Amid the panic spreading through Westpac’s executive floors this week, never mind Friday’s emergency board meeting, is the little matter of what on earth to tell shareholders at the annual meeting on Tuesday fortnight.
The chairman should start by announcing his resignation.
After 11 years on the board, eight of them as chairman, Lindsay Maxsted’s position is untenable.
Apologies have been a common feature of bank responses to various Hayne’s royal commission disclosures, along with less-forthright mutterings of about responsibility.
For all the pile-on suggesting CEO Brian Hartzer’s head must roll, it’s the chairman who has ultimate responsibility for the bank.
The foreign transfers scandal enveloping Westpac means another “sorry” won’t be enough.
Last year’s Westpac AGM brought a 64 per cent vote against the remuneration report – a “first strike” that means the entire board would be spilled if more than 25 per cent of shareholders vote against it on December 12.
The board and senior executives subsequently took pay cuts.
Mr Hartzer beat the rush by volunteering to forgo his short-term bonus before the board decided he wouldn’t get one anyway.
The final dividend – dividends are what Westpac shareholders care about most – was cut by 15 per cent from 94 cents a share to 80 cents. The prospect of a billion-dollar fine means a further dividend cut is on the cards.
A lot can happen between the chairman penning his AGM notice message to shareholders and the meeting taking place.
Talking of the royal commission, customer remediation and operating difficulties over the past year, Mr Maxsted wrote:
“Your board is very mindful of the impact of these challenges on shareholders, including from a reduction in the dividend, and so I thank you for your ongoing support.”
I wouldn’t bet on that support for the board being ongoing any longer.
This year’s remuneration report is more modest but still generous by the standards of normal human beings.
After last year’s outrage over over-the-top bonuses, Mr Maxsted met major institutional shareholders and proxy advisers to find something more acceptable.
For example, CEO Hartzer was awarded 227,338 potential shares last year as his long-term variable remuneration (LVTR) bonus incentive.
This year’s proposal is for 120,020 shares.
But there’s a telling kicker in the remuneration report’s fine print about the LVTR – the shares vest after four years only if a not-unreasonable hurdle is met.
To receive half of the potential shares, Westpac’s total shareholder return (TSR) has to equal the average of 10 other financial services companies. To get the other half, Westpac’s TSR has to beat the average for 5 per cent compound over the four years.
The notice of meeting records that the hurdles for the 2016 CEO and group executives LTVRs were not met and thus the awards lapsed – for the fourth consecutive year.
Which is another way of saying Westpac has been consistently underperforming its peers. The looming penalties from the Austrac scandal are likely to continue the tradition.
Aside from chairman Maxsted, another director might consider himself lucky to still be on the board and two other directors up for re-election could be doing a little soul-searching about responsibility as well.
Craig Dunn has been a Westpac director since 2015. He was re-elected last year.
Mr Dunn was AMP’s CEO from 2008-2013 and before that ran the AMP business that regulators have had the most trouble with – he has had plenty of experience with a big finance company serving customers and shareholders badly.
Up for re-election is Ewen Crouch, a lawyer who has been on the board for nearly seven years and chairs its risk and compliance committee. He’s been there while all the bad stuff has been going down and chaired the committee that’s supposed to be on top of the biggest problem.
Also up for re-election is Peter Marrlott, former ANZ chief financial officer, on the board since June 2013 and chairman of the audit committee. Audit, in the broadest sense, doesn’t seem to have been going all that well.
I am, of course, not suggesting any of these men knew bad things were happening on their watch and did nothing. However, there are questions of whether they should have known and what responsibility they should bear for not knowing.
As I wrote early in the royal commission hearings last year, the supposed quality, competence and role of Australian capitalism’s blue-blood directors’ club has been blown apart by the financial sectors’ failings.
If CEO Hartzer is to be held responsible for the Austrac failings, chairman Maxsted should be held responsible for Mr Hartzer.
Beyond the fate of directors, the immediate question for Westpac shareholders is whither the dividend, as in “where is it heading”, rather than “withering” – unless it’s both.
In April in this space, I wondered if bank shares were priced for armageddon or were the buy of the year.
Using NAB as the prime example, as it then had a whopping 11.27 per cent pre-tax dividend yield on a $25.11 share price, I suggested a lower dividend was already priced in and would still offer a very attractive yield.
In February, Morgan Stanley analysts proved prescient by correctly forecasting NAB would cut its dividend by 16 per cent. The resulting franked-up dividend of $2.37 still represented a pre-tax yield of 9.44 per cent on a share purchased for $25.11.
As it has turned out, NAB shares were trading around $26.30 as I wrote this, after the NAB’s own embarrassing admission about junk insurance. They were above $29 two weeks ago.
For Westpac – and the other banks – the doubt is over whether dividends will need to be cut further as net interest margins continue to tighten and compliance costs rise, never mind that looming billion-dollar fine.
The analysts are still weighing their bets, but for shareholders who don’t need to worry about share price gyrations and are reliant on dividend income, there is an element of entrapment: What else are they to do with their money?
Even with another trimming, the yields are very attractive. And the asset price inflation caused by super-weak monetary policy means the share price risk should be somewhat cushioned.
Yes, there is risk – but otherwise there wouldn’t be the reward. Such is capitalism.
An immediate decision for Westpac shareholders is whether to take part in the bank’s current share purchase plan.
Shares are being offered at the lower of the $25.32 institutions paid for $2 billion worth or two per cent below the average share price over the five days up to December 2.
It’s not an easy decision.
Disclosure: The Pascoe family super fund holds Westpac shares. For what the very small vote is worth, the fund is voting against the re-election of Mr Crouch and Mr Marrlott. Re the purchase plan, the fund is content with its level of exposure and won’t take part.
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