Heartland and the proxy company verdict
There was a reasonably sizeable vote against re-electing Heartland Group's chair, Greg Tomlinson, and an even larger vote against expanding the directors' fee pool by 50%.
Since proxy advisory company Institutional Shareholder Services (ISS) recommended qualified votes in favour of both resolutions at last week's annual shareholders' meeting, I can only assume that rival firm Glass Lewis recommended against them.
I was given a copy of the ISS report, but I haven't sighted the Glass Lewis one.
As I wrote last week, these two firms have a global duopoly, which I regard as a dangerous degree of influence.
It's especially dangerous because of the difficulty non-clients have in accessing their reports.
Nearly 16 million shares were voted against Tomlinson, but he was still re-elected with more than 90% of shares voted being in his favour, and 23.7 million shares were voted against the fee increase, which passed with nearly 87% of shares voted in favour.
I can only agree with ISS' reasoning behind its recommendation on Tomlinson's re-election.
Tomlinson, who owned 9.76% of Heartland at June 30, became chair in February this year when founding director Geoff Ricketts became ill – Ricketts died in March.
Reason to object
Tomlinson has been on the current board since 2018 but had also been on the Heartland Bank board before the reorganisation in 2018, having been first appointed in the 2013 financial year (ISS said he'd served for 13 years, clearly an error).
But it wasn't the fact that he was a major shareholder that ISS objected to – readers may have seen in last week's column that was the reason for Glass Lewis recommending a vote against re-electing Skellerup director David Cushing – the Cushing family company, H & G, owned 4.27% at Aug 3.
But ISS' problem with Heartland was that he chairs the remuneration committee “and there is a persistent problematic pay practice observed.”
That problem is with the disclosure of managing director Jeff Greenslade's short-term incentive payments (STI).
Greenslade received a base salary of $1,089,200, unchanged from the previous year, $10,800 in benefits – namely his car – and an STI of $990,000, up from $975,000 the previous year.
The annual report says the STI is up to 100% of base salary and based on the achievement of financial and non-financial performance expectations, and that Greenslade had achieved 90% of these targets.
The missing link is that it didn't say what those expectations are.
Entirely discretionary
The annual report further noted that STI payments “are entirely discretionary and entitlement is not guaranteed, even if performance expectations have been met or exceeded.”
ISS said Heartland's failure to disclose what Greenslade's targets are “is inconsistent with better corporate governance disclosure practices and the expectations of many shareholders.
“Disclosure of the rationale and guiding principles for bonuses is expected as a matter of good corporate governance to allow shareholders to independently assess the rigor of performance against targets and bonuses, and to ensure that bonuses to decision-makers are aligned with shareholder interests.”
Asking for better disclosure on this matter is something I wholeheartedly agree with.
I would note that Greenslade has led the company since its Marac days and I'd find it difficult to quarrel with the notion that he obviously has added a great deal of value during his tenure.
The question of the increase in the directors' fee pool is less clear-cut.
Of the additional NZ$800,000, or A$800,000, whichever is the greater, increase that Heartland sought, 68.8%, or A$550,000, was earmarked for paying directors of Australia-based Challenger Bank, should Heartland successfully close that purchase.
So, excluding Challenger, the increase was nearly 16%, nowhere near 50%.
Settlement hopes
Greenslade told the AGM that he hopes to receive in-principle regulatory approval on Challenger before Christmas, or early in 2024.
He noted that the regulatory process of a NZ bank buying an Australian bank “is a novel process on both sides of the Tasman. There have been a range of technical issues to resolve across two jurisdictions.”
The history to date is of Australian banks owning NZ subsidiaries, not the other way around.
Essentially, Heartland plans to fold its existing Australian reverse mortgages and livestock financing operations into Challenger as part of its plan to replicate its existing Heartland Bank businesses in NZ in Australia.
Greenslade specifically mentioned the opportunities in Australia for motor vehicle and asset finance.
The motor finance business' lending in NZ grew 13.5% to $1.57 billion in the year ended June, despite new and used car sales being down 6.2% while asset lending here rose 7.8% to $682.8 million.
Heartland's notice of meeting said that if for some reason the Challenger acquisition fails, that the A$550,000 in additional directors' fees wouldn't be spent.
“However, should the acquisition proceed, Heartland will need to be in a position to be able to commence paying such fees immediately on completion in order to secure the necessary high calibre of directors,” the notice said.
Regulatory requirements
It's not as if Heartland has any choice about that; our regulator, the Reserve Bank, demands that the big four banks, all Australian-owned, have stand-alone NZ subsidiaries with their own boards.
Why would Australia's banking regulator, the Australian Prudential Regulation Authority (APRA) agree to anything less?
Heartland plans to pay the Challenger chair A$320,000 and other non-executive directors A$155,000 with the chairs of the audit and risk committees being paid an additional A$25,000.
The rest of the increased fee pool will be used to increase Heartland chair's fee from $150,000 to $175,000, a 16.7% increase, and to increase the remuneration of other directors by $20,000 to $120,000, a 20% increase.
It will also increase the additional fees paid to the chairs of four board committees by $5,000 to $20,000.
The notice said that the company hadn't changed its fee allocations since June 30, 2018, and that between then and June this year, the Consumers Price Index had risen 21.3%.
“This inflation has been accompanied by increasing demands on directors generally, as well as increased regulation of businesses in the banking and financial services industry.
“The workload and expectations for directors has also increased significantly over this time.”
It also noted Heartland's significant growth – net profit in the year ended June was $95.9 million while the 2018 net profit was $67.5 million.
The notice included an independent report by accounting firm EY supporting the increases.
An “excessive” increase?
ISS called the fee increase “excessive at 50%” but still recommended a vote in favour.
“The proposed increase in the aggregate pool is not unreasonable or inconsistent with the company group's financial performance over the last five financial years,” it said.
Moreover, the current fees on average were “below the average of NZX market cap peers in the $900 million to $1.5 billion range.”
Heartland shares closed Monday at $1.65, putting its market capitalisation at $1.18 billion.
Some people might not like Heartland's business model, which I've heard criticised for being more of a finance company than a bank – indeed, its origins were as a finance company.
But the critics could not deny that it has been a success story from the time it was formed in late 2010 from the merger of Marac Finance and two building societies.
Following a “best or only” strategy, Heartland has chosen to operate in parts of the market where the major banks, or even its smaller competitors, don’t play.
It has forged a unique business in the New Zealand market and, in more recent years, has been at the vanguard of technologically-driven change, introducing automated digital lending platforms for both small business loans and mainstream mortgages.
It is also the biggest player in reverse mortgages on both sides of the Tasman and a major provider of agri stock finance in both countries.
Given the prospect of the Challenger purchase, I disagree that the increase in fees was “excessive.” Big, yes, but not excessive, given it will have to pay a whole new set of directors.
This is a company with a strong track record, which has mostly rewarded its investors and appears likely to continue to do so.
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