Guerdon Associates and CGI Glass Lewis held their twelfth annual Governance and Remuneration Forum in Sydney on 7 March and Perth on 12 March.
Whereas the 2017 Forum was the product of the breakdown of trust between investors and companies that occurred in the 2016 AGM season, the 2018 forum was all about proactivity:
- Engagement to meet shareholder activism head-on
- Developing incentive structures that are fit-for-purpose
- Monitoring and influencing company culture
- Increasing gender diversity on the board and throughout the organisation
Proxy adviser review of the 2017 AGM season
CGI Glass Lewis provided its debrief of the 2017 proxy season. While the Forum is conducted under the Chatham House rule, CGI Glass Lewis is happy for a precis to be shared.
Trends increasing in prominence were:
- Shareholder activism
- Alternative remuneration structures
- Protest votes against directors
- Diversity (not surprisingly)
Where strikes, or high no votes, against remuneration reports occurred, they were generally due to structural concerns with incentive plans.
Of the twenty ASX 300 companies for which CGI Glass Lewis recommended a no vote, only five companies suffered a strike. It appears that investors, while they might have regard for proxy adviser recommendations, will come to their own conclusions.
The increasing trend for shareholder activism was in the form of a motion proposing a constitutional amendment on climate change or human rights.
Evidence of trends on the decrease was found in:
- Remuneration strikes (11 ASX 300 strikes in 2017 v. 18 strikes in 2016)
- CEO turnover, and
CGI Glass Lewis’ forecast of 2018 trends is:
- Remuneration report disclosure – not just the what (i.e. the quantum), but the how (fixed pay, performance pay, deferral etc.), and the why.
- Increased focus on gender and skill diversity
- More remuneration structures that vary from the traditional “fixed, STI and LTI” norm
- More shareholder activism on environmental and social issues
- Activists are credible, well-funded and think in the long term (private equity horizon) – they are not necessarily just there to get the “sugar hit”. In an increasingly competitive market, they are looking for good places to deploy their capital. Traditional fund managers are becoming more “active”.
- Funds are now targeting profitable companies
- Although there has been a lot of talk about shareholder activism in Australia, there has not been significant action, until now. This changed with the Elliot/BHP activism.
- Australia’s regulations are relatively friendly towards shareholder activism
- Activist battles are generally won on shareholder communication and engagement.
- Checklist for boards is:
- know whether there are activists on the register
- communicate company strategy effectively
- prepare responses for likely activist attack vectors
- ensure governance is squeaky clean, capital expenditures are reasonable, assets are effectively utilised, and costs are contained; and
- create a communications and legal share activism response team.
Points that emerged from the discussion included:
- A number of potential markers for culture scandals included tenure of NEDs and executives, high remuneration and increased M&A activity
- Consensus is that culture is “the way we do things around here”
- It is often possible to get a read on a culture very quickly by walking the floor, comparing what is done to what is said to be done
- There is a view among global regulators that if they had had a better eye on culture before the global financial crisis, it may have been averted
- It’s reasonable to expect that the next level of regulatory activity will be in the cultural assessment space
- Investor focus is increasingly on the business “social compact”, where business is not just about making profits but aligning with community expectations
- The board should determine how it wants culture to be and set the “tone from the top” although there were other views, with some believing that the “mood in the middle” was equally important. Others (including Guerdon Associates) believe that organisations are at risk of “pockets” of poor culture no matter what the organisational culture may be.
- There was a strong view that senior management can be the most important driver of culture and that social media can play a critical part in both developing and reinforcing the culture.
- The difficulty of managing organisational culture across the globe was acknowledged. Employee and executive mobility can go part of the way to addressing this.
- The focus should be on walking the floor, and not just on the traditional board “wedding party” trip of organised outings and meetings. Directors have an obligation to undertake their own environmental scan across the business to understand employee behaviour, reaction and discussion
- It is also important to be keeping tabs on the pulse of the organisation through metrics that can be measured such as engagement.
- Employees should feel psychological safety, where they can ask the “stupid” questions.
Guerdon Associates sees culture as normative behaviours. It is behaviour that causes problems, not attitudes, or values or not being responsible. Behaviours are also more easily observed measured and verified than values.
Boards can do more to monitor, predict and control for bad behaviour. They can also establish a risk appetite for bad behaviours that will focus action to rectify subcultures that are tolerant of misbehaviour.
Alternative remuneration frameworks
The theme from discussions around non-traditional incentive structures was that it matters less what is implemented, as long as the rationale as to why that structure fits the company’s strategy is clearly disclosed and makes sense.
Points that emerged included:
- Executive skin in the game is considered important, however, the method of obtaining that skin in the game split investors. There was one comment for example, that with their pay, executives should be required to purchase shares using after tax pay.
- There is a general consensus that relative TSR is a less than satisfactory performance measure that puts executives at the mercy of a fickle investment community with an often short-term focus that runs contrary to the company’s focus on the long term.
- While TSR is an acceptable performance metric for many investors and fund managers, it is preferable to be used in conjunction with another metric.
- A good incentive plan was considered to be one that was simple, had a long-term focus, was symmetrical so that executives were rewarded for good outcomes and punished for poor outcomes, and was aligned with the shareholder experience.
- Investors will have regard for the board’s and the company’s record with incentive payments when considering a structure that vests solely on a one-year performance condition. Where short term incentives have been consistently paid, companies will have more trouble having their incentive structures accepted than those companies with incentive payments reflecting performance and the shareholder experience. In other words, the boards need to have established the trust of their investors.
- Companies introducing non-traditional remuneration frameworks should start their engagement early, well before the structure is to be introduced.
- Investors expect a sound rationale and basis for a change in structure and not simply one that will make it easier for incentives to vest and be paid.
Points that emerged from the discussion included:
- It is a non-question whether having women on boards increases performance or not. The fact is that half of the population are female and if the number of employees in positions are less than that, there is a talent pool that is being ignored. Boards may be missing out on directors who could be better than the current talent.
- The 30% club was based on research showing that once a minority reaches 30%, it is no longer a minority.
- Quotas may be necessary if businesses do not reach the end goal on their own.
- There are no bad men or boards, just unconscious biases.
- Focus is using personal influence of gender champions, where chairman might call other chairman and relate their experiences when hiring female directors and on ensuring that the hiring processes are robust and do include female candidates.
The key take outs from the day on culture and gender equality was that everyone was on the same page but that implementing intentions was going to be difficult. On alternative incentive structures, there is no single view as to what is best and what will be accepted by which investors.© Guerdon Associates 2019 Back to all articles