Wesfarmers (WES) 2015 AGM Voting Intentions

Company/ASX Code : Wesfarmers Limited (WES)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
1pm Perth Convention and Exhibition Centre
Mounts Bay Road
Perth, Western Australia
Monitor : Mr John Campbell
AGM Details / NoM : Thursday 12th November, 2015

This company is monitored by Mr John Campbell and Mr Geoff Field.

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

WES describe their result as ‘very strong’ with a net profit after tax of $2,440 million.  Last year’s NPAT of $2,689 million was bolstered by discontinued operations and non-trading items (NTIs) contributing $436 million, mainly being profits from and on sale of their insurance operations in 2014, offset to an extent by impairment of Target goodwill together with a few other smaller items of a similar nature.  Earnings per share were 216.1 cents in 2015, a 9.9% increase on adjusted 2014 EPS (from continuing operations and excluding NTIs) of 196.6 cents, being actual EPS of 234.6 cents less ‘discontinued operations and non-trading’ items. On a similar basis, ROE improved from 9.4% to 9.8%.  

WES retail businesses had generally good results, with Bunnings and Coles leading the contribution to group earnings with earnings growth of 11.1% and 6.6% respectively. Kmart and Officeworks achieved double-digit earnings growth.  Target and the Chemicals, Energy and Fertilisers business achieved small improvements in earnings whilst coal operations and the industrial and safety business both went backwards in earnings.

Cash flow was also strong with $3,791 million generated from operations compared to $3,226 million in 2014.  Net debt was temporarily reduced at the end of 2014 by the receipt of the proceeds from the sale of the insurance division and was only 13.1% of shareholders’ equity.  It has risen in 2015 to 25.1% but is still only $6,209 million compared to total assets of $40,402 million.  Corporate overheads increased 9.7% on 2014.

The total dividend for 2015 was 200 cents per share, the same in total as 2014, but 2014 included a special centenary dividend of 10 cents per share to celebrate Wesfarmers foundation in 1914 and represented a partial payment of proceeds from divestments and the distribution of franking credits to shareholders in a timely manner.  By comparison, the 2013 dividend was only 180 cents per share.  Shareholders approved capital management distributions of $1 and 50 cents per share at the 2014 and 2013 AGMs respectively.  No such return is proposed at this AGM.

WES announced in June that the chairman Dr Bob Every, AO, would retire at the end of the 2015 AGM and be replaced Mr Michael Chaney, AO, a former managing director of Wesfarmers from 1992 to 2005, having been finance director for a period prior to that.  Mr Chaney is currently Chairman of Woodside Petroleum and National Australia Bank, and has confirmed that he is retiring from the National Australia Bank board at its AGM in December.

ASA Position
Items 2(a), (b) and (c): Re-election of Mr Paul Bassat, Mr James Graham and Ms Diane Smith-Gander as Directors

Each of these directors is retiring by rotation and was supported by ASA at their previous election.  Mr Bassat has been a director since 2012 and Ms Smith-Gander since 2009.  Both are well qualified to be directors and the ASA is satisfied with their status as independent non-executive directors.  Mr Graham has been a director since 1998 which would normally lead the ASA to consider voting against his re-election on the grounds that he would be deemed to have lost his independence, but he is not an independent director and has been involved in the transition of Wesfarmers from an unlisted co-operative in the 1970s to its current status in the ASX top 10.  He is also well qualified to be a director.  There is a substantial majority of independent directors so any perception of a lack of independence is no barrier to our supporting his re-election.

ASA Position
Item 2(d): Election of Mr Michael Chaney, AO, as a Director

Mr Chaney was re-appointed a director in June 2015 and as noted above is a former executive director who left the company in 2005 to become a professional director.  Due to the length of time since his previous involvement with Wesfarmers, we are supportive of his status as the intended independent non-executive chairman of WES.  He is well qualified to be a director and is an experienced chairman.    

ASA Position
Item 3: Increase to aggregate fee pool for non-executive directors

This resolution seeks to increase the non-executive director (NED) fee pool from $3.3 million to $3.6 million. The pool was last increased at the 2012 annual meeting.  Directors’ fee increases since that time have been nil in 2013, 3.2% in 2014 and 4% effective 1 Jan 2015.  Fees will be reviewed again in January 2016.  It was intended that the previous pool increase accommodate a temporary increase in the number of NEDs to allow for board renewal.  It appears that the need for this may now be over, but in the meantime a change in ASX rules now requires fees paid to directors of divisional boards to be included in the pool cap.  The proposed increase seems reasonable in these circumstances.

ASA Position
Item 4: Adoption of Remuneration Report

The WES remuneration report is one of the most readable and readily understandable reports these monitors have seen.  It is only 14 pages compared to BHP’s 32 pages. The features of the WES remuneration structure generally comply with ASA guidelines:

•    4 year performance appraisal period for the long-term incentive (LTI), 

•    2 robust relative hurdles for the LTI - ROE and TSR, 

•    Short term incentives (STI) measurement based in part on NPAT, in part on divisional EBIT, and not on ‘underlying earnings’

•    allocation of share-based payments rights calculated on market value of WES shares and not discounted, 

•    No dividend rights until shares are vested.  

The level of base salaries is still high.  Mr Goyder’s fixed salary at $3.6 million has been frozen since 2011 so is no longer so exceptional given his tenure of office since 2005.  Mr Bowen’s fixed element is about $1.8 million and the other divisional heads range down from about that to $1 million. Accounting standards apportion the fair value of share-based payments over the period during which they are earned.  Measured on that basis, total disclosed remuneration was about 270% of fixed pay.  STI and LTI are individually less than fixed pay in all instances and a high proportion of STI is share based.

Our concerns with WES remuneration structure are relatively minor:

•    we would like to see disclosure of ‘actual’ take-home pay, 

•    for the CEO, we would prefer to see a greater proportion of pay dependent on long term strategic hurdles, and a lesser proportion on short term ones,

•    we prefer to see a compulsory holding lock over a proportion of shares for a period after vesting, and

•    we believe that LTI incentives should not be awarded if TSR has been negative, even if WES’ relative performance to other companies would permit an award.

Overall we see the positives outweighing the negatives in relation to their remuneration structure and will vote in favour of the report.

ASA Position
Items 5 and 6: Grant of performance rights to Managing Director Richard Goyder and Finance Director Terry Bowen

The performance rights proposed to be granted are for the long term incentive plan under which Mr Goyder may receive up to 100% of his fixed pay based upon the extent to which 4-year performance hurdles are achieved, whereas Mr Bowen may receive up to 160% of his fixed pay on the same conditions. The number of share rights allocated is calculated by dividing the limit based on fixed pay by the average market price of WES shares at the time of allocation in August/September. We have outlined our overall support of the remuneration plan under item 4 and consistent therewith intend to vote proxies in favour of the grant of these share rights.

The individuals (or their associates) involved in the preparation of this voting intention have shareholdings in this company. 

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