Principle 2: Structure the board to add value
1. Composition
2. Appointment to the boards
ASX has granted listing rule waivers in respect of the rights attaching to the A and B Special Shares (described below) to facilitate Macquarie appointed directors to the Bermudian company in the same way as they are appointed by Macquarie to the responsible entity board (which is a wholly owned subsidiary of Macquarie Group Limited). These director appointment rights were put in place by Macquarie with a view to promoting consistency of management across the stapled entities. However in October 2008, Macquarie announced undertakings to exercise its director appointment rights in respect of MIIML and MIGIL in accordance with a MIG security holder vote and subject to certain conditions. These undertakings will apply in respect of director appointments at the 2009 Annual General Meeting and continue for a minimum three years. The director nomination form by which security holders can put forward candidates for election under these new arrangements is on the MIG website. The form sets out the nomination criteria which are discussed below.
Details of the appointment arrangements are set out below.
MIIML
The following board composition and membership criteria have been adopted by the board in consultation with Macquarie Group Limited (MGL):
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The board is to comprise at least four directors. Additional directors may be appointed if the board feels that additional expertise is required in specific areas, or when an outstanding candidate is identified
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Directors nominated by the board for election require full MIIML board approval
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A majority of the directors must be independent as defined in the Macquarie Fund Policy extracted below
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No director may be an employee of the Macquarie Group (although they may be a consultant)
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The board is to be comprised of directors with an appropriate range of qualifications and expertise
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The chairman of the board will be appointed by the MIIML board and may be non-executive or independent
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A majority of directors must be resident in Australia
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To ensure that the board has the benefit of regular new input and to avoid the potential for loss of objectivity over time, independent directors will retire after 12 years
The following guidelines apply to director selection and nomination by the board:
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Integrity
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Particular expertise (sector and functional) and the degree to which they complement the skill set of the existing board members
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Reputation and standing in the market
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In the case of prospective independent directors, actual (as prescribed by the Macquarie Fund Policy definition of independence below) and perceived independence from Macquarie.
Of the present MIIML board, Mark Johnson will be subject to re-election at the 2009 AGM as part of the new corporate governance arrangements.
MIGIL
Under the MIGIL bye-laws, MCFEL has been issued with an A Special Share (and has rights under the advisory deed) which entitles it to appoint the managing director and other director(s) constituting up to 50% of the MIGIL board. MIIML, as responsible entity of MIT(II), has been issued with a B Special Share which entitles it to appoint director(s) constituting up to 25% of the MIGIL board while the entities are stapled. Neither the A nor B Special Share has any economic interest, which means that the holders of those shares are not entitled to any dividends and are only entitled to the par value of those shares on a winding up of MIGIL.
As noted above, as part of the corporate governance changes announced in October 2008, MCFEL and MIIML will exercise their appointment rights under the A and B Special Shares in accordance with a security holder vote. The additional composition criteria that apply to nominees to the board of MIGIL, which is a Bermuda domiciled company, are:
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At least two directors must be resident of Bermuda at the time of appointment
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No more than two directors may be resident of the same country (other than Bermuda)
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At least 50% of the directors must be independent
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The chairman must be a Bermudian resident
The balance of the directors is elected by MIG investors. Of the present board, Jeffrey Conyers is subject to rotation and security holder approval. Peter Dyer will also be subject to re-election as one of the appointees of MCFEL.
The MIGIL board has 50% independent directors rather than a majority of independent directors. This reflects the requirement of the Macquarie Fund Policy for the boards of the responsible entity of the stapled trusts and the stapled company to have at least 50% independent directors and at least one of the boards in each stapled structure to have a majority of independent directors.
The rationale for this approach is that under the stapling arrangements, the practical operation of the MIIML and MIGIL boards is such that no significant decision (in particular strategy, capital raisings, borrowings, and investments) can be made by one board without the consultation and consideration of the other board, and the MIGIL board has a sufficient quorum of independent directors to vote on transactions with Macquarie companies.
