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SPEAKER 0 this material is made available to you by or on behalf of the University of Melbourne under section 103 P of the Copyright Act 1968. It may be subject to copyright. For more information, visit the university copyright website. SPEAKER 1 Yes, sir. I like that speaking is Yeah. SPEAKER 2...

SPEAKER 0 this material is made available to you by or on behalf of the University of Melbourne under section 103 P of the Copyright Act 1968. It may be subject to copyright. For more information, visit the university copyright website. SPEAKER 1 Yes, sir. I like that speaking is Yeah. SPEAKER 2 Alright, let\'s get some mood light mood lighting going. We can go darker. This is too dark, right? Anybody have any violent? Yeah, let\'s keep it this way because this is sleeping. This is sleeping. This is se semiconscious. Um, somewhat sleeping. Alright, Welcome. Everybody have a seat. We have a very, um, special surprise for you all in the towards the end of this lecture. Uh uh, I\'ll leave it at that. Um but before that, let\'s get into, um, governance. So just I think it always sort of helps to recap, you know, the structure of what we\'ve been talking about. So we\'ve talked about three different types of investors ESG investing EIE investing that incorporates ESG factors. We\'ve talked about, uh, ethical investing where you have, like, a Y. Your motivation is, um, primarily ethical, or your motivation is actually financial, but subject to some ethical criteria. And then we\'ve talked about, um, Universal owners and that sort of special role that they play in thinking about things in a slightly different way and thinking about how one company\'s actions affect the rest of their portfolio. So those were the three types of investors, and then we introduced the tool kit, which is remote integration, which is how do these things impact our portfolio and then stewardship, which is once we invested in these comp, uh, um, invested in these companies, How do we use our influence to push them towards, um, better practises? So so far, we\'ve really kind of talked about things in a relative. You know, we\'ve given a few examples, but talked about it mostly in a pretty abstract way. So now we\'re gonna kind of dig into for the next three weeks E environment, S social and G, and we\'re gonna start with G, which is governance. And I think the reason for that I we\'ll hopefully become clear to you as we go on. But J, the J and really the tools that underpin uh, governance really enable investors to have, um, a lot more say on the E and the S. So we\'ll start with, um, governance. So here we\'re gonna talk about probably only three of these four concepts. So the board remuneration remuneration is just a fancy word for pay executive pay, um, and then entrenchment, which I\'ll explain what that is later on, we probably won\'t have time to talk about dilution today, But maybe later on, if we do have time, we will talk about it. And then if we don\'t talk about it, it\'s not going to be part of the exam. I think it\'s probably a safe assumption at this point to say it won\'t be part of the exam. So you can maybe put yourself a little note to say, unlikely to be part of the exam. Um, so let\'s get into governance. Uh, and we\'ll start with some pictures to get you started. So So here is an ice cream truck, which you may find, uh, if you\'re walking down Saint Kilda Beach. The question is, who owns this business and who controls it? Does anybody have a have a view? Just based on that picture, you have no other information. Just have a guess. Like what would be your best guess as to who owns this business. Yeah, th th That\'s right. The guy in the back. And then who controls that business? The guy in the back? Correct. There he is. He\'s making his hot fudge sundaes. So he is both the owner and the person controlling the bi this business. So one and the same actual human being. Uh, let\'s think about a different business. Which is this one called Woolworths. Uh, who owns Woolworths, who controls it? As you can probably already start to, um, see, it\'s a bit more of a complicated. And so then they got the guy in the back of the ice cream truck. So the answer to this question at a quite a simple level and as you will see, you know, not quite correct. Answer is ownership is 365,000 shareholders. So on the left there I pulled that out of, um, Woolworth\'s annual report. Different shareholders have different numbers of shares, and there\'s 92 shareholders that have over 100,000 shares. My guess was that those are, uh, funds like Hester that I\'m sure are very large Woolworth shareholders. Those are institutional funds and then you have lots and lots of retail. Um, retail investors at the very top. But anyway, there are 365 entities that own Woolworths shares. And then, um, for another three weeks, The CEO is Brad Banducci, and he controls Woolworths. He gets to decide what happens with Woolworths. He gets to decide, you know? Is our logo gonna be green, Isn\'t it not gonna be green? What are we gonna sell? What prices are we gonna sell? Etcetera, Etcetera? As I said, it\'s not as simple as that. But let\'s assume for now that, um but that\'s the case. So the question you can ask yourself is, what\'s the point of kind of having companies where some people own it and then other people actually control it or run it, Uh, why aren\'t Why aren\'t Why isn\'t every company just like this where the person who controls it also, um, owns the business? Well, um, and this is going to your paper from Farmer and Jensen and just a flag here as well. You know, farmer of farmer, French model. Has anybody heard of farmer French model? I\'m sure you\'ve heard of that, right? and then Jensen\'s Alpha. You\'ve heard of that? That\'s the same. These are the same people writing about corporate governance. So there you go. So this is, um this is actually a I think a really sometimes hard to read in terms of the language, but I think a really important paper kind of talking about a lot of these sort of foundational concepts that we\'ll, um, talk about today. So the the advantages that they talk about in this paper are that why separate ownership and control is to make use of management skills. So in the ice cream truck case, the person at the back of the Ice-cream truck is owns that business, and it also has the skills to run that business, whereas OK, so like through my super fund, I am a share a shareholder of Woolworths. I have no idea how to run Woolworths. OK, so you can make use of management skill. That\'s the first benefit for the company. The company will probably run better by having actual experts to run that business and then make use of something slightly different, which is oversight skill. So management and and in brackets I\'ve put it management oversight skill and we\'ll talk about what that is and who actually does that a little bit later on so that these are two sort of skills that the company can harness if you separate ownership and control, and then the the the bottom part is something that I just sort of put together, which is OK, well, imagine this kind of crazy world in which you could only own shares in a company that you actually ran. You could maybe run one company. Maybe you could run two, but you couldn\'t run more than that. So you would obviously wouldn\'t have any of the benefits of diversification. You know that we\'ve talked, You know, I\'m sure you\'ve talked about many, many times throughout your degree and again, you know, from the in the same way that companies can make use of management skill. I can be a shareholder of Woolworths without knowing anything about not run running a, um you know how to run a supermarket. OK, so there\'s obviously benefits to the company. There\'s also benefits to the investors as well. So these are the advantages now, Um, what are the disadvantages? So what are the disadvantages of splitting out ownership and control. And to this, we I go to a paper, um, very famous, very old, um, paper written by a guy whose first name is, uh I think bel His first name was Adolf. So you can, um, uh, understand. Therefore, how old this paper is because anybody after the 19 thirties would not have named their Children at all for very, very obvious reasons. Um, he talks about, you know, this this paper talks about, you know, the disadvantages of, um, splitting ownership and control. And it\'s actually something that I\'m sure you\'ve already encountered before. But basically, he asked this question. Can we assume that people who control a corporation, Brad, uh, will choose to operate it in the interests of the owners, the 365,000 shareholders? So he says that the answer to that question, which is on the next slide, is Well, it actually depends, and it depends. I think this is really, really well put. He says it depends on the degree to which the interests of those in control Brad run in parallel to the interest of ownership. IE the shareholders. And if they differ the checks on the use of power. In other words, how do we ensure that where those interests differ the CEO versus the shareholders? What? Are there any mechanisms or ways that we can check that, um, power we can We can oversee or understand, Um, and we can reduce those differences or those divergences. And so this is ESS essentially, this concept of agency risk, which is something that we\'ve already really, um, talked about in the beginning. You know, when we talked in week one about investors, Um, sorry. We talked about beneficiaries at one end. You know, beneficiary puts their money into a fund that\'s run by certain people who might allocate that money to a different fund, who might then allocate that to a different company. And then that company allocates a different project at all These layers, the the interests of the two people or two groups transacting are not necessarily aligned. OK, so I if, you know, I am with, um Unis Super, for example. They\'re my superannuation fund. My interest is in maximising my returns when I\'m 65. Um, their interest the the CIO or the CEO of unis Super. Maybe they have their bonus, which is based on performance over the last year or the last three years. They\'re not. They\'re not necessarily first of all gonna be around for when I\'m 65. Um, or at the very least, yeah. They don\'t necessarily have pay that is aligned to that. So we\'re gonna talk really about checks on the use of power through most likely three different mechanisms, which is the board remuneration and entrenchment. So these are all kind of key, uh, corporate governance topics and really the they answer these questions around agency risk and how to reduce and minimise agency risk through these various structures, which we\'ll talk about. So the on the board, the question is, is there oversight over how these agents, like the CEO, use their power on the remuneration or pay question? We\'re asking the question. How do we make sure if Brad is the CEO of Woolworths that he\'s not gonna just enrich himself and make himself extremely wealthy at the expense of all the shareholders? And entrenchment answers the question which is around, How do we get rid of bad agents? So if if, um if if we\'re the we\'re all the shareholders and Brad is a bad CEO. How do we get rid of him? Uh, and other tools that management sometimes uses to make sure that you can\'t get rid of them. OK, so that\'s the sort of introduction. Now, let\'s jump onto the board. And really, this is the key. Um, this is really the key, uh, governance tool. And again, what we talked about, Yeah, this this sort of the tool to enable the check on the use of power. So that\'s this is the board. So the way that I framed this before was to say, OK, there are these 360,000 shareholders and then one CEO who\'s all powerful. But the reality is that\'s not the case. OK, so, um, every listed company, I think that\'s a fair statement to say, has something called a board of directors. And what they do is they exercise what we talked about back here, the the second point on the top, which is make use of management oversight skill. They exercise that power. So they oversee the management. They they keep Brad in check. That\'s the way that sort of I phrased it here. So again going back to the Farmer Jensen paper. They say most of the shareholders are not qualified for roles in the decision process. And so delegate their decision control rights to other