Speaker 1:        Welcome to the Guerdon Associates podcast.

Speaker 2:        Hello, everyone.

Speaker 1:        This podcast is based on the August 2026 issue of GuerdonNews, which is the monthly newsletter articles published by Guerdon Associates. And this podcast summarises these articles. This podcast details the integration of artificial intelligence in proxy advice alongside the proposed fifth edition of the ASX Corporate Governance Principles. It reviews executive incentive structures, actual realised remuneration outcomes according to ACSI, and the regulatory differences affecting initial public offerings. Finally, the discussion covers proposed capital gains tax reforms for employee share schemes in startups.

Speaker 2:        So let’s start by looking at the June 10th, 2026 release by Glass Lewis regarding artificial intelligence.

Speaker 1:        Yeah, that release introduced a framework advocating for a human-centric model and proxy advice, right?

Speaker 2:        Exactly. In a human-centric framework, the artificial intelligence system functions to enhance human judgement rather than replacing it entirely.

Speaker 1:        And to achieve this, Glass Lewis states the system depends on a requirement for investor grade information.

Speaker 2:        Yes. The categorisation of investor grade involves eight specific characteristics.

Speaker 1:        Okay. What are they?

Speaker 2:        The inputs fed into the artificial intelligence must be accurate, consistent, complete, traceable, valid, timely, secure, and observable.

Speaker 1:        Got it. And we see financial entities applying these systems in practise using similar parameters. JP Morgan utilises an AI agent that operates on rules based on governance beliefs.

Speaker 2:        Right. The underlying logic there relies on structured guidelines. Systems operate efficiently when analysts follow established rules based on specific governance beliefs.

Speaker 1:        Okay, let’s unpack this. It makes me think of an airplane on autopilot.

Speaker 2:        How so?

Speaker 1:        Well, the autopilot handles routine altitude maintenance while a human pilot is required to land the plane during a storm.

Speaker 2:        Ah, I see.

Speaker 1:        Yeah, the AI handles the structured baseline analysis and the analyst steps in for the complex governance valuations.

Speaker 2:        That aligns with the framework.

Speaker 1:        But I have a question about the inputs. If proxy research teams and portfolio managers rely on differing underlying sets of information, how do AI tools process those contradictions?

Speaker 2:        Well, the mechanism of automated speed amplifies contradictions.

Speaker 1:        Meaning what? Exactly.

Speaker 2:        Investment stewardship teams process information from corporate disclosures, board structures, and historical voting outcomes. When the underlying inputs do not align, the processing speed causes different arms of an investment firm to reach conflicting conclusions simultaneously.

Speaker 1:        Wow. Okay.

Speaker 2:        Yeah. So this structural outcome necessitates the investor grade framework to establish validated inputs across the entire firm before the AI processes them.

Speaker 1:        Right. And according to the research published by Guerdon Associates, verification steps and human input remain necessary for AI outputs.

Speaker 2:        Yes. So if you are sitting on a board of directors right now, the takeaway for a board director is to ensure your company’s disclosures are verifiable as trusted information and that internal governance frameworks make AI outputs safe for institutional use.

Speaker 1:        So to wrap up our evaluation of this topic, the segment summary is that AI functions as an augmentation tool relying on verified inputs rather than a replacement for human judgement . Now, this focus on structured governance in AI workflows connects to the broader structural updates occurring in corporate governance regulations.

Speaker 2:        Yes, it does. The ASX advisory group on corporate governance met on July 8th, 2026.

Speaker 1:        And that meeting reviewed the consultation package for the fifth edition of the ASX Corporate Governance Principles.

Speaker 2:        Right. And the public consultation for these updates runs from July 20 to mid-September with the next meeting scheduled for October 12th, 2026.

Speaker 1:        Okay. So the proposed updates adjust the total number of recommendations, changing them from 38 to 36.

Speaker 2:        Yeah. This reduction involved the removal of Duplicated Corporations Act 2001 requirements.

Speaker 1:        The update also includes the expansion of recommendation 2.2, which covers director skills.

Speaker 2:        And the consultation package introduces recommendation 4.3 on auditor appointments.

Speaker 1:        Right. Plus recommendation 8.1 changes the wording regarding remuneration to fair and reasonable.

Speaker 2:        Additionally, the package introduces recommendation 8.2 and downward adjustments to performance-based pay, and recommendation 8.3 on fixed fees for non-executive directors.

Speaker 1:        Here’s where it gets really interesting. You can compare the updated principles to a building code revision.

Speaker 2:        A building code revision.

Speaker 1:        Yeah. In a code revision, redundant guidelines covered by other laws are removed while structural requirements like the new auditor appointments and recommendation 4.3 are explicitly added to the code.

Speaker 2:        That works as an analogy.

Speaker 1:        But looking at recommendation 8.1, I want to explore how the term fair and reasonable operates when CEOs and investors hold differing definitions of those specific words.

