In our article of 15 June, “ASIC provides guidance on exercising discretion on incentive pay arising from COVID-19” (see HERE), we summarised the Information Sheet released by ASIC on 12 June for boards considering the application of discretion on variable reward plans and payments.

Guerdon Associates and another remuneration adviser subsequently met with ASIC following the release of Information Sheet 245 for more detail in regard to review outcomes.

While we had some idea of the findings from discussions with Commissioner John Price prior to his retirement, the subsequent discussion with ASIC served to illustrate how significantly most large ASX-listed companies outside of the APRA-regulated entities fall short on remuneration governance.

The following will enable directors and senior executives to better understand ASIC’s perspectives on remuneration governance.

• ASIC reviewed the remunerations decision-making processes for variable pay outcomes for the 2017 and 2018 financial years of 21 ASX 100 companies:
  • 8 of the companies are APRA-regulated, and
  • The other 13 are across different sectors
• ASIC’s focus was on KMP accountability rather than the company wide remuneration framework. It is considered the findings of the specific review will send a wider message
• ASIC thematic reviews are proactive regulatory tools to maintain and improve market integrity
• ASIC did not review remuneration structure or quantum. Its focus was on the decision-making processes and the exercise of discretion.
• ASIC engaged with APRA as it reviewed remuneration regulation (CPS 511 – see HERE) as both agencies considered remuneration governance.
• ASIC’s review involved nearly 100 interviews of directors and senior executives, examination of 32,000 documents and insights from international jurisdictions.
• ASIC found APRA-regulated organisations to have more effective and sophisticated governance processes. This was in stark contrast with the governance processes of some others. For example, in 2018 it was found that when scorecards outcomes were not aligned with company performance:
  • The majority of APRA-regulated boards exercised discretion to adjust the outcomes.
  • Only a small number of the other company boards exercised discretion to ensure alignment with company performance
• ASIC found better practices included prompts in the decision-making framework and process to alert the board to consideration of adjustments to outcomes. These prompts would be based on group performance, risk modifiers, past practices and experience. Decision trees and hypothetical scenarios would assist boards in their decision-making.
• While ASIC might have expected deferred pay (like deferred Short Term Incentive, or STI) to be subject to active review before payment, it found that only a small number of boards undertook a considered review practice. In nearly all of the other companies reviewed, the vesting of all deferred STI was regarded as near certain. For example, with deferred STI, ASIC did not see oversight or approval of awards that were due to vest, meaning they appeared to vest as a matter of course.  ASIC considered there was significant room for boards to actively review deferred awards before payment – that is, there should be a critical ‘look back’ over the results and the award.
• ASIC observed that some boards displayed limited management of the potential for conflicts of interest. Management were present during discussion of incentive pools, the performance of individuals, and the financial and non-financial performance results on which incentive payments hinged.
• ASIC did find that, where there is a robust governance framework, there was active, timely and consistent exercise of discretion. Discretion was not exercised to respond to publicity as it responded to the time when issues were escalated internally within the company, and there was active oversight of resulting consequences for both in-year awards and to deferred remuneration.
• Some other findings ASIC considers indicate a need for improved governance processes include:
  • There was considerable reliance by the board and remuneration committee on the information provided by the CEO.
  • In about one third of cases the only source of written information for the board was that provided by the CEO.
  • Conversely, the APRA-regulated company boards drew on information from other sources including chief risk officer, HR and external advisers.
  • In a number of companies, there was a lack of written contextual information with the board simply given a table of outcomes for approval.
  • There was evidence in less than half of the companies of information being shared across committees. Better practices included joint risk and remuneration committee meetings, and specific agenda time for the remuneration committee to consider the input of other committees. ASIC found weaknesses in relying on cross committee membership only as there was no structured input from the committee either via the member or otherwise to consider.
• ASIC considers it is the role of the Remuneration Committee to bring independent judgment to remuneration outcomes as reflected by the duties of directors and Principle 8 of the ASX Corporate Governance Council’s Principles and Recommendations.  ASIC was surprised to find that in more than half of the companies reviewed, executives were present in discussions and determination of the agenda item about variable pay outcomes that had an impact on those executives. While a Managing Director may absent him or herself from the room because section 195 of the Corporations Act specifically requires directors to be excluded from meetings in which the director has a material personal interest in the matter being discussed, other conflicted management at times remained.
• Of concern for ASIC was the further finding that there were no indications of active oversight of remuneration outcomes by a material number of remuneration committees.
• ASIC used the Governance Institute of Australia and the AICD guidelines on board and committee minutes as its guide for good practice. In the majority of companies reviewed, it found that there was no minuting of what was discussed or the basis for the outcome reached.
• In a small number of companies, there was evidence of board concern about privacy and defamation issues if there was to be a more transparent disclosure of the rationale for remuneration adjustment.

Themes emerging from the review

The significant themes emerging from the review that ASIC considers to be relevant both now and going forward include:

• The Remuneration Committee needs to be active – it should not simply apply a ‘rubber stamp of approval’. That there was evidence this may be the case is a significant concern. Directors have been on notice for many years now that investors consider executive remuneration to provide them with insight into board governance quality and risk.
• ASIC considers that remuneration governance frameworks have processes that guide the exercise of discretion.
• The remuneration committee and the board should be getting structured and contextual information from unbiased and not conflicted sources.
• There should be formal arrangements to manage conflicts of interest.
• There should be transparent recording and communication of outcomes. Investors and regulators should be able to determine from these what type of performance is being rewarded.
• ASIC does recognise that remuneration governance needs to be scalable across all size companies.

A checklist for Remuneration Committees

Here is a checklist for remuneration committees to consider prior to the publication of the ASIC report later in the year:

1. Undertake a formal review of remuneration governance

2. Identify current sources of advice/information whereby the source has a conflict of interest

3. Identify and consider sources of advice/information with minimal conflicts of interest, including the risk and audit committees

4. Document a formal process to seek input from unbiased sources

5. Schedule the active consideration of discretion before any payments are made

6. Identify inputs necessary for robust assessment of whether discretion should apply

7. Determine what matters are to be considered and the outcomes that should be recorded as a reference for consistent and fair judgement in future

8. Consider the extent and frequency of in-camera sessions of the remuneration committee

9. Review how the remuneration governance process is disclosed, consistent with the commentary for Recommendation 8.1 of the ASX Corporate Governance Council’s Principles and Recommendations.

The ASIC report is due to be published later this year.

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