agents a K the board. So you might be asking yourself. OK, so as a shareholder, like, what exactly am I delegating? And you know, the sort of decisions. What exactly is this all about? And so they actually split this? Um, they split this question of the shareholders, you know, delegating management control and management oversight to the board. And they split it into these four stages. And I thought the simplest way to explain it to you is to to to go through an example and to go through, like, a live, Um, example. So has anybody heard of, um Bunnings? Of course. You\'ve heard of bunnings, right? Of course you\'ve heard of Bunnings. Have you heard of masters? Has anybody heard of masters? N One. Come on. And nobody\'s heard of masters. Interesting. Well, there you go. Oh, is there OK? One person. One person\'s heard of masters. Ok, so masters was Woolworths attempt to get in on hardware basically So masters was a business that Woolworths tried to create to compete with Bunnings cos like you see bunnings and you see maybe Mitre 10 or something like that. But Bunningss seems to be very dominant in their position in home hardwares. And so Woolworths not under this CEO but under I think two CEO S Prior tried to, um, yeah, create a business to compete with bunnings. So let me go through a my version or a rough version of what that decision would have been through the lens of, um, the different roles that the CEO in blue and then the rest of the board, um, has OK, so it first starts with, as you can see, initiation. So generating of a proposal for resource utilisation and structuring of contracts. That\'s basically to say, you know, coming up with an idea around a particular strategy. So whose role is it to do that? Well, um, according to this paper, I think according to, you know, real practise, it\'s the CEO S job. So the CEO comes up with a strategy, and in fact, I think probably when most CEO S are appointed, they actually have to pitch their strategy to the board to say this is what I think is a strategy. So, you know, one day the CEO of Woolworths wakes up and says, I\'m driving past all these bunnings stores. They seem to be making a lot of money. They seem to have a lot of people in there. We should compete with them and we should take some of that market for ourselves. So the CEO comes up with that decision Now, the CEO can\'t just go off and spend all the money. Buy the hammers, buy the land. Great, get people to come and make your make the stores, etcetera, etcetera, without getting the second step done, which is ratification. So ratification is sort of like, um, you know, getting the stamp of approval, right? And who does he have to go to to get the stamp of approval? Well, it is to the board. So the C, they have board meetings, usually in Australia. You have, I think, between probably eight and 10 board meetings per year. And at one of those board meetings, Once upon a time, the CEO of Woolworths went and said, I think for these reasons, we should do our own hardware and the board reviews all of that. So they re they review the strategy, they review the finances, they review the budgets, etcetera, etcetera, and then they ratify it. So that\'s the board\'s role, then. OK, so you\'ve had you\'ve got your strategy approved by the board who then goes and actually does it. Well, then again, that\'s the management. That\'s the CEO. So the blue the CEO goes off and does it, but can\'t just continue and, um, can\'t just go off and do whatever he likes. He needs to. It needs to be regularly reviewed by the board. OK, so that is the final part, which is monitoring So measuring the performance of the decision agents IE, measuring the performance of the CEO and implementation of, um, rewards in other words, basically paying the CEO for executing on that strategy. So the the word CEO actually kind of has the answer in there. It\'s a chief executive officer executive is execute, and I eat and it, you know, probably a very similar word to the word implement so that the CEO S job is to execute or implement the strategy that\'s been approved. So So this is the board now Now we\'ve sort of talked a little bit already about you know what the role of the board is. And this is really again, um, going back to the paper. What farmer and Jensen mean when they say the separation of ownership, control, ownership and control works? Because there\'s this effective common approach to controlling the agency problems caused by the separation and that effective common approach is the board. So in one of your readings, which is the A SX corporate governance principles they talk about, you know, what\'s the role of a board? What\'s the job of a board? And I think now that you\'ve sort of understood, hopefully you know what their function is and how their function is slightly different from the management you\'ll. Hopefully, a lot of this stuff will kind of make sense. So they set the strategy together with management. In other words, they sort of approve the strategy they approve. In other words, using this language ratify so approve is kind of like ratify budgets and Capex. They appoint and replace the CEO. Now, I\'ve highlighted that because in my experience at talking to listed company boards, when I say to you then what is the most important job that you have as a CEO? Uh, sorry. As a as a board member, they basically say it is finding the right CEO. And if they\'re not good getting rid of them and replacing them, um, they\'re also obviously in charge of finding new directors. So replenishing themselves because they\'re not gonna be sticking around forever and they oversee again, is the kind of key word of monitoring. Monitoring is like oversea overseeing the monitoring functions like accounts, risk management, governance, continuous disclosure, etcetera. And then the the last one is executive pay. So so that one of the key role of the board is to set how much and how as in other words, based on what will the executive be paid? And you can see here again in Farmer and Jensen\'s paper. They talk about that under monitoring, they talk about the implementation of rewards. So how do we adequately motivate this person to create the best hardware chain that nobody in this room remembers, anyway? Um, so so those are some of the roles of the board. Um, so now I\'ll pass on to Claire to talk really about you know what makes what makes a good board. Who are these people? Where do you get them from? What? What should they be doing so to you? SPEAKER 3 Alright, so you can see by looking, um, down this slide, like all the ways that, um, a board can help solve a lot of the agency risk risks. Um, that mike has talked about. So in theory, um, but what actually makes a a good board? How do you get the right people in place to be able to actually do what the board is supposed to do? In theory, what are the characteristics? Um, that will help manage those agency risks and mean that the board is gonna be able to do what it has, um, been assembled to do, which is essentially to act in our best interests as shareholders. So on the slide here are a few characteristics that a good board should have, according to the a SX corporate governance principles. Although I would say that this is Oh, the characteristics that are up here. Yes, they\'re from the a SX corporate governance guidelines. But, uh, they\'re not really that contentious I, I think across industry. Um, but also across the world. Um, the idea that these are going to be the characteristics that, if you get will hopefully, or more likely, um, mean that you\'ve got a board that\'s going to be able to execute, um, or exercise, uh, its responsibilities. Um, well, so the first one here, perhaps most obviously, Um, what you want on a good board are directors with skills or experience. But what skills? So if you\'re running a supermarket, maybe having someone on the board who has been there and done that run supermarkets in the past previously in their career Maybe that would be a good example of the type of experience that you would want on this board. Um, what about professionals like accountants, um, auditors, digital tech experts. So if you see here, one of their jobs is to oversee functions like accounts and risk management. So, you know, perhaps you want, um, someone or a few people on the board that have those skills. Um, you might think that you want people on the board, um, who have had previous CEO experience or previous, you know, really senior executive experience. Um, you want people on the board? Perhaps who can understand the challenges that come with trying to run a very large organisation. I think that there are. It\'s sort of subject to never ending debate what the right skills and experience are to have on a board in general and on specific company boards, too. Um, for example, until fairly recently, um, there was a view that technology or digital skills weren\'t necessary on the board. Um, instead, the board could get consultants in to provide specialist expertise if the board required that on digital or technological issues. Um, I would say that that has really been changing over the last few years, obviously because, um, digital and tech experience, um and the importance of that in the growth of companies is only just amplifying more and more so Having someone who can oversee, um, a chief technology officer and their team and the digital direction that a company is going in is obviously becoming more important. So the next one on the list is, um, commitment or capacity. So again, perhaps obvious. Um, but board directors are employed on a part time basis, so this isn\'t a full time role. Um, and so as a because of that, uh, directors often have multiple board roles. So the question for investors when thinking about their ideal board and who\'s on it, um, is how many roles is too many? Um, so if you\'re a director, say, on Qantas and JB hi fi as two examples, um, in March 2020 when the pandemic, um really hits Australia. And there\'s all of these significant government changes in terms of lockdowns and you think about the impact that that had on say, those two businesses obviously impacted everyone but Qantas and JB. Hi, fi. Um, suddenly those directors who were signed up to be going to a meeting every six weeks or eight weeks, depending on the cadence of board meetings, are suddenly very busy. Um, and so you as an investor, you wanna make sure that the people on the board have sufficient capacity, um, to be able to pay attention to the needs of your company, uh, especially, uh, in an emergency or in a crisis situation. And of course, you never quite know, um, when that will occur. The final one, in terms of one. Well, there\'s one more skill to come on the next slide. But on this slide, the final, um, skill that we\'ve got here is diversity. So if you have a board size on the A SX, I don\'t know typically, 8, 10, maybe 12 people, sometimes smaller. Um, but if you have, say, eight people who all think the same, then they\'re not gonna be able to foresee the risks. Challenge management, see different opportunities, you know? So when they\'re trying to ratify a decision, um, be able to suggest Well, have you thought about this or thinking about things from a from different angles? So as investors, you want diversity of thought? Um, because you want the directors to be challenging management and offering different insights. So having eight people of the same gender is one way of seeing from the outside that there perhaps isn\'t enough diversity on the board. Um, and increasingly, we\'ll touch on this a little bit later. But my, um, with Mike. But he where directors sorry boards are not just looking. Investors. Excuse me and not just looking only at gender diversity. But increasingly other forms of diversity like age, ethnicity, geographies and a lack of diversity, say gender or otherwise can be a sign of a bad appointment process. So on this list of, um, board roles under the, um, one that\'s highlighted in yellow. One of the roles is finding new directors, So this is the job of the board to in large part there. There are some caveats here, but in large part the people that get put up to be elected onto a board are people that that board itself has found to put up for election. So it is one of their key roles to put forward someone up for election to say this is who we think would be a good fit for the board. So if you have a board that lacks diversity, then it can be a sign