Speaker 1:        Welcome to the Guerdon Associates Podcast.

Speaker 2:        Hello. Thanks for tuning in today.

Speaker 1:        This podcast is based on the July 2026 issue of GuerdonNews, which is the monthly newsletter articles published by Guerdon Associates.

Speaker 2:        Yeah, and we have a lot to cover.

Speaker 1:        This podcast summarises these articles. We explore the valuation of long-term incentives alongside the relationship between dividend yields and growth measures. The discussion examines structural changes in APRA and ASIC regulations and targeted enforcement actions concerning executive remuneration frameworks. We finished with ASX updates on equity plan adjustments and an OECD report regarding proxy advisor conflicts of interest.

Speaker 2:        Right. So starting off with the valuation of long-term incentives or LTIs.

Speaker 1:        Yes. Proxy advisors and boards use face value to benchmark these LTIs.

Speaker 2:        They do. And face value equals the number of rights granted multiplied by the share price at the grant date.

Speaker 1:        Okay.

Speaker 2:        But there is a discrepancy here because face value incorporates an expectation of dividends.

Speaker 1:        Oh, I see.

Speaker 2:        Yeah. Whereas many LTI grants lack dividend entitlements.

Speaker 1:        Right. So how do they value this according to the actual guidelines?

Speaker 2:        Well, the AASB 2 B34 guidelines state that valuation should be reduced by the present value of dividends expected to be paid during the vesting period.

Speaker 1:        Okay. Can you walk through a calculation for that?

Speaker 2:        Sure. Comparing a $500,000 face value grant with a 6% yield over four years results in a present value of $393,314, which results in a 27% variance.

Speaker 1:        Okay, 27%. But how does a board rectify this disparity without alarming investors?

Speaker 2:        I mean, they incorporate dividend rights that accumulate exclusively upon vesting.

Speaker 1:        Oh, okay.

Speaker 2:        Yeah, that eliminates the disparity, establishes capital neutrality and aligns with shareholder interests.

Speaker 1:        So the takeaway for a board director is that remuneration committees must review valuation methodologies for like-for-like adjustments within benchmarking to ensure executive packages are valued accurately. To summarise this section, adjusting the face value for expected dividends provides an accurate grant value, which transitions us right into how these incentives tie into specific performance metrics like capital allocation strategies.

Speaker 2:        Yeah. So moving to those performance metrics, let’s look at growth measures.

Speaker 1:        According to research published by Guerdon Associates, 47% of ASX 100 companies adopt at least one growth metric in their LTI.

Speaker 2:        Right.

Speaker 1:        But 27% of ASX 100 companies that grant an LTI maintain a dividend yield above the ASX 100 index.

Speaker 2:        And while there is an inverse relationship between high dividend yields and growth measures.

Speaker 1:        Wait, really?

Speaker 2:        Yeah. 10% of these high yield companies incorporate a growth measure.

Speaker 1:        Okay. How does that break down by sector?

Speaker 2:        Industrials and healthcare use growth measures at 83.3% and 80% respectively.

Speaker 1:        Got it.

Speaker 2:        While utilities and energy utilise zero.

Speaker 1:        Zero. But does this relationship hold true across different market capitalisations or do smaller companies behave differently?

Speaker 2:        The gap remains consistent across all three-month market capitalisation quartiles.

Speaker 1:        Oh, I see.

Speaker 2:        Companies in the highest quartile without a growth measure record a median dividend yield 3.19% higher than those with one.

Speaker 1:        And what about the lower end?

Speaker 2:        The lowest quartile sees a 1.47% difference.

Speaker 1:        So the takeaway for board directors here is that remuneration committees must evaluate whether current performance hurdles accurately align with the capital distribution strategy and dividend policy.

Speaker 2:        Yes, that is key.

Speaker 1:        To summarise, the inclusion of growth metrics varies inversely with dividend yields across all market caps. This alignment of internal pay strategy with external stakeholder expectations brings us to the evolving landscape of regulatory oversight.

Speaker 2:        Right, which leads us to structural realignments by APRA and ASIC.

Speaker 1:        Articles published by Guerdon Associates detail these changes, specifically the financial accountability regime or FAR.

Speaker 2:        Yeah. FAR removes accountability maps for accountable persons’ direct reports and it has ongoing notification requirements.

Speaker 1:        That seems like a shift. What else is changing?

Speaker 2:        There is a consolidation of five APRA governance standards into CPS 510. The definition of responsible persons aligns with FAR and most notification requirements are removed.

Speaker 1:        When does that actually start?

Speaker 2:        Enforcement commences at the start of 2028.

Speaker 1:        But how do the changes impact smaller, less complex entities regarding board structures?

Speaker 2:        Well, non-SFIs are permitted to combine their audit and risk committees.

Speaker 1:        Oh, that makes sense.

Speaker 2:        Furthermore, boards have the authority to delegate immaterial compliance matters to committees and management.

