Brian Gaynor: Monopoly firms driving director fee rises

Sky Network Television. File photo / Sarah Ivey

Proposed director fee increases will be one of the main issues at upcoming annual meetings as a number of companies, including Auckland International Airport, Sky Network Television and Vector, are asking shareholders to approve them.

This is a difficult issue because our listed companies need to attract top class directors but, at the same time, directors shouldn't be overpaid, particularly when their companies are underperforming.

In addition it is important that company directors are not seen to be greedy when figures released by Statistics New Zealand this week show that the median income for all individuals fell from $538 a week in the June 2009 quarter to $529 a week in the June 2010 quarter.

Another issue is the decision by Judge Jan Doogue regarding the Feltex directors where she argued that directors didn't have to be experts and could rely on outside advice to help them make decisions.

If this is so why should directors be granted large fee increases when they feel they have to rely on expensive outside advice?

The proposed fee increases are also controversial because many of them are for infrastructure companies, namely airports, ports and electricity companies.

These entities face less competition than most other companies and have the ability to raise prices without the prospect of losing too many customers.

Auckland International Airport is proposing that total authorised fees are increased from $1.15 million to $1.29 million. The notice of meeting refers to an independent report which recommended that non-executive directors be paid $125,000 and the chairperson $250,000.

This will be the airport's third fee increase in five years.

In 2006 director fees were increased from $560,000 to $660,000.

In 2007 they surged from $660,000 to $1.15 million.

By contrast, Air New Zealand has had only one directors' fee increase since the early 2000s, from $900,000 to $995,000 in 2007.

It is difficult to compare one company with another but Air New Zealand operates in a more competitive and complex environment than a monopoly airport and as a result the airline company's directors and executives should be paid more.

The Shareholders Association has objected to the Auckland International Airport increase. However the outcome of the vote, which will be held on October 28, will be mainly determined by the new Auckland Council because Auckland and Manukau councils hold 20.8 per cent of the company between them.

Colonial Motor is proposing a 21.6 per cent increase at its November 5 meeting. Fees were last increased in 2007, from $148,000 to $185,000, and directors believe that they should be raised every two years. However last year's review was postponed.

The Colonial Motor directors seem to believe that fee increases should be automatically granted every two years instead of being based on individual expertise and the company's performance.

It is difficult to have any complaint about the proposed increase in Ebos' director fees from $450,000 to $525,000 as the company has performed extraordinarily well.

Chief executive Mark Waller was appointed in 1987 when Brierley Investments owned 51 per cent of the Christchurch-based company and it reported a net profit of just $123,589 for the 15 months ended June 1987.

Brierley sold out to Ross Martin after the 1987 crash and when Martin's company failed the Ebos controlling stake ended up in the hands of an Auckland-based dental supplies company.

Ebos, which now has a much more diversified shareholder base, reported normalised net earnings of $25.4 million for the June 2010 year compared with $19.7 million for the previous year.

Waller has been a top-performing chief executive and Ebos' directors believe that their proposed fee rise is justified because of the increased size of the group and complexity of its operations. It is difficult to argue with this.

Lyttelton Port and South Port are two South Island-based companies that raise directors' fees almost every year. Lyttelton Port's authorised fees were increased from $225,700 to $250,000 in 2007 and from $250,000 to $270,000 the following year with little explanation.

Meanwhile South Port's authorised fees have risen from $157,375 in 2007 to $170,000 in 2008 and 2009 and $180,000 in 2010, also with little comment.

The controlling shareholders of these two companies, namely Christchurch City and Southland Regional Council, seem to be happy to endorse these annual fee increases whereas private sector shareholders scrutinise them far more carefully.

New Image, which was a reverse takeover through Selector Group in 2004, is proposing a 50 per cent increase to $300,000.

This is expected to attract some shareholder opposition as the company reported a 53 per cent reduction in net profit for the June 2010 year and has only three non-executive directors.

The notice of meeting states that "the proposed increase is to allow the board the flexibility to be able to strengthen the board by the appointment of new non-executive directors in the ensuing year".

The fee increase will be approved because executive chairman Graeme Clegg owns 57 per cent of the company and is expected to support the resolution.

Sky Network Television is proposing to raise its authorised directors' fees from $500,000 to $750,000. The $500,000 was set when the company was formed after the merger of the old Sky Network Television and Independent Newspapers in 2005.

The 2010 notice of meeting has the following comment: "The increase is being sought to provide the company with greater flexibility and ability to attract and retain high-quality directors. It is not anticipated that the total amount of the increase will be allocated in the next financial year."

The board consists of two News Ltd representatives, which holds 43.6 per cent of the company, one Todd Communications representative, which holds 11.1 per cent, chief executive John Fellet and three high-quality independent directors.

Sky Network Television annual meetings are usually quick and uncontroversial. This year's meeting, to be held in Auckland on October 28, is unlikely to be any different even though shareholders are being asked to approve a significant increase in directors' fees.

The Vector notice of meeting is complicated, dealing with individual director increases rather than the total amount paid to all directors. Shareholders are being asked to approve an increase in chairman Michael Stiassny's fee from $180,000 to $189,900 a year and for all other directors from $90,000 to $94,950.

The directors argue that there hasn't been a fee increase since the company listed in 2005 and it "withdrew a resolution for a proposed increase in 2008, because of the then tough local and global financial conditions". The company also "wishes to offer competitive fees in order to attract and retain the highest quality directors".

TrustPower expressed similar sentiments when it raised its directors' fees from $600,000 to $660,000 at its July annual meeting.

Most shareholders would agree with these sentiments but should infrastructure and utility companies be leading the upward charge in director fees when companies operating in a more competitive environment are less inclined to raise their fees?

The other issue is why should directors be lobbying for top dollars when the Feltex decision by Judge Doogue will encourage them to employ expensive outside advice because this reduces the prospect of their being held accountable under our legal system?

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.