The MIGIL board charter also provides that there must not be half or more of the board located in any jurisdiction other than Bermuda. Robert Mulderig and Jeffrey Conyers are Bermuda-based. Mark Johnson is based in Australia and Dr Peter Dyer in the UK.
In determining the status of directors, the MIGIL board has adopted the standards of independence required by the Macquarie Fund Policy.
Nomination Committee
Neither of the MIIML or MIGIL boards has appointed a nomination committee given the small size of each board but an appropriate review of board candidates to ascertain that they meet director selection criteria will be undertaken by each of the relevant board in full meeting before they are put forward for election.
Independence
Independence of directors determined by objective criteria is acknowledged as being desirable to protect investor interests and optimise the financial performance of the fund and returns to investors.
In determining the status of a director, MIG applies the standards of independence required by the Macquarie Fund Policy which are similar to but not the same as the Principles. The full details of MIG’s independence criteria are as follows.
An independent director is a director of the responsible entity and/or special purpose vehicle who is not a member of management (a non-executive director) and who (to the satisfaction of the MGL board corporate governance committee) meets the following criteria:
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Is not a substantial shareholder of:
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MGL or MIG, or
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A company holding more than 5% of the voting securities of MGL or MIG
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Is not an officer, or otherwise associated directly or indirectly with a shareholder holding more than 5% of the voting securities, of MGL or MIG
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Has not, within the last three years, been:
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Employed in an executive capacity by the responsible entity and/or special purpose vehicle, or by another Macquarie entity, or
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A director of any such entity after ceasing to hold any such employment
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Is not and has not within the last three years been a principal or employee of a professional adviser to MIG, Macquarie or other Macquarie managed vehicles whose billings to MIG, Macquarie or other Macquarie managed vehicles over the previous full year, in aggregate, exceed 5% of the adviser’s total revenues over that period. A director who is or within the last three years has been a principal or employee of a professional adviser will not participate in any consideration of the possible appointment of the professional adviser and will not participate in the provision of any service to MIG, Macquarie or another Macquarie managed vehicle
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Is not a significant supplier or customer of MIG, Macquarie or other Macquarie managed vehicles, or an officer of or otherwise associated directly or indirectly with a significant supplier or customer. A significant supplier is defined as one whose revenues from MIG, Macquarie and other Macquarie managed vehicles exceed 5% of the supplier’s total revenue. A significant customer is one whose amounts payable to MIG, Macquarie and other Macquarie managed vehicles exceed 5% of the customer’s total operating costs
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Has no material contractual relationship with Macquarie other than as a director of a responsible entity and/or special purpose vehicle
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Is not a director of more than two Macquarie related responsible entities or special purpose vehicle boards
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Has no other interest or relationship that could interfere with the director’s ability to act in the best interests of the Macquarie managed vehicle and independently of management of Macquarie.
Where an individual may not meet one or more of the above criteria but the MGL board corporate governance committee makes a specific determination that, in the particular overall circumstances of that individual, the fact that these criteria have not been met would not prevent the individual from exercising independent judgment on the relevant board(s).
The main areas of difference from the independence criteria set out in the Principles are:
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the Macquarie Fund Policy independence criteria are designed to ensure that directors are not only independent from MIG but that they are also independent from Macquarie Group and its other managed vehicles. Accordingly the independence criteria must be satisfied in respect of relationships with each of MIG, Macquarie and other Macquarie managed vehicles. By way of example a partner of a law firm who is a director on MIG would not be able to provide legal services to MIG or any Macquarie entities or managed vehicles and would not be able to vote on the appointment of his law firm by MIG. Additionally the law firm must not have earned more than 5% of its annual income from doing work for any of MIG, Macquarie or other Macquarie managed vehicles for 3 years prior to the appointment of the director and on an ongoing basis during the currency of the directorship;
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the Macquarie Fund Policy independence criteria do not specifically provide that independent directors must be free of any business relationship that could reasonably be perceived to materially interfere with their independence. However, the criteria are designed to ensure that this is in fact the case. Further, the MGL board corporate governance committee or the MIG boards can in appropriate circumstances determine that a director is not independent notwithstanding they continue in a formal sense to satisfy all of the Macquarie Funds Policy Independence criteria. This envisages that in some cases candidates will not be appointed or directorships will cease because of perception issues around independence;
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the Macquarie Fund Policy has a catch all provision, not included in the Principles, which gives the MGL board corporate governance committee or MIG boards discretion to determine that a director is independent even if they don't meet all the other Macquarie Fund Policy independence criteria.