Speaker 2:        Well, the new wording and recommendation 8.1 introduces subjectivity into the compliance framework.

Speaker 1:        Right, because the assessment of fair and reasonable requires qualitative judgement rather than a quantitative checklist.

Speaker 2:        Exactly. The overall structural shift moves away from prescriptive compliance toward an entity-focused culture. Under the proposed fifth edition, the focus of principle three shifted toward the entity itself rather than broader stakeholders.

Speaker 1:        So the takeaway for a board director evaluating this consultation package is to review the proposed changes regarding director skills, auditor appointments, and the revised remuneration guidelines ahead of the consultation close.

Speaker 2:        Yes. The summary for this segment is that the proposed fifth edition principles adjust 36 recommendations covering auditor appointments, board discretion, and non-executive director fees.

Speaker 1:        And that updated terminology regarding fair and reasonable remuneration directly precedes our examination of current CEO incentive structures operating in the market.

Speaker 2:        It does. We can evaluate Guerdon Associates’ analysis of ASX 100 CEO incentive opportunities from FY23 to FY25.

Speaker 1:        Okay. And the market context for this analysis includes a recent Glass Lewis report, right?

Speaker 2:        Yes, which identified an upward drift in variable incentive opportunities across the market.

Speaker 1:        So examining the metrics for domestic incumbents, the median short-term incentives and long-term incentives remained at 150% of total fixed remuneration.

Speaker 2:        And the fixed to variable pay ratio held at 25 to 75.

Speaker 1:        Right. Now we can contrast this domestic group with foreign domiciled CEOs.

Speaker 2:        The foreign domiciled CEOs record average long-term incentive opportunities exceeding 410% of total fixed remuneration.

Speaker 1:        Wow. And this metric reaches 443% at the 75th percentile.

Speaker 2:        Yes. The median short-term incentive opportunities for this offshore cohort sit at 207% of total fixed remuneration.

Speaker 1:        But wait, how do we reconcile the findings from Guerdon Associates differing from the Glass Lewis observation of an upward drift?

Speaker 2:        It comes down to the methodology.

Speaker 1:        It’s like calculating the average vehicle weight in a parking lot containing 40 bicycles and two cargo trucks. The mass of the cargo trucks alters the final average number, misrepresenting the weight of the bicycles.

Speaker 2:        That illustrates it well. The methodology isolated incumbent longevity and separated executive domicile. By applying the segmentation, it becomes evident that the overall market average is skewed by a cohort of foreign domiciled executives with US and UK aligned pay structures.

Speaker 1:        Ah, I see.

Speaker 2:        Domestic incentive structures remain static at 150% of total fixed remuneration when controlling for those specific variables.

Speaker 1:        So the takeaway for a board director is to separate short and long-term incentives and control for executive domicile when evaluating aggregate proxy advisor benchmarks.

Speaker 2:        Exactly. The summary for this segment is that domestic executive incentive ratios remain static at 25 to 75, while offshore domiciled executives recorded long-term incentive averages above 410% of fixed remuneration.

Speaker 1:        Okay. So the structure of these incentive opportunities leads into the realised monetary outcomes achieved by executives over the past year.

Speaker 2:        Yes. And we have the June report by ACSI on ASX 200 CEO pay detailing these outcomes.

Speaker 1:        The ACSI report states the ASX 100 median realised pay reached $4.8 million.

Speaker 2:        Looking at the longitudinal growth metrics, ASX 100 CEO median realised pay grew 2.2% annually since FY15.

Speaker 1:        And during the same period, inflation was at 2.65% and average worker earnings growth was at 3.16%.

Speaker 2:        Right. ASX 100 median fixed pay declined 0.3% annually since FY11.

Speaker 1:        The report notes that ASX 100 realised pay is 55 times the average Australian adult earnings. And according to the productivity analysis among Guerdon Associates articles, the median market capitalisation of ASX 200 companies grew 8.1% annually.

Speaker 2:        The termination metrics indicate the ASX 100 recorded nine CEO termination payments totaling $18.6 million.

Speaker 1:        So what does this all mean? Let’s break down the mechanism of realised pay versus statutory reported pay. Okay. It is like having cash in hand versus holding a promissory note maturing over several years.

Speaker 2:        Right, because statutory remuneration amortises the expense of awards vesting over multiple periods based on accounting standards.

Speaker 1:        Exactly. Whereas realised pay measures pre-tax remuneration actually received upon vesting or exercise. So what is the relationship between the CEO realised pay growth metric of 2.2% and the 8.1% market capitalisation growth?

Speaker 2:        Connecting the longitudinal metrics highlights the divergence between listed company executive pay growth rates, inflation, average worker earnings, and the overall market value generated by the companies. The market capitalisation growth rate of 8.1% operates independently of the realised pay growth rate of 2.2%. The value of the companies grew at a different rate than the cash remuneration received by the executives.

