Performance And Governance Analysis Of Aurizon Holdings Limited

Management and directors of the company

In this report, an attempt is made to discuss and analyses the overall performance of an Australian stock Exchange listed company Aurizon Holding Limited. The report discuss the history, operation and performance of the company. The aim of the report is to discuss the performance and governance of the company.

The company that have been selected for this report is Aurizon Holdings Limited. The company is the largest rail freight operator in Australia and is one of the top 50 company in ASX. The company was earlier known by the name of QR National Limited. The company changed its name in 2012. The headquarter of Aurizon Holding limited is in Brisbane Australia.  The company through its subsidiaries provides its customer with the logistic solutions and integrated freight across Australia (“About us | Aurizon”, 2017). The commodities that are transported in this network are agricultural, mining, industrial products, retail products, and coal and iron ore. It is estimated that the company each year transports 250 million tons of Australian commodities. In addition to this, the company is also engaged in the operation of Central Queensland Coal Network that approximately has track network of 2670 kilometers.  The company also provides specialist services in the engineering, designing of rails, management, construction and maintenance of the supply chain. The company serves the customers of resources, manufacturing and primary sector by transporting bulk freights for these customers.

The high standard of corporate governance and the performance positively effects the company, community and the economy. The term corporate governance means the framework of relationship, rules, process and systems that exercises control within the corporations. The corporate governance helps in promoting confidence among the investors. The investors’ confidence is very important for any company because it allows the company listed in ASX to raise capital (Tricker & Tricker, 2015). The evaluation of the performance of the board of directors is regarded as an integral part of the corporate governance initiatives. The ASX introduced the new concept of board evaluation through the publication of ASX Corporate governance Councils Principles of Good Corporate Governance and Best Practice Recommendations. In this section of the report, the annual report of the company is evaluated to ascertain whether the company follows the recommendations provided by the ASX CGC.

The recommendation provides for solid foundation for management oversight. It recommended that a company listed in stock exchange should:

1. disclose the responsibilities and roles of management and board;
2. should check the person before putting forward an individual to be elected as a director;
3. directors and the entity should have the written agreement providing the terms of the appointment;
4. have a company secretary that is accountable to the board;
5. have diverse board members in terms of gender and race;
6. disclose the process by which the performance of the board is periodically evaluated;
7. the review of the management performance;

The annual report of 2014, 2015 and 2016 are analyzed in order to evaluate whether the recommendations were accepted. On analyzing the annual reports of the company, it can be seen that board has recognized a distinction in the function of the board and those charged with governance. It is provided in the charter adopted by the company and is available in the company website. Therefore, it can be said that the company has adopted the first recommendation.

Major shareholders

The experience, skill, character and education of the potential candidates to be adopted as a director of the company is verified and checked. This process is conducted to check the suitability of the candidate. The board has appointed a search firms that are professionals to appoint two additional directors. The company has developed a procedure by which appropriate information are provided to the members that are relevant for electing or reelecting directors. Therefore, it can be said that the company has adopted the second recommendation (Christensen et al., 2015).

The company provides a letter of appointment to each directors highlighting the responsibilities and roles. The letter includes the appoint terms, time commitment, expectations etc. The senior executives of the company enters a contract for service that details the terms of the employment, responsibility, remuneration and rights or entitlements. The details of the contract with the key management personnel is provided in the page 32 of the annual report 2016, page 34 of the annual report of 2015.  Therefore, it can be said that the company has adopted the third recommendation (Epstein & Buhovac, 2014).

In order to facilitate the corporate governance the accountability of the Company Secretary is to the Board. The services and advise of the company secretary can be accessed by any directors. The appointed and removal of company secretary is a matter of the whole board. Therefore, it can be said that the company has adopted the fourth recommendation.

The company has adopted a diversity policy that is provided in the corporate governance section of the company’s website.  The company follows gender diversity that can be seen from the following figures: In the Management Leadership Team there is 27% of female representation, in middle management there is 35% of female representative and 33% of the trainees are female. Therefore, it can be said that the company is actively participating gender diversity. Therefore, it can be said that the company has adopted the fifth recommendation.

The performance of the board and the board committee is evaluated annually. There are two types of evaluation one is individual evaluation of the directors with the chairperson and another is self-evaluation. There are internal assessment procedures that the company has adopted to evaluate the performance of the board, individual directors and chairman. Therefore, it can be said that the company has adopted the sixth recommendation (Leipziger, 2015).