of a bad appointment process or or a flawed, um, search for new directors that that board itself is undertaking. And that should be a concern for investors. Um, because they\'re looking to have the most capable boards one. And secondly, it tells you that maybe the board that you currently have isn\'t executing on one of its key functions, which is to find new directors or it\'s not doing that well. So I think in society um, especially currently in the US. There can be a view that this push for diversity on boards is a result of woke ESG investors, Um, you know, kind of trying to push some social agenda. But the reality is that there is plenty of evidence that a more diverse board leads to a better performing company. Governance and diversity are the foundations of how a company operates and therefore how a company performs. So in the ESG context, when we\'re talking about diversity as a characteristic that we\'re looking for in a board that is not about wokeness, it is about value. And we\'ll talk a little bit more about gender diversity in the coming slides. So you need skills, um, capacity and diversity as key characteristics. The final element or the final characteristic of, um, what the corporate governance guidelines suggests makes a good board. Is this element called independence? So the a SX um, corporate governance principles say that a best practise governance is to have a majority independent board with an independent chair. But what is independence So most obviously independence is about independence from management, So a director\'s job is to approve management decisions as Mike discussed and also to oversee management. Um so ratify and monitor if you\'re not independent from management, especially because you are part of management yourself. Um, in other words, you\'re a direct executive director. Then your ability to oversee management completely falls apart. It just doesn\'t make any sense. So if you\'re a board with five executives and three non-executive directors, it\'s not going to work. This setup, um, won\'t work because there won\'t be a Step two. Or it will just be essentially a rubber stamp process because management are going to come up with their best ideas initiation. And then they take them to the board. And they ask themselves, Is this the best idea? And the people that have come up with it say yes, because they\'re the same person or the same people, so it just falls apart. You need independence from management number one. Um, independence also, um, means being independent of the company. So imagine a board where the majority of directors are customers. So a mining company that sells iron ore and the board is full of customers of that mining company. So in a really extreme case, they could, uh as as directors, um, fire the CEO and hire someone who\'s going to reduce prices. Um, that then they buy cheaply. So obviously a crazy example. But those sort of things, um, other things that you risk as an investor if you have the majority board made up of these types of categories. So suppliers, customers, um, in a supplier case, if a supplier sits on the board or um has a majority position on the board, they could pressure the company to use that supplier. Um, and these are all termed related party or related party directors. So there are some instances where it might make sense for one of these related parties to be on the board or to have someone who isn\'t deemed independent from the company. What you\'re essentially looking for, though, is majority independence. So you know you if you\'re appointing someone like that onto the board, you want to have a good reason for it. Um, but it\'s not the end of the world if it\'s not, um, a majority of the board and the last type of independence that we have. Oh, it\'s actually not quite the last type. Third last type is independence. from substantial shareholders. So there are legal requirements to act in the best interests of the company. Um, but if you represent 20% of, uh, the share register, um, then you might want to appoint a board director who\'s going to represent your interests. So in that sense, a director might be pushing to run the company in the interest explicitly of that shareholder rather than the Board of Register. So this is a little contentious, I guess, because many consider it appropriate to control the same proportion of board seats as what you control in your share register. So 20% of the company\'s shares should equal 20% of board directors on, um, on the board representing you. But what we\'re saying here is if we\'re looking for what makes a good board in an ideal sense, independence from substantial shareholders is one of those characteristics, and the last one here is tenure. So the corporate governance principles, um, indicate that tenure can compromise independence. So why is that? And what we\'re saying here is you get elected on day one. As an independent director, you\'re independent from management. You\'re independent from the company you\'re not representing a substantial shareholder. For all intents and purposes, you are an independent director, and then you go on that board and you continue to serve on that board for an extended period of time. So after many, many years, and we\'ll talk about what what the right number is. But after many years, you can invariably get too close to management, too close to the company story. Kind of drinking the Kool Aid, perhaps, and you lose the ability to bring independent judgement to the board table because you\'ve been there for so long. So I think the idea that tenure can compromise, um, independence is well established. But the idea that there the corporate governance principles suggest it\'s 10 years after 10 years a director should no longer be considered independent. Um, I think that there\'s a bit of debate about what that number is. It\'s gonna depend on the actual person I see some shakes of their head. I don\'t know if it\'s specifically about this. Do you disagree? You just think that there is no time or 10 years is too much 10 years so that it should be longer. Sorry, it should be longer or shorter the money has SPEAKER 1 been, it\'s the most. He should be the one that actually taking the most since he has been mhm. SPEAKER 3 Want the car? Yeah, So I guess there\'s, um AC. So the intention might not be for that, but the question is, Can you see outside of it once you\'ve been there for so long? And there is this, I think there\'s a real tension between that and experience because, of course, the longer you\'ve been on the board, you\'ve got corporate memory. You understand what\'s worked in the past and what hasn\'t worked. You\'ve got a good understanding of, um, M, the market dynamics, how the market responds to this company. Different strategies it\'s put out, Um, you have a better sense of culture, so it it\'s not. I don\'t think it\'s just at 10 years you\'re done. It\'s going to depend on different people. But having that in mind like I don\'t think it is good governance to have a board of directors who have all been there for 15 years, for example, having one person for 15 years, depending on who that person is, What their story is could be fine. Um, there isn\'t a hard and fast rule, but the market will start to consider or question someone\'s ability to exercise independent judgement after a certain period. And the rule of thumb is 10 years, you might start facing some of those questions. Um, so, yeah, I, I guess that gets to the last point which isn\'t on this slide. But I am going to talk to it, which is that these rules of thumb that we\'ve put up here, that\'s just what they are. These are principles that you should broadly apply. But every in case of individual, director or company is going to be slightly different. So just because something fails a conventional governance standard IE tenure and a particular director being on the board for so long or, um, a non independent chair, because they\'re an executive chair and they\'re an executive chair because they\'re a founder of a company that they\'ve built from the ground up and has now become listed. Maybe, um, that is who you want on the board. Um, if you\'re a shareholder, So, yes, they might fail that independence check. Um, but you have to understand their story, so it depends what you think of the founder as an investor. So there are plenty of founders out there who I believe it is worth ignoring that some of the governance flags that will come up for them. Um, because they couldn\'t be more aligned with shareholders if you tried. I think, um, And if we go back to what Berla means said, um, what we\'re looking for is that either you have self, you have interests that align or you have good checks on the on the exercise of power. And so, in the case of a founder, an executive chair as a founder, you know, a lot would argue that you don\'t have to worry so much about the checks because those interests are so aligned. The vast majority of their wealth, their reputation, their entire career is built into this company that they\'re that they\'re leading. So it\'s they\'re just guides to think about, on average, what makes a good board. But of course, um, as there is with everything in this course, there are always exceptions and grey areas, Um, and just to kind of talk a little bit, I guess about integration. In that sense, this is where a qualitative assessment really works. So if you\'ve got a governance flag and you\'re just like, OK, red, red, red. But you don\'t actually sit there and go, It\'s red. But what do we think about it? Like you\'re going to miss part of the investment story. So to summarise four characteristics, um, that typically make up a good board skills and experience, capacity, diversity and independence. Um, so this is a really simple framework, um, to assess the quality of the board. Um, but it could be applied to any of the integration tools that we\'ve talked about. So for valuation, you could set up a governance, um, rating that assesses a board on each of those four and then combined. That gives you your governance score. It can be a qualitative, um, aspect where you\'re at least in your assessment of companies qualitatively looking at each of those aspects of the board and coming up with you know how well you think. Um, that board is structured from an ideal governance perspective. So we\'ve Yeah. I\'ll keep talking. Have a quick break. Uh, when did I No. I\'ll keep going for a little bit. Yeah. Um, so we\'ve described the issue of agency risk. Um, And why? Without enough checks and balances, this represents, um, risks for shareholders, of course. The model that has been set up to try and reduce these risks. The mechanism to reduce the agency risks is the board, as we\'ve discussed. Um, so this model of the board it facilitates the opportunity to reduce that agency risk that exists between investors and company management because of the separation of ownership and control. Um, but really, the reduction of that risk, um, in practise it depends on the quality of the board itself. And that, of course, depends on the people who are on it. So they are agents themselves, even though we are using them to try to reduce agency risk. There is some slight irony in that, um, I\'ve outlined some of the qualities that a good board, um, could that you\'d want a good board to have to try to minimise those risks. So how can you actually use the ESG toolkit to try to get a good board? So the major reason, um, that we\'re trying to get a good board is because Brad is accountable to the board, and then the board is accountable to shareholders. So that\'s the link. Um, and the board is accountable to shareholders because of the stewardship tool that we\'ve mentioned, um, earlier in this course which is voting. So if you remember, uh, we told you that there is this right, uh, typically attached to equity investments, which is a fundamental right of shareholders, and that is that shareholders get one vote per share they hold in the in the vast majority of circumstances. So voting is the mechanism for creating accountability, um, of the board to shareholders, because shareholders elect the directors. So director elections are one of many types of resolutions that shareholders have the opportunity to vote on each year at a company\'s annual general meeting. But they are regularly the most important resolutions on the ballot. So the cadence of director elections that is how often