Welcome to the April 2016 issue of GuerdonNews^®

In this 1st month of Autumn issue we:

• Evaluate the extent that company culture can and should be regulated, and implications for reward systems

• Provide an institutional investor check list for executive and director pay that permits innovation

• Summarise ASIC's findings for conflicts of interest and remuneration in vertically integrated funds-management businesses

• Provide due warning of APRA's focus on superannuation board evaluation and renewal

• Summarise draft legislation to enable ASIC to regulate for remuneration clawback in the life insurance industry

• Present a timeline to streamline preparation of director remuneration reports

• Summarise discussions and debates from our tenth annual forum on remuneration and governance

• Consider new guidelines by the FSC and ACSI for company disclosure of ESG performance

• Review documentation released by the Australian Tax Office to help start-ups implement an employee share option plan 

We conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData^® on-line database.

Can culture be regulated?

There is a danger in losing sight of what is important and what works

Culture is defined as "a system of shared assumptions, values and beliefs, which governs how people behave in an organisation." That is, that attitudes, beliefs and values govern behaviour.

This is not a valid definition. More than 60 years of behavioural research clearly shows that behaviour is not governed by attitudes, beliefs and values, but rather, it is the other way around. Attitudes, values and beliefs stem from behaviour. 

Instead of attempting to regulate culture, boards and regulators should place their focus on overseeing behaviour and the economic systems that reward certain behaviour.

Read more.

Can an ASX company have a pay structure encouraging innovation, agility, and risk-taking?

Not likely if they follow governance guidelines. A checklist for revised investor guidelines and a very short remuneration report

There are 'best practice' guidelines that prescribe how and what companies must and must not do when paying their boards and executives. The result is lockstep pay, whereby the pay varies only by size of company. Everyone has the same incentive pay opportunity, and even have the same performance hurdles. 

It is suggested instead that institutional investors should throw out the rule book and let companies innovate. When determining executive and director pay, four simple questions can be considered in their place: 

• How much did it cost me?

• To what extent were my shareholdings diluted with the equity granted employees?

• How much risk and innovation did this encourage employees to take?

• What performance did I get for this cost, dilution, and risk-taking?

Read more.

ASIC reports on culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry

A focus on systemic risk and reward systems and board competence

In general, ASIC found that financial services organisations demonstrated a commitment to maintaining policies and information barriers, with some focus on training. However, ASIC also found that on matters of outsourcing, product selection, remuneration and board membership, there may be areas where financial services organisations could better demonstrate a commitment to managing and, where appropriate, avoiding conflicts of interest.

Read more.

APRA’s focus on superannuation governance and culture

Not happy with board evaluation, renewal and effectiveness

APRA has warned that it will be looking at the processes of superannuation funds for the appointment of directors and for board performance evaluation. The focus of APRA'S review includes:

• The size of the board

• Director tenure

• Skills matrices and skills gaps

• More rigorous performance assessment of the board

Read more.

Remuneration reform in the life insurance industry

Bill will enable ASIC to regulate on clawback

The government is seeking submissions on a bill to amend the Corporations Act 2001, that, if passed, will significantly impact the remuneration and commission arrangements in the life insurance industry. Once enacted, the bill:

• Will remove the exemption from the conflicted remuneration ban on benefits paid in relation to certain life risk insurance products

• Will enable ASIC to determine the acceptable benefits payable for life insurance products; and

• Will ban volume based payments in life risk products.

Read more.

The remuneration report – a remuneration committee timetable and checklist

Guerdon Associates provide an approach that will make drafting your remuneration report more timely

We address issues such as:

• Who is responsible for the remuneration report?

• What's a good timetable for preparation of the remuneration report?

• Who in management should be responsible for preparation of the remuneration report?

• What is 'best practice' for the remuneration report structure?

• Should an actual or 'realisable' table of the pay outcomes be included?

• What are the red flags?

Read more.

Tenth Annual Forum On Remuneration And Governance

A summary of debates and panel discussions among company directors and institutional investors

While our annual Forum continues to be held under the Chatham House Rule, the key points of discussion emerging from the Forum can be shared. Guerdon Associates' co-host, proxy advisor CGI Glass Lewis, shares its 2016 approach for the following areas: curating the board, remuneration, corporate actions, environment and sustainability issues, incentives and innovation and regulation of culture. 

Read more.

ACSI and FSC release guide for company ESG reporting

Important because institutional investors are increasingly factoring risk from ESG factors into investment decisions

While there is still no mandatory Environmental, Social and Governance (ESG) reporting required of listed companies, the ASX Corporate Governance Council recommendations require companies to disclose whether they have material exposure to ESG sustainability risks, and what they are doing to manage these risks.

There is a new set of guidelines that has been released by the Financial Services Council (FSC) and Australian Council of Superannuation Investors (ACSI). These have been developed to provide Australian companies with a framework to disclose the ESG information that institutional investors would look for when considering their investments.

Read more.

Start-ups and employee share schemes – ATO assists with documents

Resist the temptation to impose listed company schemes

Companies large and small are investing in start-ups and businesses that may one day disrupt their own. Apart from some input into shareholder agreements, directors representing listed company investors on start-up boards should be careful not to impose a listed company employee equity plan on a start-up.

It may be best for a risk-taking and innovative start-up to have an equity plan unlike that of listed companies because of so-called "governance guidelines" on the listed companies.

The Australian Tax Office has released template documentation for certain eligible start-ups to draw from to implement an employee share option plan.

Read more.

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The information, analysis and opinion in this e-mail and attachments are intended to be for informational purposes only. Analyses are based on information taken from public documents or private surveys, and we do not represent to its accuracy. Guerdon Associates assumes no liability for the use or interpretation of information contained herein. This publication is provided 'as is' without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of marketability, fitness for a particular purpose, or non-infringement of third party rights.