Technology One (TNE) 2016 AGM Voting Intentions

Company/ASX Code : Technology One Limited (TNE)
Registry : Link Market Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
10.30am Brisbane Convention Centre
Merivale St
South Brisbane, Queensland
Monitor : Mr Mike Sackett
AGM Details / NoM : Wednesday 17th February, 2016

This company is monitored by Mr Mike Sackett and Mr Kim D'Arcy. The company monitors had a pre-AGM meeting with Executive Chairman Adrian Di Marco.

ASA Position
Not Applicable
Consideration of accounts and reports

TNE is Australia’s largest enterprise software company, based in Brisbane.  It supplies software to more than 1,000 Government and business organisations in Australia, NZ, SE Asia, the South Pacific and the UK in a market dominated by international suppliers such as Oracle and SAP. Current market capitalisation of $1.46 billion places it just inside the ASX150. That capitalisation grew by over 50% during the course of calendar year 2015 and is the major reason that ASA is monitoring TNE for the first time.

TNE has produced average total shareholder returns in excess of 40% per annum over the past one, three and five years, and 28% over the past 10 years – a record which few companies can match.

The dividend yield for 2015 is equivalent to 2.5% (fully franked) based on the 30 September 2015 share price, but only 1.9% on the current elevated price. Most of the key financial parameters have shown remarkably strong and stable growth over the past 15 years with barely a pause during the GFC.

TNE is run by a Board of five directors including company founder and Executive Chairman Adrian Di Marco and John Mactaggart who own 14% and 18% of issued shares respectively.

ASA Position
Resolution 1: Re-election of Mr Richard Anstey as a Director

Mr Anstey was appointed to the Board in December 2005. He has more than 30 years’ experience in the IT and telecommunications industries and in associated investment banking roles. Should he be re-elected, he will exceed 12 years of service as a director and thus would not be regarded by ASA as “independent”.

This subject was raised in a pre-AGM meeting with the Executive Chairman, who stressed that it was particularly important for the company to have long term directors. TNE operates in a business environment subject to significant cycles of around 10 years’ duration and TNE had found it invaluable to have directors who have weathered earlier cycles. It is also noted that the company is looking to appoint two additional independent directors, with the first likely to be a female director in 2016, which would increase the diversity on the board and move the board towards having a clear majority of independent directors.

We raised at the pre-AGM meeting that Mr Anstey has minimal “skin in the game” with only the mandatory minimum 7,500 shareholding. ASA expressed a preference for directors to have acquired after three years on the board a shareholding with a value equivalent to one year’s worth of directors’ fees. This is intended to more closely align the interests of directors and shareholders. For this to be achieved at current prices Mr Anstey’s shareholding would need to be around 16,000 shares. ASA has suggested that TNE may wish to consider increasing the mandatory minimum accordingly.

ASA Position
Resolution 2: Adoption of Remuneration Report

Although ASA did not monitor TNE before this year, the registry records show that there was a 24% proxy vote against the Remuneration Report at its February 2015 AGM, which was passed at the meeting on a show of hands. This resulted in criticism in the financial press of TNE along with eight other ASX300 companies.

A bone of contention in the earlier Remuneration Report appears to have been the extent to which executive staff benefitted from attractively priced options in reward for the achievement of financial targets. TNE appear to have taken this issue to heart. All resolutions at the February 2016 AGM will be the subject of polls. Furthermore over the past year, the remuneration framework has been substantially revised.

The key elements of the remuneration changes are as follows:

- Improved disclosure/information on remuneration structure;

- Remuneration structure/policies aligned to ASX200 best practice;

- Discontinuation of options for executive LTIs;

- Introduction of new Executive Performance Right plan for executive LTIs with mandatory performance hurdles;

- Introduction of a mandatory shareholding for directors;

- Engagement of an independent remuneration adviser to assist in development of new remuneration policies.

Remuneration objectives include, in addition to the usual attraction, retention and motivation of skilled executives, a specific objective to “align executives’ financial rewards with shareholder interests”.

TNE stress that their new remuneration structure is fundamentally different to that of their peer companies. Differences include lower initial fixed remuneration (33% v 65% for peer companies) together with higher STI weighting (33% v 15% for peers). Over time the TNE fixed element is planned to decline to 25% while STI increase to 50% at the expense of both the fixed element and LTI.

Initially LTIs are planned to comprise 33% of remuneration compared to 20% in the case of peers. Over time this is intended to decline to 25% which seems unfortunate and at odds with ASA’s voting guidelines. TNE have established three year LTI performance targets, contrary to ASA preference for 4 years plus. Both these deficiencies were noted by ASA in the pre-AGM meeting with the Executive Chairman. In addition, we believe that the hurdles applicable to the incentive schemes and the resulting vesting levels need to be better articulated in the report and we would expect to see improvements next year in this regard.

In conclusion, ASA plans to vote in favour of this resolution reflecting our view that the move to a share-based performance rights approach with rights earned subject to the achievement of key financial measures such as NPBT and licence fee growth represents a potentially significant improvement on past practices. KMP remuneration levels appear moderate compared to the company's peers. 

ASA Position
Resolution 3: Increase in non executive director’s fee pool

It is proposed to increase the director’s fee pool from $600,000 per annum (approved by shareholders at the 2009 AGM) to $1 million per annum. This increase seems unobjectionable in view of very large increase in size of the company over the past six years and the fact that it is proposed to increase board size from five to seven members. ASA notes that Board fees are reviewed on a triennial basis and supports this resolution.

The individuals involved in the preparation of this voting intention have no shareholding in this company.

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