directors are elected is set in the A SX listing rules. That is in Australia, of course. And an excerpt of this listing rule is on the slide. So it states that a director of a company must not hold office without re-election for longer than three years, So they\'re essentially on an Australian political, um, timeframe or similar timeframe that is being re-elected every three years. So the rule, of course, does not apply to a managing director. Um, and that\'s because a managing director or the CEO is accountable to the board, not the shareholders. So the shareholders don\'t elect a managing director. So because of this listing rule, what it means is that in Australia, a tranche of directors are up for election or up for re-election every year. So every year investors are going to elect or reelect some directors. But in any one year, they\'re never reelecting the entire board in one go. So the cadence of director elections is different around the world. In the UK, for example, now the entire board is up for re-election every year, according to their listing rules. So investors over in the UK have the opportunity to vote or vote off every director on that board every single year. And there are pros and cons to having one year versus three year cycles. Uh, and when we get to an example of directors being voted on and off, I\'m gonna talk about those. So if shareholders can vote directors onto the board, how should they decide who to elect. So we\'ve outlined, um, some of the qualities of a good board, and therefore investors typically use this sort of criteria to help them decide. Um, who they should elect? So on the slide here is an excerpt from Vanguard Stewardship Principles, which reflects the criteria that they use in director elections. So, as they say here in yellow, good governance begins with a great board of directors, and therefore directors should be independent, as we mentioned be appropriately diverse in personal characteristics. And they should have skills and experience. Although these criteria can guide investors in practise, I must be honest. It is really difficult. Um, so Independence. Excuse me, Independence. It\'s fairly easy to define in the beginning. Um, do they have a recent long-term relationship with the company? Um, are they a key supplier, etcetera, Etcetera? No. Well, it\'s fair to say that they\'re probably going to be able to exercise, um, reasonable independent judgement. But how long could they be affiliated there before we start thinking about whether they\'re still independent? Um, 10 years? Maybe that\'s the right number. Maybe it\'s not. In some ways, often, diversity of personal characteristics can be fairly easy to identify. Um, but not always. Of course. Um, one of the reasons I think that when we talk about diversity that gender gets such a focus is because it is fairly easy to observe from an outsider\'s perspective about whether there is gender diversity on a board. Um, what about skills and experience? Um, of course, you can assess someone\'s skills and experience. Uh, but typically, that relies on reviewing their career in a CV type of way. And we all know that CV S aren\'t going to tell the whole story about what someone is or isn\'t bringing to a board. So despite some of the challenges in practise that investors have in making sure they\'re appointing good quality directors to create good quality boards to address the agency risks, we\'ve discussed thinking about these aspects of quality in any detail. Um is likely to lead to better quality boards overall, So if shareholders gave up on doing it because it\'s difficult, it\'s imperfect. It\'s hard to assess independence after a certain time. I\'m only reading this person\'s CV like if just because it\'s difficult or the methods are imperfect, I still think thinking about them can give us better quality boards, um, across the majority of companies. So the tools in the toolkit, and especially on the stewardship side, they\'re not mutually exclusive. So investors and we talked about this a bit last week. Investors can achieve much more when they use their tools in combination to drive towards specific outcomes. So two of the tools that really are best friends are engagement and voting, so investors can engage companies prior to voting for important kind of two way communication about the quality of the board. So, as you can see from this slide again using Vanguards Stewardship, um, principles as an example of what they do, Vanguard identify this discussion about governance as being a key area of focus with in their engagements with companies. So I said just before that this represents an important two way communication. So in one direction, engagement is an opportunity for investors to express to directors what they think a good quality board looks like. And what from the outside in the board might look to be missing. So you can say to directors in these conversations about it looks like you don\'t have enough diversity, it doesn\'t look like you have skills. You\'ve got what we can see as a gap here from the outside in. And directors, especially chairs, truly often take this feedback on and keep it in mind when they\'re looking for new directors to put up for election again. When we talk about what the roles of the board are, one of them is finding new directors. So when you\'re kind of getting into chairs, the heads of chairs, about what you\'re looking for, that is going to influence some of what they\'re looking for when they\'re looking for those new directors, the other direction of conversation is just as important. So what, the chair or what the board are saying back to you as an investor in those, um, in those engagements. So while shareholders vote for boards, um, to reduce agency risk, of course, it\'s not 100% solved because those board directors, as I said, are agents themselves and shareholders never get to see the board functioning in practise. So it is important in engagement to hear first hand how the board is functioning, the things that are working well and the challenges that the board\'s facing I must say, like even this is an opportunity to hear how the board is going. Of course, you can never totally be sure. One thing you can guarantee is that when you ask a chair how the board\'s going, they\'re never gonna say terrible. Um, they\'ll never be that honest. Um, And so because of that, the board is a little bit of a black box for investors. Uh, which is a challenge because we\'re asked to vote on directors individually. We\'re not asked to vote on the board as a whole, but it is actually hard to see who\'s contributing, what to the board, um, meetings, because you\'re not there. So when you\'re in an engagement, of course, they never say terrible. Um, boards are often, um, pretty positive, which is a good thing. We\'re shareholders, and we\'ve appointed these people like hopefully, they\'ve got good things to say. Um, but you can get variations, and in an engagement, it\'s really important to listen to the language that a chair is using. So you can start to tweak that. Maybe things aren\'t great by what they don\'t say or by by their lack of enthusiasm. Um, so you can maybe work out that things aren\'t as good as they could be. Um, because a board isn\'t a chair. Isn\'t waxing lyrical about board unity? Um, and about board performance. So given that we\'ve got this black box challenge, how do you work out as an investor who is responsible for what if you can\'t see the individual contributions? So one way to proxy for this is the hierarchy of the board, where the chair of the board, of course, is accountable for board performance as a whole. But then also, the chairs of different committees are responsible for key outcomes relating to that, um, to that area. So this might not totally resolve the black box nature of the board, but it\'s one of the best options that investors have if something goes wrong, um, say, for example, with sustainability at the company, Um, so the person who\'s most contributed to that or certainly the person most accountable, um, for that at the board level would likely be the chair of the sustainability committee. So that\'s sort of the best depth that we can get in terms of working out, how to hold and who to hold accountable for different outcomes. So this has all been pretty theoretical. Um, yes. Shareholders can technically use their vote to devote directors on or off the board, depending on their assessment of director quality and investor satisfaction with the performance of the board or company. Uh, and, yes, they can potentially engage, um, companies on the suitability of directors. But does this actually happen? So we have an example of it here. It\'s an example from 2018, so obviously slightly dated six years ago. But we have it in these slides not because there isn\'t another example more recent, Um, but because this example really provides some of the neat insights into neat insights into the issues related to director elections and a few things that I\'ve talked about, um, in principle. So to give some context in 2018, following significant revelations of poor management practises at a MP, um, through the royal commission into the banking and superannuation sector, um, a MP S performance there led to significant loss of shareholder value. Um, multiple directors stepped down. Well, that\'s what the media releases say, uh, they step down, Um, rather than being voted off. That\'s how it appears. Um, but in reality, uh, the decision of a series of directors to step off, um, was the result of feedback from engagement ahead of the A GM, um, where they realised that directors were likely to be voted off by shareholders or not be re-elected. So, as you can see in the line at the bottom of this slide highlighted in yellow, it says that extensive engagement had occurred and that enough institutional investors had voiced the same in opinion, Um, for the board to essentially see the writing on the wall that these directors aren\'t gonna be re-elected. So in this particular case, um, it could be interpreted as shareholders believing that these directors did not have the quality required to be good directors at a MP. Um, but I think the example is not all, as it seems so in reality, uh, this outcome, I think, was more a result of shareholders not being satisfied with the board as a whole, and therefore they were going to express that dissatisfaction through these particular director elections. So this goes back to two points that I\'ve already made. Firstly, board performance is a black box, and secondly, there are pros and cons to the cadence of three year elections. So one of the cons is that board performance can be poor and that becomes clear to investors at a certain point. For example, it\'s revealed in the royal commission. Um, and at that point in time, shareholders become really unhappy, and they demand accountability. But the way to gain that accountability is not by, um is by not electing the directors who are next up for Re-election. So in the a MP case, out of the entire board Vanessa Wallace, Holly Kramer and Patty A Pants were the three directors, um, who were up for re-election. So were these the three directors of the whole board who were most responsible for the performance of the board, the poor performance, or were they unlucky in terms of it was the right. Their term was up right at the time that shareholders were demanding accountability. So to provide some perspective on who these directors were and what their relationship or history had been on this board. Holly Kramer and Vanessa Wallace had both been directors for just one term, so they had been on the board for three years, maybe slightly less if the entire board had been up for re election, as is the case in the UK. Would there have been other directors that shareholders would have judged to be more accountable for the board failures? So in terms of seniority, we\'re talking about the chair, perhaps the chair of the remuneration committee or the longer serving directors might have been more of a focus if that whole board was up, although it should be noted that Patty ay Pants was one of the directors up for Re-election in this case and was also the longest serving director on the board. So, um, perhaps you could say she did have more responsibility or an accountability than Holly and Vanessa. The point isn\'t necessarily, um, to provide a view on whether these were the right three