Welcome (again!) to the March 2009 issue of GuerdonNews®

But this time we have fixed the links to our articles! We apologise for any inconvenience.

In this issue we provide a checklist for assessing the extent of your company’s compliance with a new remuneration practice code likely to be the model for Australia; note that the new AICD guidelines on executive pay include suggestions that should be considered by more boards; comment on the over-reaction that threatens economic success in Australia and the world with an excessive focus on risk management via regulation; make the case that none of the regulation being mooted or already passed will resolve the fundamental failings of US executive pay structures and discuss why this is important to Australia and the rest of the world; and reflect on the vexed issue of mandatory shareholdings for executives.

We conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData® on-line database and references to Guerdon Associates in the news media.

Look out for the next issue on the first Tuesday in April, as we report on the outcomes of the Remuneration Forum for regulators, investors, non-executive directors and executives to be held in mid-March. We will also cut through the media rhetoric based on old pay data to give an early indication on the extent that CEOs are feeling their shareholders’ pain.

New remuneration code of practice announced – a checklist for all companies’ boards

The FSA's new remuneration code has importance for all Australian companies.

The UK's FSA guidelines are the first guidelines published reflecting the views likely to be pushed by all the global regulators of financial services providers, including Australia's. (In fact, APRA is a participant in the working group set up under the G20 Action Plan dealing with executive remuneration, with which the FSA guidelines will comply). And while they will apply to financial services providers initially, we expect that it will not be long before the guidelines are universally referred to by proxy advisers, governance groups and institutional investors for all listed companies (including companies that are not capital intensive, and to which many of the guidelines are actually ill-suited).

This article summarises the code, whether this is reasonable for most situations, and provides a checklist for companies and their remuneration committees to critically assess the extent of compliance.

Australian Institute of Company Directors releases guidelines on executive pay

The Australian Institute of Company Directors (AICD) released its executive remuneration guidelines on 12 February 2009.

They outline the AICD’s views on good practice for establishing appropriate executive remuneration frameworks and processes, setting remuneration policies and terms, and reviewing arrangements. While most of the guidelines are consistent with current market practice, there are several particularly worthy suggestions that, in our experience, are not considered often enough by directors.

Australia (and the rest of the world) needs the USA to fix its executive pay governance

Global action to regulate executive pay will not achieve its aims. In fact, for already well-regulated and relatively well-behaved countries like Australia, it will just add to the regulatory burden with no consequential benefit.

Why? The source of the problem is US governance.

The USA is a destination for the world’s most talented; it is also a vast pool of executive talent for the world’s companies outside of the USA, including Australia.

That means every company board outside of the US with the need to draw on this pool has to make exceptions and adapt pay to attract the talent and experience that can best manage their enterprise.

Australia has been fortunate in having a regulatory regime that provides companies with the flexibility to do this.

A free global executive labour market creates pressure for convergence of the price for labour. So, gradually, the US pay spiral impacts advanced economies around the world, with US pay levels and also good and bad practices in pay and incentive design being exported with the executives.

Some executive pay needs to encourage more risk

New regulations do not preclude non-financial sector companies from being pressured to provide remuneration arrangements similar to those of their banking peers, and over the next two to three years, we expect this to be the case.

Last Thursday 26 February 2009 the UK’s FSA presented its code of practice for Britain’s bankers. On 16 March, at the Remuneration Forum we sponsor in association with CGI Glass Lewis, Senator Nick Sherry will discuss the pay regulation changes proposed for the Corporations Act, while Mr. John Trowbridge will provide more information on the APRA pay code that is yet to be released.

It is likely that the two sets of regulations will be complementary, and not replicative.

However, this does not preclude non-financial sector companies from being pressured to provide remuneration arrangements similar to those of their banking peers, and over the next two to three years, we expect this to be the case.

This could be a problem if all industries are expected to adopt a “lower-risk” focus, derived from commercial banking industry concepts.

Just as there was an under-estimation of risk (noted by us in our past articles), the pendulum could swing to an over-emphasis on constraining risk in executive pay.

Mandatory shareholding requirements for executives can be vexing - an issues checklist

Given recent criticism of ‘short-termism’ in remuneration practices, it is timely to re-visit the issue of compulsory share ownership policies as a means of reinforcing the importance of sustainable longer-term performance.

After something of a ‘false start’ in the late 1990s, when we first saw tentative attempts to install compulsory shareholding requirements in Australian companies, the practice has gained some traction in recent years, although it could not really yet be considered widespread amongst ASX-listed companies.

But all things have their time, and the current environment might be just the impetus for a fresh look at such an initiative, particularly in the form of the “hold until retirement” and “hold through retirement” approaches.

Latest GuerdonData® Updates

Updates to GuerdonData® include disclosures from the following 4 companies:

AUSTRALIAN AGRICULTURAL COMPANY LIMITED, AED OIL LIMITED, LEND LEASE PRIMELIFE GROUP, and WOODSIDE PETROLEUM LIMITED

Executive and director remuneration data from all ASX 300 companies on GuerdonData® is available to any subscriber. Visit our website for more information on GuerdonData®.

Assess how easily you can find out director and executive pay information by viewing our 6 minute demo. Click on the “More Info” button below.

Guerdon Associates In The News

“Sherry cool on US-style caps”, Patrick Durkin, Australian Financial Review, 6 February 2009, p. 15

“Executive pay to come under closer scrutiny”, Prue Moodie, Australian Financial Review, 12 February 2009

“Why executive salaries just don't add up”, Patrick Durkin, Australian Financial Review, 14 February 2009, p. 28

“Exec pay does not need surgery”, letter from Paul Riggs to Australian Financial Review, 23 February 2009, p. 51

“Treasury report backs crackdown on executive pay”, Patrick Durkin, Australian Financial Review, 26 February 2009, p. 1 and p. 6