State Street annual stewardship report review
12/04/2021
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State Street is one of the world’s largest investors, and is likely to hold a fair chunk of every ASX 100 company. Hence it is worth noting how they are likely to vote on remuneration matters.

At the end of March, State Street Global Advisers (State Street) released a summary of their annual asset stewardship report for 2020.

One of their report’s engagement and voting highlights in 2020 was on executive remuneration. Executive remuneration received elevated attention due to COVID-19 rendering certain performance targets unattainable.

On a world scale, it seems pesky Australian companies take up more than their share in engagement time. Six percent of all of State Street’s global engagement was made towards Australian companies while only 2% of their votes were attributed to this region.

Engagement and voting highlights

Through engagement and voting with State Street’s investee companies, they found the following trends:

  • Temporary pay-cuts due to COVID-19. Many CEOs and senior executives in companies hit hard voluntarily reduced pay until COVID-19 subsides. Discretion will be a key focus moving forward as companies consider applying discretion on short-term incentives and long-term incentives to determine awards earned for 2020. State Street notes that remuneration committees should be clear about discretionary powers available to them. See HERE for what ASIC has to say about discretion.
  • Short-term incentives becoming more complicated. State Street noted overly complex short-term incentives with numerous metrics in 2020. State Street noted the difficulty in interpreting what the executive is being incentivised for or how business results translated into awards. It recommends a simplified plan to create a clear link to strategy.
  • Over-reliance on relative TSR. State Street noted concerns over using relative TSR as the sole long-term incentive hurdle. See HERE for our long held thoughts on relative TSR.
  • Shift from long-term equity to long-term incentives in the US market. State Street encourages the trend of moving away from time-vested awards.

State Street supported approximately 84% of pay-related proposals, an increase from 82% in 2019. Votes against mostly resulted from poor pay-for-performance alignment, poor disclosures of pay structure, and increasing pay quantum in the prior year. Poor incentive design structure was the most common factor driving voting rationale on pay proposals, followed by excessive pay, one-off payments and retesting or repricing.

Regional Differences in voting on pay proposals

The Australian market had the second lowest level of ‘for’ votes in State Street’s portfolio for remuneration proposals. Only Europe had a lower level of ‘for’ votes. It noted votes ‘against’ were for poor remuneration structures, poor disclosures or misalignment between pay and performance.

State Street noted a shift in emphasis in the remuneration framework from long-term incentives to short-term incentives in the Australian market. Though disclosures on short-term incentive metrics have improved, it expects companies to disclose performance against short-term incentive targets for reporting purposes.

State Street is also concerned with certain companies benchmarking executive remuneration against larger American peers without enough proper justification. It increased engagement with Australian companies to ensure remuneration plans are linked to long-term performance and appropriate benchmarking peers.

Assessing director re-election with R-Factor

Beginning 2020, State Street used their proprietary R-Factor scores (generating ESG scores) to take action against directors that were laggards and could not articulate how they plan to improve their score. In total, fourteen companies were identified in 2020 to be R-Factor laggards that led to votes against the board’s independent leader. Two (14%) were from Australia. It also exercised its stock-lending policy and recalled on loan securities for an Australian software company that it identified as an R-Factor laggard.

The R-Factor CorpGov Score Screens identifies portfolio companies that do not comply with the country-specific governance codes. Companies that scored in the bottom 10% relative to local peers and in a major index were identified and engaged with. Eighteen companies in the ASX 100 were identified as laggards, the highest proportion among all the regions. Eleven (61%) saw the independent leader of the board (in Australia this is usually the Chairman) receive a ‘no’ vote for re-election. The remaining seven (39%) either improved their governance practices, provided enough rationale or did not have a director standing for election.

State Street noted that it will consider company engagement, improvement of disclosures and performance related to financially material ESG matters when determining whether to support an independent director for re-election.

Fearless Girl Campaign

This is a State Street campaign designed to increase the number of women in higher positions of the organisation. It has led to 57 global engagements with boards on the subject of adding more females to the boardroom. For the ASX 300, it identified 64 companies since March 2017 as not having a woman on the board. Out of this 64, 44 (69%) added a female director to their ranks. It also noted that over a four year period, the proportion of companies without a female director in the ASX 300 decreased from 17% to 6%

State Street voted against director election or re-election of nine companies for nominating a director that did not improve board diversity.

State Street has noted that future engagements will focus on encouraging board independence, ensuring remuneration is appropriately linked with long-term performance and benchmarked appropriately.

The summary can be found HERE.

The full stewardship report can be found HERE.

© Guerdon Associates 2021
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