Harvey Norman faced a 50 per cent vote against its remuneration report last year and is likely to face a spill vote at its annual general meeting next Wednesday. Additionally, prominent proxy advisers Ownership Matters and ISS are supporting a non-endorsed board candidate, Stephen Mayne.
Over the past few years, Harvey Norman shareholders have seen millions spent on investments out of line with the company’s home goods retail remit.
This includes a $34 million outlay for the Coomboona dairy farm in 2015, which had its value written down to zero three years later. In 2018 shareholders faced more than $74 million in impairments and trading losses from the investment.
The company’s other investments include a Bundaberg farmers’ market, mining camps, and a line of school supplies stores.
Ownership Matters points to these investments as a major reason for supporting a board spill, saying they have cost shareholders more than $150 million.
Since 2009, at least 20 per cent of shareholders have voted against the re-election of the company’s directors due to questions over their independence from founder and executive chairman Gerry Harvey (who is married to Ms Page). In the last 14 years, only one new director has been appointed to the board.
The majority of directors have been on the board for more than 15 years, and five of them are company executives, a higher number than any other ASX 100 company.
Mr Harvey is joined by Ms Page, and his son, Michael, on the board. A number of directors also have substantial related party transactions with the company.
Harvey Norman runs like a private family company dressed up to look like a public company.
The Australian Shareholders’ Association
Ms Page is the only female on the board, significantly fewer than other similarly sized companies.
The Australian Shareholders’ Association says board independence is “sorely needed” and claims Harvey Norman “runs like a private family company dressed up to look like a public company”.
Mr Harvey has rejected calls to improve the board’s independence, saying its directors have “skin in the game” and that broadly, independent directors “don’t have a clue what’s going on”.
Harvey Norman views its franchise network as independent third parties and does not count their sales as part of the financial results of the consolidated entity.
This is a key concern for its auditor and shareholders, who argue it reduces transparency over the company’s accounts.
In 2019, the company also recognised $74.88 million of “tactical support” expenses to franchisees, showing the business has some exposure to the liabilities of its franchisees.
The Australian Securities and Investments Commission (ASIC) investigated the issue in 2017 but gave the retailer a pass after it modified its reporting.
Sixty-two per cent of the retailer’s asset base consists of the company’s property portfolio, which is valued at about $3 billion.
However, unlike other real estate companies, Harvey Norman has not detailed the individual valuation of each property, arguing it would give competitors an unfair advantage.
Instead, the company re-values one-sixth of its portfolio every six months by external valuers, with the remaining properties valued by the company’s directors. It does not specify which of its properties are externally valued.
Poorly structured capital raisings
A total of $338 million has been raised by shareholders in the past two years, with the company running two heavily discounted 1-for-17 entitlement offers in order to both pay down debt and bolster shareholder dividends.
Everyone has the right to evaluate the company’s position and continue to hold, purchase or sell their shares accordingly.
Harvey Norman chief executive Katie Page
Smaller shareholders believe they are disadvantaged by the capital raises, partially due to the relatively small number of shares they would receive via the 1-for-17 ratio.
Retail shareholders also believe the capital raises are structured to benefit Mr Harvey and his associates, who control more than 50 per cent of the company.
Last year the ASX rapped the company’s board for breaching listing rules by implementing a top-up scheme that allowed shareholders to apply for any leftovers if they owned more than 300 shares. The board was required to donate the shares they obtained to charity.
Page defends compliance, calls for proxy scrutiny
In response to questions from The Age and The Sydney Morning Herald, Ms Page hit back at criticisms of Harvey Norman’s operations, defending its most recent financial report and saying the business “complies with the law”.
“In recent days, there has been much unsubstantiated conjecture in the media about the form and content of the 2019 financial report of Harvey Norman. Our critics have ignored the clear and transparent disclosures in the Harvey Norman financial statements and notes,” she said.
“None of the accusations are new, they have been publicly addressed in the past. Everyone has the right to evaluate the company’s position and continue to hold, purchase or sell their shares accordingly.”
The chief executive also supported the Australian Institute of Company Directors’ (AICD) call for the implementation of a US proposal which would see companies given early access to proxy advice in order to “identify errors” and respond to the recommendations.
“All reputable proxy advisers would believe that their reports and research would stand up to public scrutiny. Any reputable adviser would want to guarantee the accuracy of their statements, rather than make misleading assumptions either intentionally or unintentionally,” she said.
“You have to question the motives of those who insist upon advising our superannuation funds behind closed doors and without a guarantee that their advice and position is accurate.”
However, Ownership Matters director Dean Paatsch said Australian proxy firms were already under an appropriate level of scrutiny, with corporate watchdog ASIC recently completing a “root and branch” review of the sector, finding no issues.
“The suggestion that private advice between sophisticated investors and their advisers be sent for review and approval by companies that are the subject of that advice … is frankly hilarious,” he said.
“Our motive is singular: our clients will benefit if there is a change that removes the discount that Harvey Norman trades at because of its unusual governance.”
Dominic Powell writes about the retail industry for the Sydney Morning Herald and The Age.