The Future Fund, Australia’s sovereign wealth fund with $11bn in Australian equities as of June 2020, has published guidelines on how they intend to vote on executive remuneration matters in the light of COVID-19. The guidance is particularly interesting for the flexibility the Future Fund is demonstrating (at least, through its guidelines) for practices that it would not ordinarily support.

Below is a summary.

• The Future Fund will treat each AGM voting decision on a case by case basis given the differences in impacts on companies from COVID-19, management responses, as well as the range in remuneration structures and potential adjustments.
• For voting decisions on remuneration, the starting point will continue to be the alignment between remuneration payouts and company performance and shareholder experience
• Key considerations for evaluating remuneration outcomes in the context of COVID-19 include:
  • Boards should not strip out the COVID-19 impact when assessing performance
  • Boards should consider applying a basic pub-test which may suggest that some of the pain felt by staff should also be applied to remuneration outcomes for executive KMP.
  • To reward executives for strong performance even where financial performance has been weak, boards could consider replacing remuneration schemes that are no longer fit for purpose with restricted equity. The quantum for restricted equity should be materially smaller (e.g. 50%) due to the greater certainty of payout. However, the Future Fund, at this stage, does not support a longer-term commitment to ‘unhurdled’ or simplified remuneration schemes.
  • Boards setting forward-looking remuneration structures may wish to temporarily shift the structure of those schemes away from performance metrics that are difficult to determine in the current volatile market environment to less complex metrics.
  • It may be prudent for boards to postpone setting LTI performance metrics, in isolated cases, until economic and market uncertainties subside somewhat. The timing and process of the postponement has to be transparent to the market.

For reference, Future Fund voted against 18% of remuneration reports and against 16.5% of equity grants during the 2018-2019 AGM season.

The guidance can be found HERE.

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