The 2008 Australian proxy season, which gets underway at the end of September, promises to be dramatic. As has happened in a number of global capital markets over the past year, the credit crisis has exposed shortcomings in the risk management practices and business plans of Australian companies, while a slowdown in the world economy also has focused investor attention on links between executive pay and company performance.

Three key issues look set to dominate the proxy season: Director quality, executive pay, and the fate of listed, externally managed vehicles trading at significant discounts to director valuations.

The 2008 season is likely to be the first in several years where executive pay will not be the primary focus; Australia has since 2005 had a mandatory annual non-binding vote on company remuneration reports, and the 2007 season saw two major companies, AGL Energy and Telstra, have their remuneration reports defeated by large margins.

Director quality, however, is likely to trump pay as the key issue for 2008 after the credit crisis caught many Australian companies seemingly unprepared. Many of these companies will face annual meetings between September and November and some of their directors may be at risk of losing their seat in the face of shareholder anger. Notably, Australia mandates a majority vote standard for director elections.

A prime casualty of the credit crisis and key focus of investors will be Centro Properties Group and its listed subsidiary, Centro Retail. The twin entities’ inability to refinance their debt has left them at the mercy of bankers for nearly a year, and directors of both entities will be facing a host of questions from investors over what they perceive to be inadequate disclosure and poor risk management.

Also facing scrutiny will be directors of Allco Finance Group, the investment and finance firm that has since early 2008 relied on bankers to stay afloat when a collapse in its market value triggered debt covenants. Directors of Allco who approved the disastrous December 2007 purchase of property manager Rubicon, a business in which Allco’s former executive chairperson and another Allco director had major shareholdings, are also likely to face scrutiny, not only at Allco but at other companies at which they are directors.

Incumbent directors of ABC Learning Centre, the child-care operator that has been forced to delay the publication of its 2008 results as its new auditor reviews its accounting practices, are also likely to be under the microscope. The company announced significant changes to its board earlier this year in a bid to address investor concerns after a loss of market confidence around disclosure issues following its interim 2008 results. Still, the firm’s inability to finalize its 2008 accounts suggests investors will still have questions for the remaining directors.

Aside from these high-profile victims of the credit crisis, directors of companies such as IAG, Foster’s, Transurban, Challenger, and Mirvac are likely to face stormy meetings as investors question them over failed acquisitions, substantial payouts to departed executives, and faltering performance.

The decline in the Australian equity market over the past 12 months is also likely to lead to renewed interest in executive pay. As noted above, large payouts to departing CEOs are likely to again be a focus, and signs are emerging that some boards will be seeking to “compensate” executives for the impact of external economic factors on company performance. This is unlikely to be received well by investors, given many company executives have enjoyed windfall gains stemming from increased bonus payments over the past five years as the Australian economy boomed.

Part of the fallout from the credit crisis is the steep decline in the value of externally managed listed entities investing in infrastructure or similar assets. These funds, many of which will face investors at meetings over the next three months, have generally carried high levels of debt, leading to investor anxiety as debt has become more expensive and harder to find. Such worries were heightened when one entity, Babcock & Brown Power, announced a shortfall as it attempted to refinance debt following acquisitions in late 2007.

Governance features of these entities, especially the fees paid to external managers and the level of power they enjoy, have also come under scrutiny as security prices decline. Several entities managed by Babcock & Brown are seeking to renegotiate management agreements with that firm, while investors in some other funds have called for the entities to be wound up. The market’s corporate regulator, the Australian Securities & Investments Commission, has already signaled that these entities, and in particular their attempts to reduce the discount between director valuations and security prices, are likely to be a major area of focus as the watchdog deals with the post-credit crisis market environment.