Public

CIMIC Group (CIM) 2017 AGM Voting Intentions

Company/ASX Code : CIMIC Group Limited (CIM)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
Sofitel Sydney Wentworth Hotel Sydney, New South Wales
Monitor : Mr Roger Ashley
AGM Details / NoM : Thursday 13th April, 2017

Good results; less good governance

The company monitor had a pre-AGM meeting with Chairman Marcelino Fernandez Verdes.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

Financial performance

The company has undergone significant change since the ACS Group acquired HOCHTIEF, the majority shareholder of Leighton Holdings (as CIMIC was previously known) but It would appear that the company is now settling in to something like a more established organisation.

Revenues were down compared with the previous year but this reflects the completion of a number of large, primarily LNG-related projects and transition to urban infrastructure projects. CIMIC’s order book seems healthy and the ASA has been assured that the company’s future is on a sound footing.

Key events

CIMIC completed a takeover of UGL in 2016, complementing and enhancing CIMIC’s existing operations and integration of UGL is currently in progress. An offer was launched to acquire the remaining equity (79%) in Macmahon Holdings, a mining and engineering company, not already held by CIMIC. This offer was rejected by the Board of MacMahon and the final impact on the CIMIC holding is yet to be determined.

A share buy-back was concluded in 2016 and a new buy-back under the same rules (that 10% of fully paid shares may be purchased over a twelve month period without shareholder approval) was commenced in December 2016. The CIMIC Chairman assured ASA that any buy-backs initiated by the company were solely based on optimising the use of capital. The effect of this latest buy-back would potentially increase HOCHTIEF’s equity in CIMIC by up to 10% over the next year. The antitheses of this would be a significant dilution of minority shareholdings.

ASA focus issues

As noted below, in relation to Board appointments, CIMIC is effectively a subsidiary of a foreign company. The ASA representative in the meeting with the Chairman was informed that the most important objective of the company was to deliver a successful and profitable organisation from which shareholders’ and other stakeholders would benefit.

ASA’s policies relating to good governance were seen to be secondary, indeed irrelevant and unnecessary, to the goal of operational efficiency. The company will meet mandatory reporting requirements but anything over and above that required by law is unlikely to be forthcoming.

There is, for example no table of actual remuneration, no Board skills matrix, no five year financial history and KMP remuneration detail is limited to three persons: the previous CEO (now Chairman), the CEO and the CFO. The number of females on the Board (none), in the workforce and in senior management is at its lowest level in five years although the ASA was assured there were policies in place to reverse this trend and the numbers were a reflection of the difficulty of attracting women into the construction industry.

The remuneration policies pursued by the company are so non-compliant with ASA guidelines that an “against” vote needs little thought.

Summary



No actual remuneration table is included in the Annual Report and the ASA does not expect such a table to be included in the future unless it is legally mandated. The CEO’s remuneration is shown as $3.2 million for 2017 comprising predominantly base salary and short-term incentives. This equates to 39 times Australian Full time Adult Average Weekly Total Earnings (based on November 2016 data from the Australian Bureau of Statistics).


ASA Position
Against
Item 2: Remuneration Report

The short term incentive (STI) is payable solely in cash. The CFO received 100% of the maximum STI (150% of target) and the CEO 96.7% of maximum STI (145% of target) including a safety objective. While the ASA representative was assured that overall safety had improved, there were three fatalities recorded during the year. Any STI determined is subject to adjustment “on the recommendation of the Executive Chairman”.

The long term incentive scheme (LTI) that is on foot is a share option scheme. The comments made in last year’s Voting Intentions are succinct and relevant: “the LTI awarded on 29 October 2015 is in the form of options at a strike price of $27.53 vesting in 2 years but subject to no more than 40% be exercised per year over the following 3 year period.  The executives will then basically receive the upside of the share price although it is structured that they will need to buy the shares at the strike price. The explanation that these options have a built in performance hurdle is quite absurd, the hurdle is an increase in the share price which is quite achievable especially as the company is currently buying back 10% shares – no comparatives to other companies, no reference to earnings per share, if the market goes up as a whole, the share price will increase.”

No LTI is proposed in 2017. It should be noted however that the Board approved “Special Bonuses” outside the STI and LTI schemes of $3 million and $225,000 respectively to the previous CEO (now Chairman) and CFO.


ASA Position
For
Item 3.1: Re-election of Marcelino Fernandez Verdes

There are nine directors listed in the annual report. Of these, the majority have been, or are, associated with the holding companies of CIMIC as employees or directors. The board of CIMIC cannot therefore be considered independent.

The ASA strongly prefers that boards have a majority of independent directors and have an independent Chairman, but accepts that large shareholders would generally have the ability to appoint nominee directors to the board proportional to their holdings. As HOCHTIEF holds approximately 73% of CIMIC’s shares, the reality is that there is no likelihood of an independent board and we will reluctantly vote in favour of this and the following resolution.

There are no female directors on the board.

Mr Fernandez Verdes was CEO of the company from 2012 to 2014 following which he was appointed a director. He has been an employee and/or director of ACS entities (the group that controls HOCHTIEF) for more than twenty years.


ASA Position
For
Item 3.2: Re-election of Jose-Luis del Valle Perez

Mr del Valle Perez was appointed as a Director of ACS in 1989 and is currently a director and General Secretary of the ACS Group and is also the secretary and/or director of its main subsidiaries and affiliates.

Mr del Valle Perez is one of a majority of CIMIC Directors that are nominees of the majority shareholder and, as noted above, our vote in favour of this resolution reflects the reality that the board is, and will remain, non-independent.


ASA Position
For
Item 4: Adoption of new constitution

The current constitution was adopted in 1998 and the board believes that it needs to be updated to take into account changes to the Corporations Act and ASX listing rules. While there are a few clauses that the ASA consider could be improved upon, there are no items of sufficient significance to warrant a vote against.

The ASA is surprised at the detail surrounding conduct at general meetings in the new constitution. New clauses, for example, allow the Chairman to move meeting attendees to a separate room if the Chairman “considers cannot be seated in the main meeting room.” Even if those in a separate room “are not able to participate in the conduct of the meeting, the meeting will nevertheless be treated as validly held in the main room.”



The individual involved in the preparation of this voting intention has a direct and indirect shareholding in this company. 


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