New ACSI Governance Guidelines raise the bar again on executive remuneration requirements
30/10/2015
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Diversity targets are also given some heft

ACSI’s best practice Governance Guidelines are updated every two years to take into account the evolving regulatory and governance landscape.

The Guidelines also underpin the voting recommendations ACSI makes to 30 Australian member-funds, who collectively manage over $450 billion in assets on behalf of 8 million Australians, as well informing its dialogue with ASX300 companies.

The new guidelines, as expected, have raised the ante with additional requirements. These requirements include:

  • An opposition to overly generous CEO ‘sign-on’ grants
  • Support for companies using “bespoke” remuneration frameworks
  • Support for variability of outcomes “over time and across executives”

The ACSI press release (see HERE) also implies enhanced provisions for deferring STI and “clawback’. However, these are unchanged from the 2013 guidelines.

The ACSI press release also implies that ACSI has increased its emphasis on appropriate shareholdings or ‘skin in the game’ for directors and executives (see HERE). A close reading of the guidelines has established that, despite the press release, it has not placed much emphasis at all on director and executive shareholdings, other than it supports them for NEDs. However, we have noticed this season that ACSI has highlighted and taken some companies to task for discrepancies between some companies’ NED and/or executive shareholding guidelines, and the absence of compliance with these guidelines.

Some investors may prefer a more assertive stance in director and executive shareholding guidelines. According to a Global Equity Organisation’s survey, 71% of large North American companies and 58% of large European companies have share ownership guidelines (see HERE). In Australia less than 30% of the ASX 100 have executive and director share ownership guidelines. However, the new tax laws applying to share schemes (see HERE) provide the means for tax effective NED and executive shareholdings.

This was evident during the ISS roundtables earlier this year, and reflected in the ISS guidelines (See HERE). CGI Glass Lewis’ new Their guidelines specify that companies should “require key executives and NEDs to acquire, if necessary, over a reasonable period, and hold throughout their employment, meaningful shareholdings in the company.” Both ACSI and ISS only mention that NEDs should be required to hold a significant number of company shares.

Most boards are cautious in regard to sign-on grants. However, as most chairmen but few proxy advisers are aware, the calculation of what is fair value for a new CEO’s foregone benefits, and the method of paying it, are highly complex, and would often defy simple explanation in remuneration reports or ASX announcements regarding the material terms of the new CEO’s package. However, the ACSI Guidelines suggest that a more detailed explanation of a sign-on may be necessary in some instances.

ACSI formally supports “bespoke” remuneration frameworks. Other proxy advisers have also conveyed this (see p.15 of the CGI Glass Lewis guidelines HERE). Despite the support of proxy advisers they do not, to our knowledge, require extensive disclosures to indicate why a company has chosen a traditional framework, whereas they always require more of an explanation for choosing a non-traditional “bespoke” framework.

While not alone, in framing its guidelines ACSI continues to box itself in, and therefore its members and issuers, with imprecise language that does not respond to the nuances that may arise with the “bespoke” remuneration frameworks it seeks to support. For example:

It continues to apply the word “clawback”, when it means malus (see HERE for the difference) . What happens, as we have observed recently, when a company policy allows for clawback and not malus, and uses more correct language? How will ACSI differentiate, as it will probably have to in the future to keep pace with overseas governance standards, to require clawback as well as malus? For example, as a result of new regulatory requirements for clawback as well as malus to apply to banks (see HERE), UK companies are now being careful to differentiate between malus and clawback. US companies, while having to apply clawback in cases of fraud and misstatement since the Sarbanes Oxley Act, have had to tighten up polices to recover all erroneous incentive payments as a result of the Dodd Frank Act’s proposed changes see HERE), while their banks need to consider malus policies in a catch-up to FSB and US federal bank supervisors’ guidelines (see HERE, although US banks have in general been relatively tardy in responding so far). What this means is that ACSI, other proxy advisers, and investors will eventually need to reconsider guidelines to differentiate requirements.

ACSI uses “bonus” when it means “short term incentive” (or “STI”). A bonus is usually considered a discretionary payment that is not an outcome of an incentive plan with specified performance criteria. In the US it has a separate column in statutory disclosures from STI payments to permit differentiation. Most investors would probably prefer to see this sort of differentiation.

ACSI has reinforced its stance on gender diversity, recommending against the re-election of directors in companies that perform poorly. This was expected, given ACSI’s high profile policy target of 30% women on each ASX 200 board by the end of 2017 (see HERE)

A decision to recommend against re-election would come where attempts by ACSI to engage at a senior level are ignored, or when the board is unable to articulate a strategy to address the issue in the near term. ACSI considers this as not unreasonable, as companies have two years notice to achieve the target.

The explicit and new requirement for more variability in incentive payments is consistent with ACSI practice in recent times. ACSI and their members have become frustrated with the consistency in STI outcomes in particular, when both company earnings and TSR have varied considerably.

On balance, the updated ACSI guidelines continue the evolution for better governance. They can be found HERE.

© Guerdon Associates 2021
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