Graham Bradley was the CEO of Perpetual Trustees for eight years and he talks with John Arbouw about executive remuneration, shareholder communication and the evolution of the virtual AGM.

    Graham Bradley was the CEO of Perpetual Trustees for eight years and he talks with John Arbouw about executive remuneration, shareholder communication and the evolution of the virtual AGM.

    Graham Bradley is getting set for his fourth major career change. The one time McKinsey consultant, Blake Dawson Waldron managing partner and recent CEO of Perpetual Trustees is not sure whether he wants an executive or non-executive role. There are offers on the table but he is in no hurry.

    He doesn't need to hurry for he is one the country's most recognised and successful CEOs. It was why the sudden announcement last May that Bradley was leaving Perpetual caught everyone unawares. During his eight years at Perpetual, he turned the staid trustee company into a leading funds management group increasing its funds under management from $2.4 billion in 1995 to more than $17 billion.

    In the tenuous tenure regime of Australian CEOs that is currently in vogue, Bradley stands out as a quiet but effective achiever. There is also little doubt that the manner of Bradley's leaving was badly managed. Instead of an orderly transition, the market took the view that Bradley had been forced out by the new Perpetual board chairman Charles Curran after the previous chairman John Lambie stepped aside.

    Following the sudden announcement that Bradley was leaving a year before his contract was up a number of key Perpetual managers also headed for the exit. The Perpetual share price took a hammering. Bradley however has remained silent on the manner of his leaving except to say that eight years is a good innings and it was time to move on. He has no regrets and his legacy is a company that is not only in good financial shape but can justifiably boast an excellent record of strong corporate governance.

    As a member of the ASX Corporate Governance Council that formulated the recent guidelines and recommendations, Bradley has strong and articulate views on where the debate is heading. Last month, the release of CLERP 9 and the suggestion that shareholders be given a non-binding vote on executive remuneration created a storm of controversy among the director community. ASX chairman Maurice Newman was quoted in newspapers as lamenting that if this proposal went ahead the next thing shareholders would seek to approve was the rent a company paid.

    Continuous disclosure is all very well but remuneration disclosure does have a sting in the tail because it could lead to greed, envy and the inevitable ratcheting up of salaries. Or at least that is the theory.

    Balance of power

    It is felt that the non-binding vote mechanism blurs the distinction between boards, management and shareholders. The reality is that shareholders already exercise real remuneration power at AGMs during resolutions to issue executive options. Both Gerry Harvey and Rupert Murdoch came face to face with shareholder protests on the issuing of options to their respective executives. They both bowed to shareholder pressure despite the fact that they controlled enough votes to push any resolution through.

    It has sent a message to boards and chairman that even if you have the proxy power, the need to maintain investor and shareholder harmony is an over-riding consideration.

    "I think it is unnecessary to legislate that shareholders should have the right to vote on anything that is in an annual report. Shareholders have the right to bring up any issue at an AGM without legislation," says Bradley.

    "There is also under the new corporate governance guidelines the need to explain more fully the executive remuneration policy. While this has always been an ASIC requirement, it hasn't always been fully adhered to. However, companies are now becoming much more open about remuneration.

    "If you start from the proposition that good governance is fundamentally about good communication with shareholders and treating every shareholder equally about the provision of information then you can't take exception to CLERP 9.

    "The whole area of executive remuneration and board remuneration is undergoing a healthy seachange."

    Just how far this change will go is the subject of much debate. There is little doubt that boards and for that matter companies have not done a great job in the past of communicating with shareholders. The reality is that if two people communicate once a year at an AGM it is not the basis for an endearing relationship.

    "Boards have not done a very good job in explaining the rationale or structure of executive remuneration. My personal view is that CEO remuneration has run well ahead of community expectation in the last 10 years. Ironically the CEO who replaces Bradley at Perpetual Trustees will be paid almost twice as much as Bradley was.

    "This was partly due to the fact that in the early 90s a number of companies brought in US executives and had to pay commensurate rates. Commensurate with this is the trend over the last five years or so to list the executive remuneration of the top five executives salaries which has added to the inflation of executive remuneration. This was not the intention of Parliament.

