Non-binding votes, remuneration reports and investor communications
The process of submitting the company’s remuneration report for a non-binding shareholder vote requires directors and their companies to develop and maintain an effective investor communications process. To that end, we have developed a checklist for the board remuneration committee members and other directors to have their companies adapt and employ.
A) The devil you know…
While we think most directors would be knowledgeable about their major shareholders, we suggest more work may be needed to understand their issues and concerns with remuneration in general and your company’s remuneration in particular. Many, like AMP Capital for example, wear their heart on their sleeve, making it known what they want to see in remuneration reports, or what they do not want to see. But this is not always the case. For example, just last week Fidelity Investments used their 15% shareholding of US company Clear Channel Communications to express their displeasure with the company’s renewed severance payments contracted for executives. The first Clear Channel’s board knew of this was when votes were counted! Ensure your company’s investor relations staff seek major investors out and listen to them. Directly address their issues. If what you are proposing is different from their preferred approach, take the time to explain how your approach is better suited to where the company is at the current time, and where it wants to move to. And lastly, don't forget to ask them how they intend to vote!
B) Coordinated effort
With the increased external spotlight on executive pay, remuneration issues are no longer the sole preserve of one company department. Investor relations are being asked increasingly complex remuneration questions from interested shareholders and the media. Corporate finance is being asked questions about the link between pay and performance, and how targets are set. Corporate accounting is being asked about share options and share rights expensing. Corporate treasury is being asked about executive ownership levels and share transactions. Legal counsel has been faced with significant CLERP 9, ASX and other legal and regulatory requirements. Human resources are asked about the comparison group for assessing market levels of pay. As a result, the design and communications process should incorporate input from throughout the organisation. Integration among internal stakeholders can be as challenging as working with external advisers. Ensure your board’s point person is an able integrator and coordinator.
C) Frequent and ongoing communications with shareholders.
Companies that receive high marks for governance policies often incorporate frequent and ongoing investor dialogue into their communications strategy. While Corporations Act and other related regulations limit a company’s ability to communicate specific information and conduct limited solicitation efforts, communication channels should remain active and open throughout the year. Investor discussions can be used to till the soil on key remuneration issues. Feedback on emerging trends or broad policy changes can be received throughout the year. Do not limit communications to the 2 months surrounding the AGM.
D) Be proactive
While many investors have now developed standard policy guidelines for addressing remuneration issues, these policies are simply guidelines. By being proactive companies can specifically address issues, and avoid adverse reactions from surprised shareholders. Contact can clarify inaccurate or misinterpreted information, and directly address compensation concerns.
E) Effective remuneration reports
While it is early days under CLERP 9, we have observed that there is still a long way to go to ensure remuneration reports are an effective communications instrument. Avoid boiler plate reports. If you have to repeat the words “attract, retain and motivate”, specifically address how your remuneration policy does this, and how it does it more effectively than others who have the same mantra. This may mean wresting the report’s initial preparation away from the legal department! Let them do the review work, and not the communications work. Be forthcoming with information. Highlight shareholder friendly provisions of remuneration practices. Accentuate strong governance provisions. Highlight the pay for performance relationship and how it has worked. Include a graph for better illustration. Be open. Investors will develop more trust in you, and as trust increases, so does the premium component of your share price for lower risk!
F) Incorporate company specific issues in remuneration policy rationales
Remuneration is not a one size fits all issue. Most investors will react on a case by case basis, providing information is full and complete. So companies should tailor their equity and other remuneration plans to the circumstances unique to their situation. And all companies do have a unique situation. So if management or your advisers come to you with a boiler plate draft remuneration report, ask the question on how it specifically relates to the company’s current situation and why this is not described in the report.
G) Do not wait until it is too late
After the rush to release final results, remuneration committees may be tempted to defer planning for the next report. Deliver feedback to management on the response to the last report while it is fresh. Insist on change and improvement to better relate remuneration to performance. Ask for a plan, and re-start that dialogue with investors.