The NZ Shareholders Association explains why it is opposing Auckland International Airport’s decision to try and increase total directors’ fees by 12.5%.

We are concerned to see Auckland Airport wants a 12.2% increase in total directors’ fees.  They state they are recommending this on the basis there has not been an increase since 2007. Chairman Tony Frankham says that the increase is to pay for future performance of the board. He seems remarkably confident with his crystal ball!

We accept that AIA has come through the global financial crisis relatively unscathed. Partly this is due to the directors’ efforts, but we should remember that AIA has a natural monopoly in the Auckland operation.

However, when you look at the earnings per share (EPS) and dividends paid to shareholders it is difficult to justify such an increase under the current economic conditions.

On every measure, the company has effectively flat lined for several years. Over the next two years, the airport company is unlikely to be able to pass on any increases in costs beyond the inflation figure – so for shareholders to receive any upside in the EPS it can only come from increased productivity or an improvement in passenger numbers.

In fact, AIA is paying out 102% of underlying earnings this year just to maintain the dividend. Without significant growth, this is unsustainable and well in excess of the board’s own guideline of 90% dividend payout to underlying earnings.

While we are not averse to boards being well rewarded for superior performance, this is a case where we would like to see some improvement in shareholder returns before the full amount suggested is paid. Half now and half in 12 months if the promised improvements materialise seems a good compromise to us.

Our research shows that AIA’s current fees are reasonable when compared to other natural monopoly organisations.   For example, Vector Energy fees are virtually identical. This company turned down an increase last year even though they had not received one since 2005.

Now they are only asking for 5.5%. Why is there such a difference between the consultants’ recommendations for these two companies? The Vector consultant’s recommendation was in line with what the Vector board is proposing.

Auckland Airport’s engaged two consultants. One claims director fees increases of between 25% and 39% would be reasonable. The other suggested a more modest figure of around 15-20%. Clearly there is no consistent methodology being employed in arriving at these figures.

This only goes to illustrate that the consultants are part of the problem. One inflated fee assessment accepted by shareholders rapidly ratchets up expectations in every other review.

Over the past few years we have seen companies getting away with paying large increases to chief executives, chairmen and to a lesser extent directors, without a corresponding relationship to performance. The common reason given is the need to pay ever higher remuneration to attract the right people.

Another excuse is claiming directors now have more risk and responsibility than in the past. In our view both of these have been overplayed.

We are however encouraged that AIA is proposing that 15% of directors fees paid will be used to buy shares in the company. This alignment of interests is to be applauded and we would hope to see other companies following suit.

Another problem is the common claim that “we have to compete with what is being paid in Australia.” However, it is apparent very little attention is paid to the difference in living cost between the two countries or other key factors.

As an example – the cost of housing in Sydney is way more expensive than Auckland. If a company has to attract an Australian

director, then it does not automatically mean the local directors have to be paid the same amount. One possibility in this regard would be to pay the Australian director the same number of dollars, but denominated in Australian currency.

When companies go outside to replace the current CEO, inevitably there is a major increase in what they end up offering the new appointee.  In his 2001 book, “Good to Great“, management guru Jim Collins points out that the most successful companies tend to promote someone from within their organisation – so why is it that our directors’ seem so reluctant to follow this path more often?

It is totally unacceptable that some CEOs earn more in a year than their employees can in half a lifetime.

As shareholders we must be more careful in what we vote for. Too often in the past resolutions have been approved without thinking of the long term implications.

Contributed by NZSA Director Des Hunt
Additional material by John Hawkins
www.nzshareholders.co.nz

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