people or not, but rather to make two points. So the first is that issues such as board performance and accountability and how shareholders use their voting rights to achieve this in practise is complicated, especially in Australia, but secondly, that despite this complication, directors, no matter how new to the board, will be held accountable and shareholders will use their voice through engagement and voting to hold them to account as agents. So it does happen in practise. So you have these tools, but they\'re not always designed as sharply, um as we might like as shareholders to get our interests across. Um, but they are there, and they can be used. I might just take a break there. Um, also because I need water and to really cough. I don\'t know if I sound so croaky, but I\'m sorry about that. Um, maybe for 10 minutes, and then we\'ll come back, um, to talk about one more example of shareholders using their stewardship tools. Are we really? What did we What did I say? Oh, Yikes. Skier, Captain and I can skip through the day. SPEAKER 2 Yeah, you You\'ve already not touched on. SPEAKER 3 I\'m gonna mark this. SPEAKER 1 This actually, Um yeah. SPEAKER 3 Let\'s see. SPEAKER 2 I think the oven area where we can move pretty quickly is like a bit chalky, and it\'s just, like, SPEAKER 1 do have access. Yeah, yeah, yeah. Right here. Hes with the but we have Oh, OK, six months. Yes. Yeah. OK, so I got this. Thank you. And to Michael Not yeah? Yes, that he the next year. Yes, sir. OK. Charges because so, I mean, they I That\'s OK. That Yeah. Uh, OK, OK, nine. OK, I research they know, and this was, like, a long time. Oh, so so I see. Interesting. Yeah. No, sorry, but I can Yeah, Yeah, OK. SPEAKER 3 No, that\'s not what I wanna do. Oo All right, so to provide another, um, recent example of shareholders using their stewardship tools to influence the composition of the board is, um, this example of Exxon Mobil in 2021. So this is really an example of governance, um, issues and environmental issues colliding where shareholders effectively voted off three incumbent board members and voted on three new board members that had been proposed by this small hedge fund, uh called engine number one that owns something like 0.02% of Exxon Mobil. Um, on the basis that the board was not positioned to address climate risk and in fact was ignoring this huge issue and was therefore not acting in shareholders best interests. So how do you go from owning 0.02% of shares to having board members that you propose elected to the board? Just a quick caveat. Here one of the roles I talked about was directors finding or board the board, finding new directors. That is one of their roles. But they\'re not exclusive. It\'s not exclusively putting directors up for re-election or election is not exclusively the domain of the board. Um, so shareholders can also do that, too. Um, in practise. More often, the new directors that are up for election are directors that have been found by the board and put up by the board. But, um, this is an example of where it\'s actually shareholders that have done that. So to go from owning 0.02% of shares to, um, getting the directors you\'ve suggested elected? Uh, well, you have to have influence with other shareholders. And that\'s what engine number one had. Um, so they went out to very large institutional investors. So Black Rock, Vanguard State Street. Uh, and they pitched to them why it would be in their long-term interests. Um, for this governance change to happen. So engine number one\'s pitch It was something like an 80 page pitch. Um, and essentially these institutional investors that together made up a large portion of the shareholder register of course, Um, multiple times larger than, um, engine number 10.02% shareholding. They were essentially convinced of this argument, Um, that had been put forward, and they used their voting power, Um, to make the changes that engine number one were proposing. So a really fascinating example here, and Mike is now gonna talk you through board diversity. SPEAKER 2 Thank you, Claire. And this is obviously a concept that we\'ve already Claire\'s already introduced. But I just wanted to use this little, um, example of the, um, blue and white, uh, balls to kind of give you a, uh, non woke, uh, explanation as to why investors genu genuinely care about board diversity, which is simply this idea of, um, biassed or unbiased, Um, sampling. So if you have Yeah. And I appreciate here where some people obviously don\'t define themselves either as men or women, but only for the sake of my poor math skills. Um, we just kind of caveat that, um imagine if you have, you know, you\'re selecting from a genuine sample of blue and white, the odds of you getting aboard and, you know, let\'s say blue is MM ma, um, men uh, white is women. The odds of you getting pulling out eight and they\'re all the same. Colour is 0.3% So it\'s very, very unlikely. And so many, many directors, you know, that we\'ve sort of spoken to, sort of say, it\'s not that we think, um, you know, women should be appointed to boards despite the fact that they have merit. So even if they don\'t have merit, it\'s actually the the exact opposite you. If you see a board that has just one gender, that probably suggests that the sample from which those people have been chosen was biassed in the first place. Um, so I just think it\'s interesting to kind of, um, make that point and I\'ve had directors. Um, I think both men and women make that point to me. So just to kind of put a little bit of statistics around this of, you know, hopefully you\'ve been con convinced that the idea of improving board gender diversity is a good idea. This shows you that it actually has happened. And really, um, you know, throughout the last, like, 1015 years in Australia, it\'s happened pretty dramatically. So we\'ve gone from, you know, about 8% women on a SX 200 boards. And that was kind of like that for a long period before that. You know, I\'m sure if you go back far enough, it was zero, to now 37.4% at the latest number. Which also suggests that if you even if investors think that boy gender diversity is important, then they\'ve achieved something here. So this was driven by many things, but I think investors clearly had a role. And again, we go back to our, you know, um, left hand, right hand of the stewardship tools of voting and engagement. So, in terms of voting and and I\'ll show you, um, there are lots of examples of this, actually, but in terms of voting, essentially what, um, investors say And in this case, this this group called Glass Lewis is an advisor to investors, So they they give investors advice on how they should vote. They basically say, if you have a board with six or more directors, less than two women, we\'re gonna tell our clients IE the investors to vote against the board chair or the nominating committee chair. The nominating committee is the group that decides who are the next people that should join the board, just in case you don\'t understand. Um, what that means. So this is basically investors saying our voting principles include this concept of voting against boards where there are less than two women. I\'m sure if you press glass Lewis or maybe, I presume if you press them, they would also make the point that, um we would also vote against, um, boards where there are less than two men. Uh, and I think II I think that would be logical. Based on what we\'ve all the things that we\'ve just said. The reality is that, um I\'m almost certain this was definitely the case when I last looked at it. And I\'m I\'m sure it\'s the same today that there are no boards with less than two men, Um, on the A SX 300 or the A SX 200. In fact, I don\'t think I\'ve ever seen a board in my entire life, um, of a listed company with more than with less than two men. So there you go, and then the the other tool, obviously, and this is State Street, another one of these very large passive managers which basically engage with, um, investors S. Sorry. Engage with companies. Um, on the topic of board gender diversity and just as a bit of something fun. Um, last year, actually, a few years ago. I didn\'t actually see it last year, but I, um I was in New York a few years ago, and, you know, that famous bull in, um, you know, that sort of famous bull in New York State Street actually sponsored this sort of, um, fearsome young girl to be, uh, in front of that ball as a you know, as part of their, uh, you know, um, promoting this sort of idea around Bo Bo, gender diversity and the final tool that we sort of talked about. Remember, in our universal owner tool kit, we talked about advocacy as a tool. So rather than just talking to this individual company and then that individual company and then going over to this individual company, if you can try to sort of change quote unquote the system or talk directly to some of these sort of rule maker, you could actually, um you know, have a have some success more broadly. And so this is an example of that being successful for investors. So in the A SX corporate corporate governance principles, it says that a board a, um, a board should have something called, you know, diversity policy. And they should have measurable objectives around improving gender diversity of their board. And it also says if you\'re a company in the top 1 300 of the A SX, um, it should your D, you know, your measurable objective should be to have not less than 30% of your directors of each gender within a specified period. So again, this is not a quota. This is not a hard and fast rule like you don\'t get kicked out of the A SX if you don\'t have this, um, rule. But these are again the sort of principles and recommendations that, um, have been put in place. And, you know, I\'m very proud to say, actually that where I used to work at AI, they actually were one of the groups that were saying that this was a good idea for the reasons that we\'ve, um, outlined the recap in the interest of time will leave, um, for you to go over in your own time. So now I will pass on to Claire to talk about I think 11 of my favourite topics, which is, um, executive pay. SPEAKER 3 All right, So the title on this slide is CEO pay an unchecked agency risk. So firstly, I would say it\'s typically not unchecked or under checked. Plenty of investors are considering, uh, this risk and this agency risk this idea that, um, CEO S can, um, enrich themselves and overpay themselves. Um, setting CEO pay, though, is really difficult. So how much if we take the CEO of the Commonwealth Bank? How much? Um, is he or she worth? So, what do you guys think? Should the CEO of Commonwealth Bank get paid a million dollars? Anyone think they\'re worth a meal? Yeah. Shake a head. Yeah, I probably when you think about the scope of their role, Um, So they\'re carrying heaps of risk. Uh, they\'re on call 24 7. Like, I\'m sure that their partner or their kids family friends aren\'t seeing them a great deal. Um, travelling a lot. Um, if things blow up, um, then your career is over. So all more than a mil. But how much more? Like what? About two for those that thought. Yeah. Two. What about four, 68? Like, it\'s hard to know the exact number. Um, so maybe we\'re all comfortable going. Yeah, it\'s definitely more than a mil, but as you kind of increase the the number you\'re like, uh oh. I don\'t actually know the exact number, um, or even kind of the range because some of it starts to feel, um, really excessive, by the way, it\'s, um, in reality way more than four or six. I don\'t know. 10, maybe. Probably about 10 mil now anyway. So when you look at the micro level on a company basis, um, it\'s pretty hard to know, um, what the exact number is. But when you look at some of the macro figures like the ones that we have on the slide here, although these figures, um uh, mainly from the US, which I will point out, have wild CEO pay outcomes relative to Australia. Um, although Australian CEO salaries don\'t worry about them, they\'re still really high. Um, they have grown astronomically compared to both shareholder return and also the wage increase of standard workers. So at the micro level, we say, uh, not exactly sure what the CEO of Commonwealth banks should be paid. But when we look at these macro figures like, something doesn\'t seem right, Um, so the paper, um, referenced in this slide, it suggests that the reason that CEO S, um, are getting more is because of quote their power