CEOs, shareholders locked in the great payout battle

Shareholders and CEOs are vying for a share of the profit pie and the investors are winning at the cost of growth.

The battle between labour and capital is alive and well in Corporate Australia.

But it’s not just the bosses and the workers on the shop floor who are going at it: this one is playing out in the boardrooms near you as directors try to balance the competing demands of increasingly assertive shareholders and the chief executives vying for a share of the profit pie.

If anything, the profit season just past has highlighted that investors — the owners of companies — continue to have the upper hand in a low-growth environment. Dividend payouts remain high and capital expenditure low — a sure sign that investors are giving short shrift to management growth frolics.

Meanwhile, a new study of 2015 remuneration reports has found executive pay at its lowest in a decade thanks to investors asserting their voting power and boards hiring new CEOs for less than their predecessors.

Call it a coincidence, but there’s an interesting parallel in the restraint being shown in executive pay and the share of profits going to shareholders.

CEO pay has fallen consistently since the global financial crisis. Fixed pay peaked in 2009 at $2.09 million and has been steadily edging lower ever since, according to a report from the Australian Council of Superannuation Investors. It was down 3.3 per cent in 2014-15 to $1.86m on average for top 100 companies and by 4.6 per cent to $1.51m if the sample is extended to the top 200 companies.

The run-up in dividend payout ratios to a historic high of 81 per cent in 2015 — according to figures cited by the Reserve Bank — is a little more bumpy but roughly coincides the great moderation in executive pay. From a peak around 75 per cent in 2008, the payout ratio fell for the next three years through to 2011, bottoming below 60 per cent, a level not seen since 1997. But from there it rose rapidly recording the strongest growth in 2013 and 2015.

Research from Credit Suisse strategist Hasan Tevfik this week showed the dividend payout ratio fell, but by less than expected.

On the face of it that might appear a good thing: were companies holding back a little cash to invest more? Not exactly. Credit Suisse found that the ratio was only down from 77.2-74.6 per cent because while dividends fell a ­little the growth in profit was less than hoped for. As Deutsche Bank analyst Mark Wilson noted this week, the high payouts are not just the result of boards deciding they have nothing better to spend the money on.

Directors are responding to demands from their shareholders, who are exercising their power to demand maximum short-term payouts at a time when it is harder and more risky to get a decent return elsewhere.

Insurance giant IAG was among the companies to dance to the tune of institutional shareholders who threatened to vote against directors if they went ahead with a $1 billion expansion in China.

AMP released figures yesterday that highlight how one of Australia’s biggest investors is exercising its power across a market where it owns on average 5 per cent of each company’s stock.

It attended 272 company meetings in 2015-16 and voted against 9 per cent of all 1388 ­resolutions. But the “no” votes jumped to 14 per cent for resolutions on remuneration reports.

That’s one in seven companies that are failing to meet shareholder expectations on pay — and it’s not ratbag activists saying this, but one of Australia’s biggest investors. That seems a surprisingly high number five years on from the introduction of the “two-strikes’’ rule that allows shareholders a vote on rolling the board if a company records consecutive votes of more than 25 per cent against its annual pay report.

Those powers were hard won and pulled down the shutters on a period between 2001 and 2008 when CEO fixed pay rose a staggering 120 per cent.

ACSI chief executive Louise Davidson said the vote was the biggest single factor in the decline since of executive fixed pay. But it’s not the end of their concerns. The ACSI report also found just 7 per cent of CEOs missed their short-term bonus, with the rest of them averaging 76 per cent of the available maximum payout. In Davidson’s words, bonuses are being paid for CEOs just to do their job, rather than as reward for “exceptional’’ performance.

Based on performance for the year to date, they wouldn’t be paid anything like that, with profit growth across the market at 2.2 per cent and shares up 6.6 per cent in the past 12 months.

It seems clear, though, that payouts to shareholders are high, pay for executives is flat to falling and investment in growth is low.

In contrast, in the US and Britain, where investors don’t get a binding vote, CEO pay is double and triple, respectively, their Australian peers. Dividend payout ­ratios are also lower, averaging 48 per cent in the US and 60 per cent in Britain, against 67 per cent in Australia averaged over the 10 years to 2015.

There are no easy answers to kickstarting growth across the economy. But a good place to start might be with shareholders giving companies the room and incentives to pursue it.