The board provides the operational, financial, management and individual target to the Chief Executive Officer and the managing director. The performance are measured against this targets and the performance evaluation is completed. The details of the performance evaluation is provided in the annual report of page number 25. Therefore, it can be said that the company has adopted the seventh recommendations recommendation.

The company is a listed company so shareholders are the owners of the company. In this section of the report, the major shareholder of the company is discussed. The major shareholder are those having 5% or more fully paid ordinary shares.

On analyzing the annual report of 2014 in the shareholders, information section the list of substantial shareholder is provided. The details of major shareholder as at 12 August 2014 are:

Statement showing details of major shareholders
Name	Shares	% Holding
UBS AG and its related bodies corporate	132,953,567	6.22%
HSBC Holdings	132,671,318	6.21%
Children’s Investment Fund Management	125,051,143	5.85%

Table 1: shareholders

(Source: Created by Author)

On analyzing the annual report of the company for 2015, it can be seen that the major shareholders as on 12 August 2015 are the following:

Statement showing details of major shareholders
Name	Shares	% Holding
HSBC Holdings	132,953,567	6.27%
UBS Group AG and its related bodies corporate	120,554,547	5.68%
TCI Fund Management Limited	112,207,436	5.29%
JPMorgan Chase & Co. and its affiliates	106,867,103	5.04%

Table 2: Shareholders

(Source: created by Author)

On comparing the statement of 2014 and 2015 it can be seen that the shareholding of HSBC have marginally increased by 0.06%. The shareholding of the UBS group has reduced and the children investment management fund, is not part of the major shareholder in 2015 (Beekes, et al., 2015).

The analysis of the annual report of the company for 2016, it can be seen that the major shareholders as on 8 August 2016 are the following:

Statement showing details of major shareholders
Name	Shares	% Holding
HSBC Holdings	151,013,818	7.36%
JP Morgan Chase & Co. and its affiliates	127,444,497	6.21%
TCI Fund Management Limited	112,207,436	5.47%
UBS Group AG and its related bodies corporate	107,640,748	5.25%
The Vanguard Group Incorporation	105,111,167	5.12%

Table 3: Shareholders

(Source: Created by Author)

On analysis of the above statement shows that the shareholding of the HSBC holding and JP Morgan have increased from 2015 to 2016. The shareholder of the UBSC group has decreased. The directors of the company plays the role of stewardship. The responsibility of the directors includes managing or supervising the management of the company. The shareholders with voting rights selects the directors. Therefore, it can be said that major shareholders of the company have significant role in influencing the corporate governance structure of the company.

In this section of the report the compensation that is paid to the directors and top executives are discussed. On analyzing the annual report of the company, it can be seen that the remuneration policy of the company is aligned with the strategy of the company. The remuneration framework of the company has three component. These components are fixed remuneration, STIA and LTIA. The fixed remuneration includes salary and benefits that includes superannuation. This remuneration are not dependent on the performance. The STIA remuneration includes both the cash component and another component that is deferred into equity (Picciotto & Mayne, 2016). This remuneration is awarded on the performance of the 12-month period. The LTIA is a performance incentive that consist of equity component. These incentives are awarded based on achievement of the three years period. The remuneration structure of the company is an appropriate mix of variable and fixed remuneration. The remuneration structure of the company is driven by the short term and long-term policy of the company (Moriarty et al., 2014).

The fixed remuneration of the company is designed to retain and attract capable executives with experience so that result can be achieved. The short-term incentive awards are provided based on the nonfinancial and financial performance measures. The financial and non-financial factors that are considered in determining the STIA are safety and environment, transformation, underlying EBIT and individuals. In case of Managing, director and CEO SITA can be 100% of the fixed remuneration to maximum 150% of the fixed remuneration. For the remaining key managerial personnel 75% of fixed remuneration to the maximum of 112.5%.  The Long-term incentive award is awarded based on the operation ratio improvement of the company, relative total shareholder return and return on invested capital. This incentive is measured based on the performance of the 3 years. In case of MD and CEO, the incentive is maximum 100% of fixed remuneration. In case of remaining key management personnel executives, the maximum remuneration is 75% of the fixed remuneration (Lin et al., 2016).  