    "When the law was introduced five years ago with a view to moderating executive salaries it had exactly the opposite effect. Now, CEOs, CFOs and other executive officers have far more information on what is being offered in the marketplace and are using this in their negotiations. This has led to the inflation."

    Victims of a cult

    What has also occurred is that Australian business and boards became victims of the cult of the CEO that was in vogue in the US. In the US where the CEO and chairman are often the same person this cult was understandable and its abuse in terms of power and excess remuneration predictable. AMP is an obvious example where the addiction to the cult of the CEO saw George Trumbell the American CEO take over in the period 1994-99 and this arguably marked the beginning of the end for the once proud company. Currently, AMP is locked in a legal battle with its recent CEO Paul Batchelor and is in danger of being taken over by the NAB.

    What the CEO cult also did was create a pay gap between middle ranking management and the CEO. It is not unusual even in not for profit companies to have the CEO paid substantially more than the next ranking executives.

    "When you get too big a gap between senior executives and the CEO or senior executives and ordinary workers you have a dysfunctional organisation," says Bradley.

    "In my role as Perpetual CEO I was always concerned about internal relativity particularly because CEOs are only members of a team. Sure they have to select and build the team, make it effective and give it direction but they are also beholden to the team in terms of the effectiveness of implementation.

    "I think the CEO cult has been largely driven by the media. This has been misplaced and we have seen as many failures as there have been successes. What we are also seeing now is an unhealthy turnover of CEOs. Four years is just too short because you lose institutional memory.

    "I also think that we are moving back into an era where it will be seen as badge of failure to have to bring a CEO in from outside rather than promoting someone through the ranks of the organisation. It is an indictment of succession planning."

    Bradley says it isn't a disaster to have a discussion on executive remuneration and boards need to do a better job in communicating this policy. He says that remuneration goes to the fundamentals of trying to drive the strategy and boards need to explain the linkage between the business objectives and remuneration.

    "In my view boards are not tolerable well-equipped to do this right. The remuneration structures that we have seen develop over the past few years have revolved around the blunt instruments of measuring total shareholder return or the share price. This is all very short term.

    "Neither the board or the CEOs have much control over this. It is market forces that determine what happens. We have defined the success of CEOs in terms of shareholder value and assumed that the right measurement of that was the share price.

    "This is a mistake. We need to start thinking about enterprise value. It is the value of embedded relationships such as customer loyalty, products, the calibre of the management team, the succession plan and the institutional skills of the organisation.

    "CEOs influence this only over time. Boards need to spend more time defining the true improvements and value creation that will make the enterprise worth more and devise better measurements to link compensation to those improvements."

    Bradley believes the industry has been badly let down by the headhunters and remuneration consultants who look principally at comparisons rather than value to the business. He believes that the next phase is that management consultants will enter this area and find and define the linkages between long-term value and remuneration because this will require an in-depth understanding of the business.

    But having shareholders issued legislatively with a right to vote on a non-binding basis on a company's remuneration policy is a backward step considering that relations between investors and shareholders is now conducted in real time on the website.

    Relic of the past

    AGMs are a relic of the past and no longer represent the only relationship between a board and the owners they represent. What Bradley sees evolving is an era of virtual corporate governance and virtual continuous disclosure. It means farewell to the AGM and the annual report.

    "I think the need for an AGM or even an annual report will eventually be scrapped. They are after all only tools to explain the past. We can now have virtual meetings at any time. The new continuous disclosure requirements coupled with the new corporate governance guidelines will change the nature of boards.

    "Companies are already required to update its website on a range of issues including changes to corporate governance so why regurgitate this once a year?

    "What we will see in the first instance is a collapsing of the time frames and companies will get out their financial statements quicker. This will all be cross-referenced to the update corporate governance statements and to the company's business in terms of any changes.

    "This may not entirely eliminate the AGM but it will certainly change the nature."

    There is also a concern that the post-HIH environment has created a situation where companies spend too much time dealing with conformance issues rather than concentrating on financial performance. Bradley says conformance and performance are not mutually exclusive.

    "Both are important and there needs to an appropriate balance".

    He does not share the concern that too much time is being spent on compliance and corporate governance matters.

    "I think we are putting in place some new infrastructure for governance and in the future this will not require as much time because the principles will become embedded. Most chairmen that I speak to have found this a constructive exercise."


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