to set pay. But hang on a second. Doesn\'t that fly in the face of everything that Mike and I have just talked to you about, which is that it is the role of the board to set executive pay? Um, so technically, yes, um, it is the role of the board to set executive pay. Um, but obviously, when you look at these figures, it tells you, um that there is something that is not perfect. Um, when or they\'re not. The board isn\'t acting as a perfect shareholder agent if the CEO is able to influence pay outcomes to align with their interests. Um, so much so that their growth in their REM outstrips shareholder return. So it definitely suggests that something in our nice little theoretically set up, um of the board representing our interests. It doesn\'t work perfectly in practise. So why are some boards seemingly agreeing to pay CEO S so much? So the first reason, um I think, is that boards are often filled with former CEO S, which, as you\'ll recall, I talked before or is one of the skills or experience that we might want to have on the board. Um, because there are advantages to that. One of the disadvantages is that the board is then filled with people who have from, I guess, my perspective a pretty warped sense of what is an appropriate amount of pay. Like so they\'re full of people who are used to having plenty of zeros on their paycheck, which is just kind of hard to relate to if, you know, you haven\'t been in that, um, stratosphere of of pay as an individual. Um, So the other, um, reason is sorry just on that, I guess, especially with non independent boards, this becomes an even bigger problem. Of course. Um, so if you\'re a non independent board filled with executives, you\'re going to have more challenges on reining in, um, pay because they\'re gonna actually have power to set their pay. The other reason that boards might be paying, um, their CEO S so much apart from their warped sense of an appropriate amount of remuneration, is that boards can become captured by CEO S. So in reality, boards spend way more one on one time with their CEO S than they do with their shareholders. So the board again, they\'re human beings. Um, And when you develop a relationship with someone, when you find someone charismatic, you know, you may be more likely to think that they\'re worth more than what the market might suggest. So we just included this slide here. Um, so Elon Musk recently got approved for a \$45 billion payday. Um, which is just crazy wild. Um, but this was supported by, like, 70% of shareholders. So there are enough people out there that think that he is worth that for their interests. Um, or, you know, they wanna keep him there. And if that\'s what he needs to be kept there, then so be it. And when you look at the value that they attribute to musk um, creating for them, then it\'s worth it. Um, for them so just because they\'re a big, um, paydays, you know, doesn\'t mean that investors are kind of throwing their arms up and saying the board process and everything is not working. Um, yeah. This exceptionally significant payday got approved by, you know, got supported by investors. So what do investors ideally want their agents to do about executive pay? What? What do we want the board to do? So here is two examples of, um, two investors that articulate what they\'re looking for in remuneration, and you can basically summarise it. Um, by alignment. That\'s what they\'re asking for. They want alignment between executive remuneration, how executives are incentivized, incentivized and shareholder interests. What about, um, executives? What do they want? Um, so I think this table kind of pulls the agency risk that manifests through pay really into focus. So executives basically want the opposite of what investors want almost across every, um, dimension of pay that we have here. So just a quick run through on what some of these sales mean. So the third sell vesting after many years. Investors want that and executives want vesting. Now what does that mean? So the word vest in this sense is when incentives actually get paid out. So when a, um, long-term incentive vests, it\'s paid to the shareholders. So, uh, sorry to the CEO or to the executives? Um, so that\'s what that means. Um, the third row, um, also kind of talks about the amount of time that investors want, um, those bonuses to be on foot before they vest. So shareholders want that, um, to be a longer time. And obviously individuals or executives want that now. So what is a long time or a long-term horizon? In terms of executive pay, it\'s typically 3 to 5 years maximum. So even though that might not be long term from the context or from the perspective of beneficiaries who are ultimately the owners of these companies, it is for an individual who is doing a job and just wants to get paid now. So, you know, if the university said to me, Great lecture. I\'ll pay you in three years, I. I won\'t be very happy about that. And so you know, executives are people, too. Um, they obviously wanna be paid as soon as possible for the job that they\'re doing. Um, the fourth row investors would rather the payment be in equity. Um, so that way management wealth is tied to the performance of a company, so management can get wealthy. Um, if shareholders get wealthy, of course, management would just pre prefer it in cash. Uh, you can\'t buy a mansion in script, so they want the dollars in the bank. Um, the fifth row stretch hurdles. So investors would prefer management to have to work really hard to get their targets, Um, in order to get paid, and executives would, of course, rather easy, uh, targets and the last row. So this subject to negative discretion conduct gateways, malice, clawback. These are all different terms for, um, the right for the board to claw back pay or reduce management\'s pay if they do something in the short or long-term, that threatens or destroys shareholder value. So, of course, any individual would rather not have that clause kind of hanging over them. Um, but investors would like to have those, and typically, more and more, we see that embedded in executive pay plans. Um, the last one disclosure Do investors want more disclosure? Um, because they want to be able to check whether REM is aligned, um, with their interests and whether they think executives are being incentivized in the right way. What do executives want? Less disclosure, Maybe, Um so one argument for why they want less disclosure is because, um, they don\'t want people to know what they\'re getting paid. Uh, the other argument is they want more disclosure because greater disclosure allows them to see what their peers are being paid and to be able to go to the board and say, Well, over here, they\'re getting paid way more like, Why am I getting underpaid if I\'m delivering X? So in the example of having more disclosure, what you might get is a ratcheting effect over time of a pay quantum as one share. One executive says, What about this person? And then someone matches it, and you just get this kind of spiral up effect of, um, Executive Quantum. So this has tiny writing. Um, but the purpose of it is to just show you, um, that the consideration of rem isn\'t just theoretical. Um, like all of these different points that I have here. This is kind of a, um, Glass Lewis detail on what they\'re looking for. on each of those elements. So in consider, in that consideration, there is a lot of detail. Um, and all of the detail on this slide can be linked back to one of these areas. Um, in terms of what investors are looking for. So given all of that, how can we use, um, the toolkit to get better executive pay? SPEAKER 2 Thank you, Claire. So we\'re going back to our, um, friends in the stewardship pillar here. So first of all, I think the question to ask is, you know, whose job is it to oversee executive pay. And we we\'ve really already sort of answered this question all the way at the beginning, where we said the board one of the roles of the board is to oversee executive pay. So you could say to yourself, Well, if I\'m not happy with how much money Elon Musk is getting paid, I should just get different directors at Tesla and then they will, um they will help rein in how much Elon musk gets paid, which is true. So the J, the bo, the the it is the role of the board, not the role of shareholders to set executive pay so and there are there. There are examples. I think out there. Probably not. Not that many, to be honest, but of of, um, shareholders voting against directors just because of how much the executives are getting paid and in what way the executives are getting paid around those hurdles and etcetera. But in Australia and I think in In In the US, throughout most of Europe there\'s also this separate vote a separate right that you get as a shareholder. So the, um, the meeting comes and as a shareholder, you get your little, um, notice and it says Director, director, director, director for against, for against for against. Also, there\'s this item that says remuneration report or pay or compensation report as they they call it in, uh, in the US. So as a shareholder every year, you can say I like the remuneration or I don\'t like the remuneration. And that\'s based on a on a report that the company has to has to produce by law. The difference between the vote that you get on D on a director and on the compensation is that for a director, if 50% of the shareholders vote against a director. That director can no longer be a direct a director. If 50% of, um I\'m not gonna use the Tesla example cos I\'m not sure exactly. I think that was a slightly different thing. But let\'s say if the Commonwealth Bank, rightly 50% of the Commonwealth Bank shareholders say I don\'t like how much money the C, the CEO is getting paid. I\'ll vote against the remuneration report if 50% of them vote against. Unfortunately, it doesn\'t mean that the CEO has to give back the money. It\'s what\'s called a non binding or binding or advisory Um, vote. So you might kind of ask yourself, OK, if it\'s non binding, If if the shareholders vote against it, the CEO still gets paid, like, what\'s the big deal? Um, well, I think what I\'ll show you why the board and the company still cares about these non-binding votes so you can see here, for example, part of the reason why which is that you get, um, splashed all over the, uh, financial review. So in this case, on the right here is tabcorp, which is obviously Australian, um listed, um, gaming company. I don\'t know why. But there were concerns with the executive pay at Tabcorp, and you can see there. It says 30% of the shareholders voted against the executive pay. So you can see that the reputation of that company and of the directors whose job it was to set that pay was damaged here. So they have an in interest to protect their reputation and to, um, try to avoid these sorts of situations. Therefore, um, satisfy, satisfy the demands of the shareholders. OK, so this is a an additional thing unique to Australia. So this is like kangaroos unique to Australia. Um, something called two strikes. So I said to you just now that the vote on executive pay is non binding. In other words, if you vote against it, C and majority vote against it. CEO still gets paid. There is this thing called the two strikes regime in Australia, which came in 2011. I think basically, it says that if 25% of shareholders in two years, two subsequent years vote against the remuneration, then there\'s this additional item, which is, would you like to have a separate meeting to vote off all of the directors. And then, if that is approved, then a separate meeting has to be held to potentially vote off all the directors. So it\'s a bit of a convoluted process, but basically it gives additional power to the shareholders in Australia around executive pay that no other country effectively has now, just to say as well that it\'s been very rare to have that situation where 25% say no the following year. 25% say no that that happens all the time. But that subsequent piece of now we\'ll have an additional vote and we\'ll get rid of all the directors that pretty much never happens. But the threat of it again, just like with the tabcorp thing, makes directors pay attention and improve executive pay. And let me kind of prove to you that this is the case. So this was a really interesting piece of work that, uh, a group called Ownership Matters did. And maybe I\'ll give it away now, but in half an hour we actually have the