Ethical Investment has some internal ethical issues.

The sustainability report for Australian Ethical Investment tells you how many A4 sheets of paper they used. But it doesn’t tell you that 73 per cent of the staff stood at the verge of resignation.

When your main assets – the staff, that is – go up and down in the lifts, you know you have a problem on your hands, especially when dissident shareholders are lurking, keen to exploit the first whiff of dissatisfaction.

So it is that Australian Ethical Investment’s managing director Phillip Vernon and chairman Andre Morony face a challenge. Three of the founding shareholders, and former directors, are seeking to roll the entire board.

Their platform is a letter of complaint from shareholders expressing discontent with management – albeit one year old and anonymous.

After a tumultuous year at the company which manages $600 million in ethical investments, AEI founders and former directors Howard Pender, Caroline Le Couteur and James Thier are bent on deposing Vernon and Morony for what they claim is “incompetent management”.

For their part, Morony and the board say the rebel shareholders have ulterior motives. Revenge is one, they say. All three contenders were former directors whose relations with the present leadership were acrimonious.

Anonymous anger

A little over a year ago, the board received a letter from a staff advocate, speaking on behalf of 73 per cent of AEI employees, with a long list of complaints about management and its strategy. The 73 per cent were anonymous.

Howard Pender said yesterday that none of the issues raised by staff had been properly addressed and, from a shareholder perspective, persisting with present management was not viable as there had been a loss of confidence by the company’s employees.

The view of staff will be critical to the outcome of any board spill. But it may have changed over the past year. Morony concedes that relations had earlier been difficult between his new management and staff.

Morony told BusinessDay the “campaign against board and management is extremely disappointing, unfair to AEI’s hard-working people and has been characterised by ulterior motives and inaccurate information”.

The dissident directors Pender, Thier and Ms Le Couteur speak, collectively, for 15 per cent of the stock. The voting position of the largest shareholder, an associate of investment manager IOOF with almost 20 per cent of the stock, is not known at this point but is likely to favour the board.

Still, a showdown is in the works. Among their 35 resolutions lodged with the company, the dissidents have put resolutions to remove every member of the board.

Performance

The financial performance of AEI does not look too bad – although return on equity is down below historical levels at 8 per cent and the stock trades at less than half its NTA. This is a tiny company with a market cap of $20 million, despite overseeing a large pool of ethical funds.

Apart from its employees, its key asset is the management rights to the funds. Arguably it would be better off unlisted.

Underlying the company, the performance of Australian Ethical funds has not been cause for management angst or a corporate governance overhaul.

Apart from the issue of poor relations between management and staff though, the acrimony between the two camps largely hinges on a dispute over a government grant.

Seeding ‘social’ capital

The federal government announced in mid-2010 a scheme to establish two Social Enterprise Development and Investment Funds (SEDIF) to attract seed and growth capital for social enterprises and develop “social impact investment” in Australia.

At the time, James Thier and Howard Pender were directors. Thier had put in a submission for the SEDIF funding and had been successful, winning approval for a $14 million grant.

Under the scheme, the $14 million in grant monies was to have been lent to worthy “social impact” causes by Australian Ethical.

But the board and management claim they were not told about the grant and, in any case, they formed the view that administering the “social impact” lending would not be in the best interests of AE clients.

Thier, they claimed, had not properly told management what was going on. Pender and Thier, however, were furious.

They say that management declined the government grant of $14 million. Spurning the grant was spurning $14 million in funding that the company could have used. The interest alone on $14 million exceeded the last interim profit, Pender said yesterday.

AE management decided against proceeding with the grant and the matter was put to the board at a meeting on April 15, 2011. With the exception of Howard Pender, who supported the application, the board rejected the grant.

Relations soured further from there. The board took legal advice and took the view that the SEDIF submission exposed the company to potential legal action for false and misleading behaviour.

There is no requisition for an extraordinary meeting. The resolutions need to be lodged for two months prior to any meeting. Now that they have been lodged it remains for the company either to bring on the showdown or to list the resolutions for the annual meeting.