The Australian Council of Superannuation Investors (ACSI) has released the latest version of its Governance Guidelines – A guide for superannuation trustees to monitor listed Australian companies. ACSI uses the guidelines to underpin its voting recommendations on ASX300 companies.

The guidelines have been prepared to be used by both companies and superannuation funds. They are designed as a reference for chairpersons, directors and senior executives of listed companies on the contemporary governance expectations of superannuation fund investors. The Guidelines reinforce the accountability of boards and management teams to shareholders.

The guidelines are also a tool for superannuation funds to help manage their investments in Australian listed companies. These Guidelines provide a framework by which superannuation funds can assess the Environmental, Social and Governance (ESG) practices of investee companies, particularly when exercising their voting rights.

The guidelines focus on the areas ACSI and its members consider in relation to material environmental, social and corporate governance issues. These include board responsibilities; board composition and processes; remuneration; company meetings; disclosure standards and financial integrity. New guidelines for 2013 cover:

• The two-strikes rule relating to approval of the remuneration report at the AGM (Guideline 17)
• The assessment of shareholder resolutions (Guideline 18.5)
• The issues considered when assessing director election proposals (Guideline 1)
• The assessment of capital raising processes (Guideline 7).

Guerdon Associates has noted several issues companies may need to be mindful of in the areas of board and director evaluation, as well as remuneration.

ACSI’s guidelines emphasise that communicating the performance evaluation process and outcomes is important, indicating that a skills matrix is an effective tool to demonstrate to shareholders how skills across the boardroom link to the oversight of company operations and strategy. While we assist boards in the evaluation process and in constructing and maintaining very useful board and director skills matrices, few Australian companies disclose these, even in general terms. This is an emerging practice in leading North American and UK companies, and Australian companies appear to be lagging behind.

Disclosing their skills matrix will assist companies with the “governance” ratings now being used by several institutions to rate governance risk for investment purposes. The ACSI guidelines indicate what industry funds should look out for, and companies should consider, in director succession and evaluation, including:

1. Sufficient overlap in director succession so that gaps in skills, experience, subject matter expertise or corporate memory do not occur.
2. Future skill gaps should be identified by following a board evaluation process.
3. When considering a director who holds, or has held, other directorships, past performance of the director and those companies should be considered.
4. An assessment of ability to provide strategic direction and objectives for the company
5. Identification of gaps in skills, experience and expertise to promote overall board effectiveness and company performance over the long-term
6. Evaluation of performance in managing shareholder and stakeholder expectations.

Most ASX listed company board nomination committees could take the above as a checklist for not only how they evaluate boards, but also how to improve disclosure of their board and director evaluation process.

Remuneration committee chairs anxious to know how ACSI approaches remuneration reports where there is a danger of a second “strike” will not necessarily be reassured. Consistent with other proxy advisers, ACSI will assess remuneration reports independently of board spill resolutions where a first strike has been incurred. ACSI considers spill resolutions on a case-by-case basis, taking into account:

• The gravity of a spill meeting
• Company performance and the performance of the board and management
• The materiality of underlying remuneration issues at the company
• Shareholder engagement and changes made by the board to address shareholder concerns.

Consistent with its 2011 guidelines, ACSI is expecting the detail of performance hurdles to be fully disclosed. Over the years they have been instrumental in effecting change in the extent of disclosure, and this year’s guidelines indicate that their vigilance has not diminished. In particular, remuneration committees should make sure their disclosures note the specific threshold performance requirements for the payment of STI and why they were chosen.

We also note the ACSI guideline that opposes “the payment of dividends to executives on unvested (and therefore unearned) incentive shares”. To date ACSI has successfully focused on this practice as applied to long-term incentive plans, resulting in the recognition and rectification of clearly egregious practices. However, this practice is still being continued with deferred STI payments that technically have not vested because they are subject to service and, increasingly, other conditions. We know from discussions with proxy advisers that this practice is not condoned. While to date proxy adviser reports have not focused on this practice, despite their guidelines, we suggest it is something that remuneration committees may need to look into sooner rather than later.

The updated 2013 ACSI guidelines can be found HERE.

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