejection of the proposed merger…It is a zero-sum game with Westfield shareholders coming out ahead; that must mean WRT holders lose.”

Morningstar analyst Tony Sherlock says “the proposal being put to a vote involves a transfer of wealth from Westfield Retail to Westfield Group. On this basis, we recommend investors vote against the proposal to create Scentre Group.”

Business columnist Michael West writes “The Westfield demerger is a brilliant deal for shareholders in the Westfield Group, not to mention the Lowy ruling family and its phalanx of advisers. For investors in Westfield Retail Trust, however, the proposal is not so rosy.”

With so much opposition to this deal one can only wonder why the Westfield Trust board are pushing it so strongly. If I was a shareholder in Westfield Trust I wouldn’t feel well represented by the directors. And as West also wrote it is no surprise  “that “independent experts” KPMG (for WRT) and Grant Samuel (for WDC) have deemed the transaction ”fair”. Their conclusion followed the $1.7 million they were paid to write their reports.”

If we can’t be assured that the directors or “independent experts” and other advisers being remunerated by Westfield are acting in the shareholders best interests then the responsibility falls to the fund managers and super funds who we invest through.  So far I have only heard from two.

UniSuper have also been joined by Colonial First State Global Asset Management in their opposition to this deal and state “We oppose the deal on its current terms. We want to see WRT maintain its very strong S&P A+ credit rating”. The merger will push up the debt that Westfield Retail Trust shareholders are exposed to with gearing increasing from 22 per cent to 38 per cent.

The knives are out in this battle. A complaint has been made to the corporate regulator over whether the Australian Shareholders Association, who are also opposed to this deal, have given financial advice without the required licence. As shareholder activist and ASA policy co­ordinator Stephen Mayne says on twitter, “Sad to see desperate Westfield camp stoop this low, claiming ASA can’t give voting advice on constitutional change.”

As if anyone really needs financial advice over this. As ABC business editor Ian Verrender states “If Frank Lowy really wanted to quell the shareholder revolt at Westfield Retail Trust, there is a devilishly simple solution – make the merger offer fairer.”

We just need the fund managers and super funds to twig on to this and we’ll be okay./

Update – 24/06/2014
On Friday 20th June the second vote occurred and enough votes were garnered in support of the deal. As John Durie wrote in The Australian, “In the end the shareholders have spoken and the deal was passed, but the stench remains”. The Australian Shareholders’ Association Chairman, Ian Curry, says the deal “will always remain an unprecedented voting conflict of interest”.

I have discovered that Vanguard and Blackrock, two big index funds, voted in favour of the deal showing that they not only have a passive investment style, but also a passive attitude to casting their proxy votes.

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