In this section of the report, the performance of the company is compared with the industry average. In order to evaluate the performance of an average is computed of the peer companies and then it is compared with the company. The peer analysis of the company:

Peer Analysis of Key Information
Company	Revenue (TTM) (bn)	Net income (TTM) (million)	Market cap (billion)
Aurizon Holdings Ltd	3.40	234	11.08
China Railway Tielong Container Log. Co.	6.12	241.37	12.55
Baotou Beifang Chuangye Co., Ltd.	2.12	-20.83	24.31
Guangshen Railway Co., Ltd.	17.07	1.28	35.76
Daqin Railway Co., Ltd.	43.72	6.6	101.84
Nishi-Nippon Railroad Co Ltd	354.78	13.35	198.4
Container Corporation of India Ltd	46.60	8.66	242.04
Sotetsu Holdings, Inc.	259.55	16.17	267.45
Seibu Holdings Inc.	514.26	78.62	651.41
Hankyu Hanshin Holdings, Inc.	748.81	78.14	953.63
Central Japan Railway Company	17.50	368.2	38.2
East Japan Railway Company	28.80	250.24	38.9
Average	185.39	94.71	233.14

Table 4: Peer Analysis

(Source: Created by Author)

The table above shows the peer analysis of the company. The industry average has also been computed to analyze the company. The table shows that the average revenue of the industry is much higher than company.  However, on the other hand it can be seen that company has more net income than the industry average. 

Peer Analysis of Efficiency of the company
Company	Asset turnover (TTM)	Inventory turnover (TTM)	Receivables turnover (TTM)
Aurizon Holdings Ltd	0.3253	6.77	7.26
China Railway Tielong Container Log. Co.	0.8645	2.34	50.41
Baotou Beifang Chuangye Co., Ltd.	0.6563	3.17	3.48
Guangshen Railway Co., Ltd.	0.55	45.92	5.38
Daqin Railway Co., Ltd.	0.3845	21.62	11.29
Nishi-Nippon Railroad Co Ltd	0.7367	7.88	11.95
Container Corporation of India Ltd	0.7103	—	2.41
Sotetsu Holdings, Inc.	0.4592	7.05	19.17
Seibu Holdings Inc	0.3324	21.02	10.52
Hankyu Hanshin Holdings, Inc.	0.327	4.62	12.56
Central Japan Railway Company	0.3058	23.5	19.03
East Japan Railway Company	0.3763	28.46	6.4
Average	0.52	16.56	13.87

Table 5: Efficiency Ratio

(Source: Created by Author)

The table above shows the peer analysis of the efficiency of the company. It can be seen that the company has less Asset turnover ratio than the industry average. It is a negative sign that indicates that the company is utilizing assets below industry average. The higher the inventory turnover ratio and receivable turnover ratio the better it is for the company. However, both this ratio of the company is lower than the industry average. It is a negative sign for the company (Larcker & Tayan, 2015).

Based on the evaluation of the performance indicators it can be seen that the company is lagging in important performance indicators. The indicators suggest that the company should improve the performance.

Conclusion

The report has discussed about the corporate governance and financial performance of the company.  Based on the above discussion it can be said that the company has adopted all the corporate governance recommendations provided by ASX Corporate governance council.  Therefore, it can be said that the corporate governance of the company is strong. The financial performance of the company is analyzed above and it is seen that the company needs to improve the performance based on important performance indicators.

The Robert Alba has won the lottery he can receive the amount in lump sum or as an annual instalment of 5 million every year.

The PV of annuity should be calculated so that decision can be made. The formula is given below:

Present Value of Annuity
Periodic Payment	$5000000
Rate	10%
Number of year	35
Present Value	$        48,220,794.86

Table 4: Present Value

(Source: Created by author)

It can be seen that if lump sum amount is received then Robert will receive $62.9 million. On the other hand, if he receives in installment then the present value of the amount received is $48220794.86. Therefore, it can be concluded that lottery money should be received in lump sum.

Reference:

About us | Aurizon. (2017). Aurizon.com.au. Retrieved 19 March 2017, from https://www.aurizon.com.au/company/overview

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Scott, J. S. (2015). The longevity annuity: An annuity for everyone?. Financial Analysts Journal, 71(1), 61-69.

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