Speaker 1:        So the board director takeaway is that boards must assess the compliance of their current governance framework, schedule reviews for 2027, and submit feedback on CPS 510 proposals before the end of August 2026.

Speaker 2:        Yes.

Speaker 1:        Summarising this, we are seeing a reduction in administrative notification requirements, and this bridges us into APRA’s targeted focus on actual governance outcomes.

Speaker 2:        Yeah, that focus on actual governance outcomes is visible right now.

Speaker 1:        In June 2026, APRA began a formal investigation into Diversa Trustees regarding executive remuneration decision-making. There was a $777,000 incentive payment to the CEO during the collapse of the $446 million first Guardian Master Fund.

Speaker 2:        And this investigation evaluates compliance with Prudential Standard CPS 511 and the Superannuation Industry Supervision Act.

Speaker 1:        What was the core governance failure there?

Speaker 2:        The internal board mechanisms failed to automatically trigger malus or clawback adjustments following a material risk event.

Speaker 1:        Wait, is the APRA investigation intended to assign direct fault for the financial losses of the fund members?

Speaker 2:        No. Direct fault is the subject of ASIC’s civil penalty proceedings.

Speaker 1:        Okay. So what is APRA looking at then?

Speaker 2:        APRA focuses on whether the board justified incentive payments while simultaneously applying for a $239 million government bailout.

Speaker 1:        Wow. For board directors, the takeaway here is that remuneration committee chairs must implement objective consequence management frameworks capable of withholding incentives during operational breakdowns. Summarising this segment, regulatory bodies are investigating governance frameworks during material risk events. While regulators mandate robust remuneration structures, amending those structures requires interaction with market operators, which is our next topic.

Speaker 2:        Yeah. Interacting with market operators like the ASX.

Speaker 1:        The listed entity supervision report 2026 was released on June 26th for the nine months ended March 31st, 2026.

Speaker 2:        Yes.

Speaker 1:        It shows that seven submissions regarding employee equity plans were rejected.

Speaker 2:        Five related to options terms and two related to shareholder approval.

Speaker 1:        Why were they rejected?

Speaker 2:        Well, ASX listing rules do not generally permit changes to employee share rights or option grants.

Speaker 1:        I see.

Speaker 2:        Seeking waivers under LR 6.23.3 yields limited success.

Speaker 1:        Are companies permanently restricted from modifying these on-foot grants?

Speaker 2:        The ASX supervision team will review commonly granted waivers in FY27.

Speaker 1:        Okay. What for?

Speaker 2:        To develop proposals aimed at reducing the need for them and simplifying the approach to employee incentive schemes.

Speaker 1:        So the takeaway for board directors is to not currently count on ASX support for changes to on-foot grants, but monitor FY27 developments for potential simplification.

Speaker 2:        Exactly.

Speaker 1:        To summarise, the ASX restricts modifications to active equity grants but is reviewing the waiver process. This connects the rules set by external regulators to the external advisors who evaluate board compliance.

Speaker 2:        Right, which brings us to proxy advisors and their conflicts of interest.

Speaker 1:        Research from Guerdon Associates indicates the OECD called out proxy advisors for issuing corporate voting grades while simultaneously selling consulting services to those same issuers.

Speaker 2:        Yeah. And 6% of jurisdictions worldwide mandate disclosure for secondary services.

Speaker 1:        What is the main conflict there?

Speaker 2:        Advisors fear losing consulting clients by issuing adverse voting recommendations.

Speaker 1:        You know this dual hat business model operates like a judge selling consulting services to the defendant standing trial in their courtroom.

Speaker 2:        Yet it does. The OECD findings show that across 50 jurisdictions, 58% address conflict of interest disclosure directly in laws while 8% use voluntary codes.

Speaker 1:        How does Australia’s regulatory framework compare to other global jurisdictions?

Speaker 2:        Well, Australia requires an Australian financial services licence for wholesale advice, but does not prohibit corporate services arms.

Speaker 1:        And what about elsewhere?

Speaker 2:        By contrast, India requires proxy advisors to publicly disclose their ownership structure.

Speaker 1:        The takeaway here is that institutional investors should demand proxy advisor firewalls that decouple voting recommendations from corporate consulting and pay a fee for quality advice.

Speaker 2:        Yes.

Speaker 1:        To summarise, the OECD report highlights conflicts of interest where proxy advisors provide consulting services to the companies they evaluate. So that covers the main points from the articles today.

Speaker 2:        It does.

Speaker 1:        To summarise the episode, we covered the valuation of LTIs, the inverse relationship between dividend yields and growth measures, the APRA and ASIC structural realignments, the Diversi Trustees investigation, ASX updates on equity plan adjustments, and the OECD report on proxy advisor conflicts.

Speaker 2:        It is a lot of shifting mechanics in governance.

Speaker 1:        It is. I’m going to leave you with a final thought to consider. If regulatory simplification and shareholder alignment prioritise long-term accountability over box ticking, how will the criteria for a fair executive incentive evolve by 2030?