CBA’s ‘top-up’ for Ian Narev raises governance issues

CBA’s decision to “top up” chief Ian Narev’s pay to compensate for its capital raising has raised eyebrows.

CBA chief executive Ian Narev has been given new reward rights so he is not disadvantaged by the raising.

Commonwealth Bank’s decision to “top up” chief Ian Narev’s pay to compensate for its recent capital raising has raised eyebrows among governance experts, claiming the board may have upset shareholders for a small sum of money.

Ahead of the bank’s annual general meeting this month, CBA won endorsement from global proxy advisory firms ISS and CGI Glass Lewis for all proposals, including the remuneration report for senior executives and a plan to increase the pay of non-executive directors.

But the governance houses took issue with a handful of finer details, including granting Mr Narev with 444 additional reward rights so he is not disadvantaged by the bank’s recent $5.1 billion capital raising. They are in addition to 54,049 reward rights to be granted to Mr Narev, worth up to $4.64 million, as part of his long-term incentive arrangements.

This comes at a sensitive time for the banks whose investors have suffered share price declines and customers have been hit with higher mortgage rates.

“A vote for the issue of rights to Ian Narev is warranted only on the basis that the proposed 444 new rights at approximately $75 a share to a total of approximately $33,000 over the three long-term incentive awards/years is considered insignificant, and still subject to performance criteria being met,” ISS’s pre-AGM report to clients said.

“Nevertheless, shareholders may still be concerned with a proposition in this proposal that the award of extra rights is necessary to compensate the CEO for a loss in his LTI following the capital raising, especially where a greater amount of rights are awarded based on ‘fair value’.”

CGI Glass Lewis said it would “continue to closely monitor” the bank’s financial planning scandal, including potentially altering its support of “directors who were on the board at the time the poor advice was being given should future evidence implicate them of wrongdoing”.

Late last month, a former assessor for CBA’s major customer remediation program gave damning evidence to a Senate committee that the review was a “joke” and designed to minimise the cost to the bank of bad advice.

While CBA has rejected the claims, they highlight the ongoing scrutiny on the bank and cost to shareholders. “The financial planning scandal has proved to be a lingering problem for the company … (and) there is a degree of scepticism about the extent to which the company has truly put its problems behind it,” CGI Glass Lewis said in its report, published prior to the recent Senate hearing.

Up for re-election at the AGM, to be held at the Sydney Cricket Ground, is chairman David Turner and Harrison Young.

Mr Turner has been a director since 2006 before taking the chair in February 2010, putting him in the sights of CGI Glass Lewis given CBA’s remediation program runs for clients of its financial planning arm from 2003-2012.

In August, Mr Turner signed off on the bank’s $5.1bn equity raising to meet rising capital requirements in the bank’s mortgage book. The deal was done through a rights issue and priced at $71.50, a 10.5 per cent discount to the last dividend-adjusted price of $79.90.

On Friday, the stock closed at $76.59 amid mixed reaction to its $2.4bn first quarter profit.

Under CBA’s so-called “Group Leadership Reward Plan”, the board can adjust the number of reward rights to ensure there is “no advantage or disadvantage” from a rights issue.

To avoid incentive “misalignment” for management, the board opted to grant additional reward rights, which the bank said was not uncommon after rights issues and its calculation method had been backed by “independent advice”.

Yet, ISS said the decision raised questions for shareholders to consider. “On the basis that the CEO’s historically realisable LTI exceeds the 100 per cent of his fixed remuneration, then it should be questioned what loss is suffered in the CEO’s LTI to require this immaterial but nevertheless questionable ‘top-up’ in the LTI award.”

While CBA and Westpac are tipped to outperform rivals ANZ and NAB in the near term, Goldman Sachs has held its sell call on CBA.

“In light of the building ROE headwind we foresee for CBA given its greater mix of low-cost funding and the fact our target price imputes total shareholder return of just 5.6 per cent over the next 12 months, we maintain our sell recommendation,” said Goldman’s Andrew Lyons. He has a $75.79 target price.