Speaker 1:        The takeaway for a board director reviewing these metrics is that they must recognise the varying growth rates between executive remuneration outcomes, worker earnings, and overall market capitalisation.

Speaker 2:        Yes. The summary for this segment is that ASX 100 CEO median realised pay recorded at $4.8 million with annual growth rates tracking below average Australian adult earnings and market capitalisation growth.

Speaker 1:        Now the compliance requirements and public scrutiny associated with listed company remuneration frameworks factor into the decreasing rate of initial public offerings in the domestic market.

Speaker 2:        They do. There is a decline in Australian initial public offerings linked to rigid executive remuneration frameworks such as the two-strike rule and the lack of a secondary board.

Speaker 1:        And we can examine the May 19th, 2026 US Securities and Exchange Commission proposed amendments for a regulatory contrast. For non-accelerated filers in the US, the SEC reduced summary compensation table information from three years to two and reduced named executive officers from five to three.

Speaker 2:        They also eliminated the compensation discussion and analysis, pay ratio disclosure, and say on pay votes for this category of companies.

Speaker 1:        And looking at the private market alternative, Citigroup introduced digital depository receipts on private shares on June 11th, 2026.

Speaker 2:        Right. This allows access to private equity through blockchain infrastructure.

Speaker 1:        Meanwhile, domestically, ASIC announced two-year trial reforms to streamline initial public offerings, but left the remuneration requirements unchanged.

Speaker 2:        You can compare the US SEC changes to removing toll booths on a highway to increase traffic flow, whereas the ASX retains the toll booths.

Speaker 1:        Yeah.

Speaker 2:        The SEC removed the reporting disclosures to lower the barrier for listing.

Speaker 1:        That’s the structural mechanism at play.

Speaker 2:        But I’m curious, does eliminating the say on pay vote in the US remove shareholder voices entirely, or does it reflect the advisory nature of the vote in that jurisdiction? The structural differences dictate the outcomes. Under the ASX two-stroke rule, a 25% vote against the remuneration report triggers a strike, and two consecutive strikes trigger a board spill resolution.

Speaker 1:        Right, which is a binding consequence.

Speaker 2:        Yes. This binding consequence means boards adopt specific pay structures to avoid a strike. In the US, the say on pay vote operates as an advisory function without the binding board spill mechanism.

Speaker 1:        So the rigid domestic requirements restrict biotech or tech companies from adopting global incentive structures such as paying fixed pay, partly as share rights.

Speaker 2:        Precisely. So the takeaway for a board director evaluating an IPO is to assess if their current incentive frameworks require alteration to meet domestic compliance, or if the Australian market inhibits the flexibility to secure leadership.

Speaker 1:        The summary for this segment is that the US SEC proposed reducing executive pay disclosure requirements for non-accelerated filers, contrasting with the unchanged remuneration compliance requirements in Australia.

Speaker 2:        Exactly. And alternatives to public listings include remaining private, which necessitates examining the taxation frameworks governing employee ownership in startups.

Speaker 1:        Right. And the June 18th, 2026 submission by Guerdon Associates regarding the government consultation paper on capital gains tax reforms addresses these frameworks.

Speaker 2:        It does. The startup concession in division 83A of the Income Tax Assessment Act allows deferred taxation for employee share schemes.

Speaker 1:        And the proposed reforms narrow this concession to employees of innovative startups.

Speaker 2:        Yes. However, the submission by Guerdon Associates states that the test for the concession should be survival rather than innovation.

Speaker 1:        The argument notes that founders on nominal salaries should not be denied the capital gains tax concession if they hold more than a 10% equity interest.

Speaker 2:        It also states that startups should remain distinguishable from venture capital investors.

Speaker 1:        You could compare the proposed innovation test to judging a marathon runner on their running style rather than whether they crossed the finish line. Survival is the measurable metric, whereas innovation is subjective.

Speaker 2:        That perfectly illustrates the submission’s perspective.

Speaker 1:        But why are founders with more than a 10% equity interest currently treated differently under the concession?

Speaker 2:        Well, the division 83A criteria function to distinguish early stage founders taking zero salary from early stage venture capital investors.

Speaker 1:        Okay, I see it.

Speaker 2:        Categorising them together under the proposed 10% equity threshold removes the tax concession from founders who hold equity in place of a cash salary.

Speaker 1:        Ah. So the takeaway for a board director of early stage companies is to monitor the division 83A eligibility criteria regarding employee share scheme tax concessions.

Speaker 2:        Yes, that’s correct. The summary for this final segment is that the proposed capital gains tax reforms narrow division 83A concessions to innovative businesses while industry submissions advocate for a survival-based eligibility test.

Speaker 1:        Well, that concludes the examination of the August 2026 newsletter articles.

Speaker 2:        As we conclude this discussion, consider whether the structural differences in global corporate governance and executive remuneration regulations will result in a unified international framework, or if regional exchanges will operate as separate ecosystems with varying compliance requirements.