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Grange Resources takes short approach to long-term incentives
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Grange Resources makes good money from its iron ore, but has shown a liking for luxury property development in recent times. Vincent Mundy
by
Peter Ker
They say a week is a long time in football, and at
controversial miner Grange Resources it seems a year is a long time in executive pay.
Grange's remuneration policy has raised eyebrows at proxy advice firms for the fact management's "long-term" performance is measured over just 12 months.
The abnormally short performance period is one of several governance issues that are expected to be raised at the $214 million iron ore miner's annual meeting of shareholders on Wednesday. A 25 per cent pay rise for chief executive Honglin Zhao's is also expected to spur debate.
As proxy adviser CGI Glass Lewis highlighted in a note to clients, the 12-month performance period attached to Grange's "long-term" incentive plan (LTIP) was dramatically shorter than accepted best practice, and was also paid in cash rather than equity.
"Best practice advocates a minimum performance period of three years for long-term incentive plans. The company has not provided a case for the short performance period," said CGI.
"This emphasis on short-term performance criteria and the apparent imbalance between short-term and long-term incentives not only influences executive behaviour, but also relates to the company's risk profile."
Mines are inherently long-term
Guerdon Associates director Michael Robinson agreed three years was the most common performance period for Australian companies' long-term incentive plans.
Speaking generally (and not on Grange specifically), Mr Robinson said the appropriate performance period depended on the nature of the company in question, with executives running long-term operations like mines typically being judged on longer performance periods.
"For example if you are developing a resources site with a mine life of 30 years or you are building an oil rig that has got a life of 20 years, they are big decisions and you need to be held to account for several years for that," he said.
"But if you are a fashion retailer, for example, where your lifeblood depends on your buying decision for a six-month period, then your long-term incentive plan would have a shorter performance period or you would be on all short-term incentives."
Grange declined an opportunity to explain why 12 months was a sufficient long-term period for judging executive pay at a company which operates a 52-year-old mine and expects to continue operating it beyond 2030.
Director independence questioned
CGI also raised "serious concerns" about the level of independence on the Grange board, with the proxy adviser judging three of the five directors to be either appointed or affiliated with Shagang, the Chinese steel mill that owns 48.8 per cent of Grange according to Bloomberg data.
"We believe that this raises serious concerns about the objectivity of the board and its ability to perform its proper oversight role," said CGI.
The query over board independence resonated with several minority shareholders, who believe the company is too influenced by Shagang and two other large shareholders, who collectively speak for about 60 per cent of the company.
Shagang and those two other shareholders have previously been deemed associates under the Corporations Act.
Concerns about Shagang's influence on the company boiled over earlier this year when
Grange announced plans to complement its Tasmanian iron ore export business with a sudden move into luxury property development.
The shock diversification, which saw Grange and a developer buy an apartment block in the Melbourne suburb of Prahran with a view to renovating it, went ahead without being voted on by
shareholders.
Some minority shareholders believe the lack of transparency and concerns over the quality of management have depressed Grange shares; the company's $214 million market capitalisation is only slightly higher than the $200 million of cash and receivables the company reported on March 31.
The meagre premium to cash and receivables exists despite the fact Grange is on track to generate profits in excess of $60 million from its Tasmanian iron ore mine this year.
Grange disagreed with CGI's assessment that only two of the five directors were independent.
"Grange Resources board currently has five directors, four of them are non-executive directors and three of them are independent non-executive directors which is in compliance of ASX guidelines," said a company spokesman.
Proxies still in favour
Despite the concerns it raised in its note, CGI recommended shareholders vote in favour of the remuneration report and the three other motions set to be heard at this week's meeting in Burnie. Fellow proxy adviser ISS Governance also recommended shareholders support all motions.
The 25 per cent increase in Mr Zhao's fixed pay, and the lack of explanation for the sharp rise, also caught CGI's attention, but the proxy adviser added that his overall pay remained "moderate" after the pay rise, meaning it was therefore not a major issue for shareholders.
Grange said Mr Zhao was "deserving of recognition".
"Mr Zhao received an increase in his salary to bring him closer with industry standards, although his remuneration is still well below previous managing director salaries and sits in the mid to third quartile range for like-sized companies," said the Grange spokesman.
"His performance leading our company through the iron ore downturn far exceeded the performance of most mid-tier companies and he is deserving of recognition for this fact alone."
(20min delay)
