On 29 April 2019, prior to the Australian federal election, the Australian Council of Superannuation Investors (ACSI) published a document advocating four new regulatory changes.  The four proposals are as follows:

1 . Introduce a binding vote on remuneration policy every three years;

2 . Disclose CEO pay ratios to shareholders, along with an explanation of how the ratio supports the company’s values strategy and culture;

3 . Introduce annual elections for directors of listed companies;

4 . Give shareholders the right to bring non-binding resolutions to company meetings.

ACSI includes 39 Australian and international asset owners and institutional investors advising its member funds on ESG issues and areas of board diversity and remuneration report recommendations. The funds manage over $2.2 trillion in assets and on average own 10% of ASX 200 companies. Proxy advice from ACSI tends to account for about 20% of votes at AGMs.

Binding vote on remuneration

ACSI continues to advocate for pay policies to be submitted to a binding vote every 3 years supplementing the existing two strikes rule (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 in the 2^nd. The UK could not do this because it has annual director elections already (refer below). 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. 

CEO pay ratios

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 25^th, 50^th and 75^th percentile pay of employees, including justification of differences in the context of the company’s strategy and any differences based on gender. The Australian Labor Party also recently announced  their intentions to introduce regulatory disclosure of CEO pay ratio to the median employee (see HERE).

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.

GA 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.

Annual director elections

ACSI argues that asking companies to put directors forward for re-election annually in Australia will ensure:

• Boards are the frontline in demonstrating accountability for their companies
• Responsive and timely feedback on director performance is provided by investors. This will boost a culture shift to further engagement with investors, and agility in responding to issues
• Careful consideration by boards and shareholders of each individual director’s contribution to the board and their effectiveness.

ACSI’s advocacy has been brewing for some time, and the more vocal stance by ACSI coincides with public acknowledgement from several superannuation funds and one proxy adviser that they will be more assertive in not supporting elections of directors associated with outcomes regarded as unsatisfactory. In the UK this has been most prominent for remuneration committee chairs. FY 2018 saw higher no votes for ASX listed company director elections than in any other AGM season to date.

It appears that ACSI has in mind the UK system that companies explain why they do not have annual director elections, on an if not why not basis. Most UK listed companies have moved to annual elections.

GA 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.

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 lower bar (i.e. less than 50% approval to reject a director, versus 25% for a remuneration report strike).

So in advocating for annual director elections ACSI is, in effect, advocating for the neutering of the 2 strikes law. Arguably, it may also contribute to an emphasis on short term outcomes as various stakeholders see opportunities for quick results rather than sustainable results. On the other hand, it would permit investors to direct their displeasure to directors deemed more accountable than other directors for poor audit or risk outcomes than the current system.

Shareholder resolutions

In October 2017, ACSI commissioned a research report (see HERE) highlighting the restricted right of shareholders to bring resolutions at company meetings. The report outlines the complicated system for shareholders to effect change within a company. Their only options are to propose a binding resolution requiring 75% shareholder approval or by voting against equity grants to directors and re-election of directors.

ACSI proposes simplifying existing shareholder resolution processes to allow for non-binding votes, subject to appropriate support of 5% shareholding or 100-members. A non-binding vote would allow investors to express their views on an advisory basis and negotiate changes such as ESG issues without having to take a drastic approach.

GA comment: This is an interesting idea that may provide an avenue for more activist investors wanting action on ESG issues, among other things. It appears worthy of debate.

See the ACSI advocacy guidelines HERE .

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