ACSI’s new Governance Guidelines
11/11/2019
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The Australian Council of Superannuation Investors (ACSI) is the umbrella organisation for industry superannuation funds. It provides a proxy advisory service to its industry fund members. As a group they effectively account for almost 10% of ASX 300 market value. As retail shareholders do not tend to participate in voting, ACSI in effect as a voting influence of about 16% to 18% across ASX 300 companies. Its governance guidelines are therefore important for directors to understand, especially those in relation to remuneration, with its low “strike” threshold.

ACSI’s guidelines have been updated.

Key aspects to note, with Guerdon Associates comments as appropriate, are below.

Director elections

ACSI advocates annual director elections. This was first put into the public domain by ACSI prior to the federal election, and has now been formalised in their governance guidelines.

Guerdon Associates comment: ACSI provides good arguments for annual director elections that are worthy of consideration. while not specifically mentioned, it would permit owners to act on unacceptable audit and risk outcomes. These committee activities to date have escaped much attention, particularly relative to remuneration committee outcomes. Yet the outcomes for these committees have a far more material impact for investors. Nevertheless, the emphasis in the UK experience still seems fixated mainly on remuneration matters, rather than the more material audit and risk matters.

ACSI advocacy coincides with recent research indicating that staggered elections may be better for longer term returns (see HERE) . 

Annual re-election for directors would allow shareholders to register their displeasure with short-term results (as is the case with remuneration report votes – see HERE), so place pressure on directors for more conservative lower growth policies, hindering R&D and other expensive activities that may add to long term value, but detract from short term profit.

Some may suggest that an annual vote on the re/election of every director could become the lightning rod for protest votes unrelated to an individual director’s performance much the same way that the remuneration report vote has been used in the past.

Another consideration is the impact on the two strikes law. Annual director elections would mute the power of the two strikes law. This law has been shown to get directors’ attention, and has increased the level of engagement between issuers and owners. Most stakeholders would agree that the 2 strikes law, for all its flaws, has worked to get better remuneration outcomes. In contrast, it is yet to be seen that annual director elections in the UK has had a similar impact, possibly due to the higher bar (i.e. more than 50% approval to reject a director, versus 25% for a remuneration report strike).

Currently only companies with a dual ASX and LSE listings provide for annual director elections. However, we note that governance standards in the US, which only legally requires staggered elections, has had an impact, with a growing proportion of US companies voluntarily adopting annual elections on a majority basis. So, given the precedence of successful US activism, the ACSI governance requirement should not be taken lightly. While it is early days, ACSI could easily step up its advocacy by deciding not to support director elections, perhaps initially for the chairman, or heads of board governance committees, if annual director elections are not held, then stepping up the pressure on all directors. While we do not expect such actions in the short term, we will have to wait and see how seriously ACSI will push for this over the next few years.

A binding vote on company pay policy every three years

ACSI has formalised this requirement, which is also advocated prior to the federal election (see HERE) . The binding vote will require listed company KMP future pay practices to conform with a policy submitted every 3 years. The ACSI paper proposes that it would co-exist with the annual retrospective non-binding (‘two-strikes’) vote on the detail including pay outcomes contained in the remuneration reports.

The rationale for the recommendation is that the binding remuneration policy vote would align an executive’s interests with the company’s values, strategy and culture, and with shareholders’ interests over the long term and would support more effective management of non-financial risk and reduce the risk of misconduct.

Guerdon Associates comment: The level of engagement required to communicate the remuneration policy would challenge boards to communicate the ‘why’ of particular policies and practices, a key challenge which has not been fully addressed to date.

ACSI’s advocacy echoes UK practice. However there are some key differences between the UK and Australia which do not seem to have been fully considered:

  • The UK does not have the 2 strikes law, whereby two consecutive annual remuneration report votes of 25% or more provides shareholders with the option to spill the entire board on the 2nd strike. The UK could not do this because it has annual director elections already (refer above). Most investors and boards would agree that Australia’s 2 strikes law has been very effective at encouraging engagement, and arguably Australia has been more effective in this on remuneration matters than the UK.
  • In practice, the UK experience delivered policies with descriptions in enlarged UK remuneration reports that are very broad, and include enough discretion that the process itself has become meaningless.
  • The ACSI proposal also raises the question of the future of the annual non-binding vote and the 2 strikes law. If there are to be annual director elections as advocated by ACSI (see below), and a binding vote on remuneration policy, then the 2 strikes rule would become redundant.
  • Lastly, a binding vote on remuneration policy every 3 years will remove the “agility” and responsiveness to issues that the annual non-binding remuneration report vote better allows for.

Gender diversity on boards

A gender diversity target for women directors of 30% has been endorsed by the ACSI members.  While ACSI works with companies to understand plans to meet targets, members are voting against the election of directors in companies where there has been no progress.  The statement in the governance document signals a shift towards action rather than continued patience.

Disclosure of the CEO’s pay ratio to that of their Australian workforce’s median, 25th and 75th percentile pay – and explaining why the ratio is reasonable .

The UK government also recently introduced a draft legislation (see our initial assessment HERE) requiring UK publicly listed companies with more than 250 employees to disclose the ratio between CEO ‘single figure’ total remuneration to the 25th, 50th and 75th percentile pay of employees, including justification of differences in the context of the company’s strategy and any differences based on gender. Similarly, ACSI is calling for the disclosure of CEO pay ratios, as well as explanations for any changes over time and how these ratios are consistent with the company’s values, strategy and culture. Along with greater transparency, boards would take greater accountability for executive pay and increase shareholder engagement to ensure pay policies are meeting shareholder expectations.

Guerdon Associates comment: The US has been reporting CEO pay ratios for 2 years. While within industry comparisons between companies are interesting, they have not been utilised in any discernible way by investors or proxy advisers (or remuneration consultants for that matter). As we have noted in earlier articles, the data could be utilised by both sides of the political spectrum (e.g. centre-left policies for equality, and centre-right policies for improved employee productivity and an increase in average wages on the other). So, at this stage it would appear that disclosures with the required accompanying commentary will take up more remuneration report space for little utility. We can see nothing particularly positive or negative in its disclosure.

Social license to operate

The guidelines also focus on the social license to operate including:

  • workforce exploitation and increased reporting following the introduction of the Modern Slavery Act
  • deficiencies in safety reporting there being no requirement to report workplace fatalities to the market
  • expectations around corporate culture which deserve a read

ESG has also been expanded and is a live issue as we signalled in our September (see HERE) and August newsletters  (see HERE) .

See ACSI’s new guidelines HERE .

© Guerdon Associates 2021
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