founder of ownership matters coming to talk to you. Uh, so you can ask him about all of this, but what they essentially did, was they? They looked at companies that got a first strike so that they looked at companies that said that where the shareholders said 25% of them said no on the executive pay year. One, The question is what happens in Year two, and what they found was on average in the second year. The vote against the pay is a lot lower. In other words, the shareholder dissatisfaction goes down in the second year. So the question is, Why does the share and and that\'s basically what\'s shown here? So you can see, for example, in 2000 and I\'ll I\'ll go over here because it\'s closer to the numbers. But 2011, the against a vote in Year one, as in the Black Square, was on average, let\'s say 35%. So 35% of SH of shareholders said no for the subset of companies that got a strike. And so they basically then took those companies that got a strike 35% average no and said what happens in Year two? And that\'s the Red Triangle There. Those same companies one year later only had 10% of shareholders saying no. In other words, the shareholder. The shareholders were more satisfied with their executive pay. So you can see that this two strikes regime actually does seem to be working in that it is improving the pay of, um, Australian companies. And what\'s happened? Probably in between the black, you know, Year one. And then Year two is a lot of engagement. So a company gets a strike. They go. Oh, there\'s a lot of our shareholders that don\'t like what we\'re doing here. Let\'s go and talk to this one. Let\'s go and talk to that one. Let\'s go and talk to that one. Why did you vote against us? Is it because we pay too much? Is it because we pay in cash? Is it? You know, all this conversation that, uh, Claire talked about? All these things are debated between year one and year two. And then, um, the vote the following year often is a lot lower. Now, this is an interesting little data point here around, um, Australian executive pay just the actual quantums like the the actual numbers. And this is again a piece of research that ownership matters has done, and just have a look on the very far column. The average change in realised pay for Australian top 100 CEO S is basically flat. So in nine years, Australian CEO S have gotten as a group no pay rise. Don\'t feel don\'t feel too sorry for them because they they still get paid, you know, 34 million or 5 million on average per year. So don\'t Don\'t feel too bad for them. Like you don\'t have to go out and donate money to them. But, um, this what we\'ve seen in over that long period, You know, for example, in the US of the pay just goes woof and goes completely out of whack with returns to shareholders. How much average people are getting paid more hasn\'t been happening in Australia for a little while, which I think is quite interesting. OK, so we\'ve, um we\'ve got our, you know, big talk here, but all we\'ve been really talking about so far is stewardship. So what about, um what about integration? And this, again is a fantastic piece of work that, um, ownership matters who you\'ll be hearing from in half an hour has done, which is basically what they\'ve done is a lot of these characteristics that we talked about. You know, the board quality executive pay. How much is it? Is the board independent, etcetera? What they\'ve done is they\'ve split the A SX two Hun 100 into two buckets. So the basically the blue blue companies the the top 75 companies that are good on these governance factors, they have good pay. They have good boards, no problems. And then there\'s, like the 25 companies that are the bad right? So what they do is every year they So they create these portfolios. TWE 25 bad governance companies. Red, uh, 75 good governance companies. They rebalance that portfolio every year based on their own analysis. This is like their own proprietary analysis that that they do every year. And they say, OK, like, how do these companies actually perform? Do the bad companies underperform the good companies and what they found over a very long time. Now you can look on their website and have a have a look at it for yourself. This is 12 years of data. You can see that there is actually substantial out performance of companies with good corporate governance. So really, I think this is a really fantastic local data point that all the conceptual stuff that we\'ve been talking about actually does drive performance. Um, there\'s a kind of a bit of a So that\'s kind of all we\'re going to talk about today on pay this little exercise we\'ll do in week six and the recap you can do in your own time. So let me just in the last. Yeah, 25 minutes. We\'re gonna try to power through the final concept for today, which is, um, entrenchment so any actually may Maybe I\'ll just pause here. Any questions on the pay stuff before I move on, you can save them for Dean. Um um OK, so entrenchment. So entrenchment is a bit of a different topic. And to be honest, one where your tools are not going to be much help to you. But so the U let me just sort of start with the usual sort of scenario. Entrenchment is basically about you have a management, a CEO. They\'re doing badly. And you as a shareholder, can you get them out of there, right? You guys are the shareholders. I\'m the CEO. I\'m doing a bad job. How do you guys get me to? They are So we\'ve already talked about the board, right? Like you can obviously elect directors that are better at hiring and firing the CEO. There are, you know, before it kind of gets to that. In reality, the public markets especially have these sort of two mechanisms which I\'ll just, um, briefly outline, which are basically you\'re in public and under scrutiny all the time. And there\'s also the threat or reality of a takeover. So this is again in that same paper which has come in handy so many times today, which is the farmer in Jensen. But they basically talk about, you know, stock prices being these visible signals. So if you\'re the CEO, you know, if I\'m the CEO of the company and I wake up every day and my stock price is going down, that is feedback from you, my shareholders to me About what a what a terrible job I\'m doing, right. And this is what typically then puts more pressure, public pressure, etcetera, etcetera on CEO S to then get out and it puts pressure on the board. Uh, as well to get rid of them. If I\'m still not going, what typically happens is somebody like Kyl. ICANN turns up on my shareholder register. So there are particular investors that are these. They\'re called, um what are they called? Um, activist investors. So Elliott management is another example. Um, Kyle icann is an example. What he what he basically does is that he looks for under performing companies. He takes a big position in those companies and then starts agitating that company to change. So this is this kind of market for corporate control. And if I still don\'t, if I\'m still not gonna go, then what he\'s gonna do is he\'s gonna gather 20% of the company. If he can, he\'s gonna gather 50% of the company, or he\'s gonna talk to all the other shareholders and say, this person has to go la la, la da, da eventually to the point of, um, taking control of the company. Or at the very least, um, putting enough pressure on the directors that they make a change. And quite literally, um, last week, one of the companies that I was personally looking at a company called Johnson controls, which does, um, air conditioning for, like, commercial buildings, like and, you know, university buildings. They had this exact situation where they weren\'t performing. This group called Elliot went on to their shareholder register, and now they\'ve effectively pushed the the board to, um, remove the CEO. So the CEO has gracefully said I\'m leaving when they find a new successor, and then hopefully the performance will improve. So this is the standard model for how things typically work in public markets. If you\'re bad, you gotta go. But there are these mechanisms, these entrenchment mechanisms we want to highlight, too, that can help you avoid me. As in help me as a bad CEO. Avoid getting removed. The first one is this thing called a poison pill. Has anybody heard of this iceberg concept of a poison pill? So a poison pill? Is this very, um Does anybody know who that guy is? Yes. Yeah, Rupert Murdoch. That\'s right. So, Rupert Murdoch, um, is the I don\'t know what his position is now, but basically he controls, um, you know, the Herald sun, the Australian, those newspapers. He controls those newspapers. Um, and he you can\'t get rid of him because the companies that he\'s involved with have something called a poison pill. A poison pill is basically a way for the CEO or in this case, like the controlling family, even though they don\'t have 50% of the stock to maintain control. The way it works is basically if somebody like Kyle ICANN turns up on the board of his companies. What happens is that every shareholder, except for poor Carl, gets free shares, which basically means so. So let\'s say imagine this sort of scenario. Kyle turns up, he becomes 10 10% shareholder. He spent all this money becoming a 10% shareholder. Let\'s say Claire is Kyle. So Claire is now a 10% shareholder of my company. Automatically, a poison pill is triggered for all the rest of you to get for nothing 10 times what you already have in this company. So then Claire goes from being a 10% shareholder to being a teeny tiny, insignificant percent share shareholder, and so obviously then a Kyle situation. He knows that that\'s at risk. So then if therefore he doesn\'t do it, which means that, um, at the ripe old age of 90 something. Um, Mr Murdoch remains firmly in control of, um of these companies. And you can have a look for the, um uh, dramatised variant, I believe, Inspired by the same thing, which is, um, the TV show Succession. OK, really quickly getting through the rest of this. So th so. That\'s sort of tool one. This is how bad management or management can entrench themselves. The other one is something called multiple share classes. So in Australia, typically this is something that is not really relevant. And part of it\'s to do with what the A SX says, which is that an entity may only have one class of shares. So what that results in is every vote Sorry. Every share that\'s issued is the same as every other type of share, including in how many votes you get as a shareholder. So that is the sort of typical way things work, which means that all shareholders are equal, like one share, one vote. However, there are companies Google being one of them where there are, I think, in this case, three different kinds of shares. So there\'s class a class B and class C. I think This is right. So Class A, you have one share, one vote class B, which is the one that the founders own. 10 shares per vote class C, which is the one that I think that they pay out to their executives, like just the, you know, standard software developers or whatever. Working at Google is zero shares per vote, which basically means these guys can, as long as they own the class B shares that come with lots of votes. They can maintain control of the company, even though they only in reality I think own something like five or 6% of the company\'s shares. So there\'s no way again for a corporate raider like Kyle ICANN to come along and take take over Google. I mean, Google is obviously so large, it would be very difficult to do in the first place. But, um, these guys essentially have a controlling stake in Google, not because they own 50% of the shares, but because they own the important high. You know, 10 votes per share types of shares and this is a problem because again, the these these, um you know, management can potentially become entrenched. I would argue in the case of those of Google, if that\'s not the case, but it can happen. Um, so, yeah, as as it says here, You know, these companies get access to public markets, they get to trade on the stock exchange, they get to raise capital from public shareholders. However, sorry you can never actually they they they really can\'t be forced to be accountable to their shareholders or subject to a typical of to a takeover unless the controlling shareholders Typically the founders like these guys, um, agree to that, uh, situation. And you can see on the right there. There\'s a, um, a corporate governance group