Flying well but outstanding new board director has a full-time job

Company/ASX Code : Sydney Airport (SYD)
Registry : Computershare Services
Poll/Show of Hands : Poll
Webcast : No
Venue :
11.00am (Sydney time) at Ballroom 2, Four Seasons Hotel Sydney,
199 George Street,
Sydney, New South Wales 2000
Monitor : Ms Joyce Yong
AGM Details / NoM : Thursday 15th May, 2014

The AGM will comprise concurrent meetings of the two entities that make up ASX-listed Sydney Airport, namely Sydney Airport Limited (SAL) and Sydney Airport Trust 1 (SAT1). The Trust Company (Sydney Airport) Limited is the responsible entity of SAT1.

ASA Position
Not Applicable
Financial Statement and Reports

Sydney Airport’s prosperity depends on growth in the numbers of airlines and passengers using this important transport hub. It is constrained by government imposed caps on flights and operating hours. Last year was a record year in terms of passenger numbers and SYD managed to sign up Air India and Sichuan Airlines. It's no wonder that EBITDA has grown steadily at about 7.3% per year in spite of increases in operating costs over time. Car parking, retail and property revenues have all grown as follows: car parking 10.9%, retail over 5%, and property 10.8%. SYD is proud that it has delivered a total investor return of 19% over the year, due mainly to the strong share price growth. The company is also proud the Master Plan that was delivered last year has been accepted.

The ‘elephant in the room’ is the second (or ‘secondary’, as described in SYD’s annual report) airport. As the details are yet to be revealed, SYD is understandably unable to comment on whether it will take up the option to develop Badgerys Creek. At our pre-AGM meeting with Chairman Max Moore-Wilton, ASA informed him that, should SYD need to undertake an equity raising to finance a project such as developing Badgerys Creek, our preference would be a renounceable rights issue as the most equitable process for retail shareholders.

SYD’s report is complicated by the sale of their share of Brussels and Copenhagen Airports and their move to full ownership of Sydney Airport. While this has enabled them to simplify their structure, it means the Financial Highlights section of the Annual Report contains figures for calendar year 2012 and 2013 only. SYD has assured us this will change with time. It also means that all their directors appear to have only come on board in October 2013 when the restructure was completed. Their careers on the boards of past incarnations of SYD are hard to trace in this year’s annual report.

ASA Position
SAL Item 1: Remuneration Report

SYD’s Remuneration Report is relatively simple with fixed remuneration of base salary and statutory superannuation (FAR) and an at risk component of a short term cash incentive (STI).

FAR comprises 50% of the package and the STI the other 50% with 10% deferred for two years. STI is based on achieving objectives related to financial (30-50%), stakeholder engagement (10-20%), people management (10%) and specific individual objectives (20-50%) targets.

The financial target comprises EBITDA growth of 7.3%, shareholder distribution growth of 7.1% and shareholder value appreciation of 19%. The CEO and KMP achieved 100% of their STIs in 2013 and 95-100% in 2012.

ASA’s concerns with this report are that there are no long term incentives (LTIs) and the STI is payable in cash. Also the fact that the CEO and KMP managed to achieve 100% of the STI may mean they are not challenging enough. SYD regards LTIs as appropriate for strategic objectives and believes that LTIs are inappropriate for a company whose strategic options are constrained by government.

While we have some sympathy with this view, we can point to the introduction of LTIs in companies like Transurban (TCL), which share many of SYD’s characteristics. For better alignment with shareholder interests, ASA believes STIs should be awarded mainly in equity. SYD explained there are historical reasons for cash awards for the STIs, namely previous ownership by Macquarie Bank. As this no longer applies we hope SYD will consider awarding equity for the STIs.

ASA Position
SAL Item 2: Re-election of Stephen Ward

A New Zealander, Mr Ward was first appointed to Sydney Airport in 2011 and serves as chairman of the Nomination and Remuneration Committee. He is a commercial partner of Simpson Grierson, one of New Zealand’s largest law firms, and served on the firm’s board of management till 2012. He appears to have only one other commercial directorship and some not-for-profit engagements. As his tenure has not been lengthy, his workload acceptable and his attendance satisfactory, we recommend a vote for his re-election.

ASA Position
SAL Item 3: Election of Anne Sherry AO

Ms Sherry is an outstanding candidate, having worked at senior levels in the private and public sectors. Her experience would be highly complementary to Sydney Airport. However, she has a full-time job as CEO of Carnival Australia and a number of other directorships in commercial and not-for-profit areas. ASA does not support the appointment of a full-time senior executive of another company as a non-executive board director. We would like to hear from her how she intends to juggle her workload before we can recommend a vote for her election.

ASA Position
SAT Item 1: Re-election of Patrick Gourley

Mr Gourley has been a director of past incarnations of Sydney Airport since 2002. Taking the long-term view, he has exceeded the ASA guideline of 12 years as the maximum length of time that a director should serve on a board. However the principal activity of SAT1 (Sydney Airport Trust 1) or TCSAL (Trust Company of Sydney Airport L td) is to hold financial loan assets as the responsible entity (RE) of Sydney Airport. It is meant to be independent of SAL (Sydney Airport Ltd). In that capacity we concede it may be of value to have a director with a long corporate memory. We recommend a vote for his re-election.

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