The ability of independent directors to serve on up to two separate managed vehicle boards is considered appropriate because the time commitment and level of remuneration for these roles is not so significant as to compromise independence.
If any independent director serves on two managed vehicle boards or has been determined by the MGL board corporate governance committee or MIG boards as independent despite not satisfying all of the criteria set out in the Macquarie Fund Policy they will be noted as such in their description in this Statement. Reasons will be provided for any independence determination.
Each year Independent directors are required to provide MIG with written confirmation of their independence status and they have each undertaken to inform MIG if they cease to satisfy the Macquarie Fund Policy independence criteria at any time. The Company Secretary also monitors compliance with the Macquarie Fund Policy independence criteria and seeks information from the independent directors in this regard if necessary and reports to the board.MIG considers that the independence of its directors, each of whom is a highly qualified and reputable business person and professional who satisfies the above criteria, does not depend on who appoints them but on their independence of mind, including an ability to constructively challenge and independently contribute to the boards.
3. Chairman
Following the 2009 AGM, the chairman of MIIML will be appointed by the full board and may be non-executive or independent. Additionally, the chairman of MIIML must concurrently be a director of MIGIL.
Mark Johnson, being the former deputy chairman of Macquarie Bank until his retirement on 19 July 2007, is a non-executive chairman of MIIML and does not satisfy the independence recommendation of the Principles. Mark was appointed as chairman of MIIML at a time when the Macquarie Fund Policy required the chairman to be a current or closely connected ex-Macquarie executive because MIIML is a Macquarie company and MIG is externally managed and Macquarie branded.
The MIIML board has resolved to appoint a lead independent director. Paul McClintock is lead independent director until 31 December 2009. Unless otherwise determined by the board, a different lead independent director is to be appointed each financial year using an alphabetical rotation system.
It is MIGIL’s policy to have an independent chairman and Robert Mulderig, chairman of MIGIL, is appointed by MIG and satisfies the independence test in the Macquarie Fund Policy.
In both cases, the chairman does not exercise the role of CEO. That role is performed by John Hughes, who was appointed as CEO in November 2007.
Both the MIIML and MIGIL board charters provide that all independent directors will meet at least once per year in the absence of management and at other times as they determine. The convenor of the meetings will be the lead independent director in the case of MIIML, and the chairman in the case of MIGIL.
4. Independent professional advice
The directors of MIIML and MIGIL are entitled to obtain independent professional advice at the cost of the relevant trust or company subject to the estimated costs being first approved by the chairman as reasonable.
5. Board performance
To ensure that the directors of MIIML and MIGIL are properly performing their duties, the following procedures are in place:
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A formal annual performance self-assessment of the board, the audit and risk committees and individual directors
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A formal induction program for directors
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Access by directors to continuing education to update and enhance their skills and knowledge.
The procedure for evaluation of the boards' performance is:
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Directors are given the opportunity to discuss individual performance and feedback on performance with the chairman and the chairman meets with each non-executive and independent director to discuss the effectiveness of the board and board committees as a whole
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The board as a whole discusses and analyses board and committee performance during the year, including suggestions for change or improvement, based on the chairman's feedback from conducting separate meetings with the non-executive and independent directors.
The above process was followed for the year ended 30 June 2009.