in the US called the Council of Institutional Investors. And they basically, you know, make that exact same argument. You say, you know, on the one hand, as a public company, you are asking the public to contribute capital. Shouldn\'t they also have some say in what happens with the company? And the answer to that, in the case of Google, is no. So with that, I will pass on to Claire to talk, um, briefly about our toolkit and whether we can use the tool kit to stop entrenchment don\'t hold your breath. SPEAKER 3 Yeah, We have thought about summarising this slide and just saying good luck. Um, these tools are useless, but, um, let\'s go through. Why? Um, they\'re a little bit useless. Um, so problems that entrenchment, um, brings, um, obviously, as we\'ve discussed, So, um, the shareholder gives their capital to the agent, and then the agent can\'t be replaced unless they themselves decide that they\'re gonna go. Um, so what can we do? So with poison pills, these companies, um, as mike discussed, can\'t be taken over in a hostile manner. Um, and therefore all else being equal, they should have a lower value so investors can\'t get access to the takeover premium that is available during takeovers. Um, they can\'t replace bad management with better management. So in this case, investors, uh, could apply a tilts or, um, a valuation, Um, by applying a higher discount rate in a DC F, for example, um, and so there\'s evidence that companies with poison pills do underperform. Um, and again, we surmise, we can surmise that\'s because the agents running these companies don\'t have to perform as highly, um, at their jobs, so they stick around for too long because there\'s less prospect of a takeover. So I think what might become clear through this is, um there are some things you can do as an ESG investor in relation to entrenchment, but it\'s all got to do with integration. It\'s not really got much to do with stewardship. So the stewardship tools, um, voting and engagement and then advocacy. Um, they\'re pretty ineffective in these scenarios. So of course, you can engage with, um, Mr Murdoch and ask him to remove this. If you can get a meeting with him, Um, I don\'t know. We\'ll have to ask Dean up the back if he\'s ever had a meeting. Um, maybe he has, but, um, he\'s probably gonna if you do get a meeting and you ask him to remove the poison pill, the answer\'s gonna be No, um, you could vote against proposals to introduce them or vote for proposals to remove them. But again, good luck. Highly unlikely that they\'re gonna succeed. So, um, these company agents don\'t have to listen to their shareholders. That\'s the whole purpose. So putting up, um, uh, uh, a resolution. They\'re just not gonna care. Um, another component. Um could be, um, to publicly shame them. Um, that\'s another tool that you might have. Um, and there is a link on this slide to see an example of a company being publicly shamed for putting in a poison pill. Um, the heart of road, um, that you can take in the stewardship R kind of space. But perhaps the one that has the highest chance of some level of success in this space of entrenchment is, uh, advocacy. Um, so it is what some investors in the US are doing. So advocating for these kind of setups, um, poison pills and the like to not be allowed legally in the first place. So to change corporate law, Essentially. So this is probably the only path that has any realistic, um, chance of being effective. Um, but of course, it requires willing governments, um, and governments themselves, who are being lobbied also by those companies with poison pills. Um, so this avenue will require very long-term patient investors who are willing to dedicate effort to this activity. Um, so I think in summary, what that tells you is as an investor, the best way to deal with this, um, issue is through integration. So you should understand the governance impediments. If you\'re thinking about investing in a company like this, and then you should discount the stock accordingly. Um, if the price is still right and you buy it, then you\'ve done your due diligence. You\'ve thought about the ESG risks. You know what you\'re in for. You don\'t get in and then say, Oh, I\'d really love a takeover premium. Like you\'ve accepted that that\'s not available to you, um, for multiple share classes, um, the second of our entrenchment mechanisms. Um, the logic regarding integration is really the same again. A company can\'t be acquired in a hostile manner. Agents don\'t have to fear their job loss. Um, so they\'re gonna stick around, um, maybe beyond their time, so the company should underperform or trade at a discount. In theory, again, there\'s some evidence for that. But in, um, the current environment, where you have companies like Google or meta that have been amongst the most successful companies in the last decades, Um, it\'s probably hard to convince anyone, um, that the most but the most long-term investors, um, to be concerned about this structure again, like poison pills. Um, the most promising path for investors that don\'t like these mechanisms is advocacy and lobbying governments and others to not allow them in law in regulation. Um, there is one avenue where investors have made some inroads here. And that\'s with index providers whose clients, of course, are investors like the S and P or FTSE. Um, so they say that some of these companies will either have less weight or will be excluded entirely from their indices. So this provides some disincentive for companies to adopt these structures. Um, because investors that track these indices won\'t invest in them. Um, but arguably that is not a very significant effect. Um, the news is, unfortunately, a little bleak. Uh, because the permissibility of multiple share classes is actually spreading. Uh, so with the UK probably being one of the most recent countries moving to allow these sort of structures on their exchange, basically in an attempt to boost IP OS especially in the technology space, and have them list on, uh, their home exchange. So they say, um, that they want companies to be listed and like list. Over here, you\'ll be able to use your multiple share class structure, um, and entrench yourself. So one thing, though, I would say, in the UK since it\'s been done quite well is that, um, the UK at least put in some safeguards, Uh, for example, sunset clauses on these multiple share class structures which say things like, after five years, um, after you list your share classes, so say if you\'ve got at the start a B and C, they will all collapse into one. so this kind of sunset clause in regulation, it has the benefit of attracting companies and protecting them, um, for a while from takeover. Um, but in the long-term, that structure can\'t work as an entrenchment or permanent entrenchment mechanism. Um, again, as we\'ve seen, uh, with poison pills, if you\'re gonna use stewardship on multiple shareholdings. Uh, good luck. Zuckerberg is not going to listen to you, um, when you ask him to give up control of matter. So there are lots of voting proposals to companies, um, to remove these things. Um, but as you can see here on this chart, um, the majority, they might get majority support. Um, but outside of the controlling stakeholder. So these are really largely symbolic votes about how other shareholders feel about these classes. So that brings us to the end. Um, and we will again skip over this recap so we can have a quick five minute break. Um, before I introduce our guest lecturer um Dean So 8. 23 come back at 8. 28. And, um, we\'ll hear from a real expert in this field on governance. SPEAKER 1 Come. Yeah, Mhm. Um, 137. That\'s not that. Yeah, really? Yeah, but what on Syria? Syria. Thank you so much. Ok, Mhm for example. Yeah, Again. Mhm. Times more because it\'s not about that. That\'s interesting. So I I just Yeah. Yeah. Tomorrow episode. So what do you think? No. Yes, Th research. Thanks. OK? Yeah. How long have you have been? So you have the answer. Why? As I said OK, nice. Right? Defend it later on C so yeah. Yes and yeah, I know clubs and thank you. You know, 2000 and so Ok, the question was so so Yes, he was to get and no one\'s make sure in J. Thank you. You so Yes, The officer. Thank you. Now in in 10. Um all right, that concept improve your home. He was. We got that. SPEAKER 2 Can we talk about, like, how do you integrate governments? And then we got this one and and then this one, This is just from the AC, Just like so SPEAKER 1 we\'ve talked about that. So that I think, Yeah, yeah, it\'s the sort of time. Yeah, we\'ve got two. So we do. SPEAKER 2 So that should just kick off as soon as you start that it just takes a minute. Hello? Yep, yep. It\'s good to go. I\'ll just do a really quick intro. Yep, Yep. And I\'ve got a little a little picture here. Oh, go too far. There\'s nothing on there We go. OK, well, um, this should be a lot of fun. So let me just briefly introduce our, um, guest speaker. So, Dean patch, um, somebody who I\'ve known as long as I\'ve been involved in anything resembling corporate governance and pretty much my entire, um, professional career, and I would yes, a you know, a mentor and a, um somebody who\'s I think mentored not just me, but many, many, um, people working in this area. So Dean is an expert in corporate governance in advising investors. And I\'m talking about very, very large investors on how they should actually in the day to day vote their shares on these things that we\'ve been talking about on the board on pay. Um, and we\'ve had Dean. I think this is the fourth time that Dean has presented to this class, and it\'s always really, really fun. And he has a very, um, great way with words, uh, as well as, um, lots of knowledge. So, anyway, I\'ll leave it at that. And, um, please welcome Dean. SPEAKER 4 Thank you, Mike. Very happy to be here. I\'m competing against the rhythmic gymnastics tonight, and, uh, having sat up the back of the class, I\'m also competing with your doom scrolling. So very good luck to you over there who was, uh, playing a computer game as well. So hopefully I have your attention from now. Um, so a little bit about me, I\'ve been doing this bizarre job for 20 years now. Um, I\'m still learning. Every day I work for a company called ownership matters. Um, but prior to ownership matters, I worked for, uh, a small group that actually spun, I guess, out of the university of Melbourne. Um, and Academic year was interested in the field of corporate governance early in the Naughties. And we worked together for a while, and we were taken over by Institutional Shareholder Services, which is the global behemoth in proxy voting services. So what does proxy voting advisory businesses? What do they do? They help but not dictate large institutional investors how they ought to use their ownership rights at public company meetings for the benefit of the S savers who entrust their money to them. So we hopefully help by providing some expertise, some data, some, uh, manpower to analyse proposals and work out whether what management and the board is proposing at an AGM is in your interest. Because stop the press. Uh, sometimes there\'s misalignment. Sometimes management want to pay themselves without performance. They want to entrench themselves because they\'ve effectively given up. They\'ve run out of ideas, and the best idea they can think of is to keep their job in perpetuity. They might wanna run assets with at a with a return. That is unacceptable. Um, they might want to enjoy the power and status of their public company status. That is not necessarily in your interests as a shareholder that you might want to have these duds hanging around. And so what rights do you have? Some of them will be transacted in a company meeting. It could be a proposal to turf out the board and the CEO. Uh, there\'s a whole bunch of listing rules, which are the rules that govern the company public market exchange. So if you\'re owning a share on the A SX, for example, there\'ll be a set of rules that enfranchise shareholders to approve or disprove certain things. And so my job is to with a whole bunch of my very talented colleagues is to look at those proposals, analyse them in the context of things that we can see in the public and private domain and work out whether those proposals are in the interests of shareholders and then to give a report like a broker might give a report to buy or sell a stock. Yep, vote for that one becaus