Speaker 1:        Welcome to the Guerdon Associates podcast. I’m glad you are joining us today. We are basing today’s discussion on the September 2026 issue of Guerdon News, which is the monthly newsletter articles published by Guerdon Associates. This analysis examines the 2026 Glass Lewis Benchmark Guidelines for ASX 300 companies and a governance checklist for boards preparing for annual general meetings. The discussion evaluates a submission on accounting firm consulting practises and reviews the utilisation of key management personnel loans across the ASX 100. Finally, the analysis details global and ASX 200 chief executive turnover metrics from the first half of 2026.

Speaker 2:        Right. So let’s get into the updated 2026 benchmark policy for Australia from proxy advisor Glass Lewis, they removed first person phrasing from their guidelines.

Speaker 1:        Oh, so they are stepping back from presenting it as just their singular view.

Speaker 2:        Yeah, that is right. The stated intent is to reflect broad investor opinion and market practise. But the functional change here is the introduction of a 0 to 100 pay for performance scorecard for ASX 300 companies. This replaces their previous qualitative ratings of poor, fair, and good.

Speaker 1:        I mean, think of this shift like moving from a subjective essay grading system to a standardised multiple choice test. The evaluation criteria are predefined and tied directly to relative shareholder returns rather than qualitative assessments.

Speaker 2:        That analogy captures the mechanical change perfectly. So, the 0 to 100 scorecard aggregates five weighted tests, and these tests are measured against index-based and bespoke peer groups.

Speaker 1:        Well, let’s clarify how those peer groups function before we break down the test.

Speaker 2:        Sure. The bespoke peer group comprises companies from the same industry with comparable business models and share price drivers. Where it is impossible to identify bespoke peers, the index-based peer group is used. The tests focus entirely on incentive outcomes rather than the quantum of total pay.

Speaker 1:        Right, because quantum is evaluated at appointment. So how do these five tests actually function in practise?

Speaker 2:        The first test evaluates the CEO’s short-term incentive payout as a percentage of maximum against relative total shareholder return or TSR over the most recent financial year.

Speaker 1:        And the second test.

Speaker 2:        The second test assesses the CEO’s long-term incentive payout as a percentage of maximum against relative TSR over the performance period.

Speaker 1:        And tests three and four evaluate the track record,

Speaker 2:        Yes. They assess the STI and LTI payouts against relative TSR over a five-year weighted average with a minimum of three years.

Speaker 1:        And then there’s the fifth test, which incorporates the qualitative parameters into this quantitative score.

Speaker 2:        Yeah, the qualitative tests evaluate elements like one-off grants, upward discretion applied by the board, instances where fixed pay exceeds variable pay, uncapped incentives, and cases where cash payouts exceed equity.

Speaker 1:        Ah, I see.

Speaker 2:        Each component is subject to size-based ranking and considered on a weighted basis to generate the aggregated score out of 100.

Speaker 1:        The 2026 guidelines also introduce changes to CEO shareholding expectations.

Speaker 2:        Yes. For CEOs with a constrained fixed remuneration profile, minimum shareholding targets are now judged against their total remuneration opportunity rather than a multiple of fixed pay.

Speaker 1:        I suppose the rationale here is linked to package structure. If a board weighs a CEO’s remuneration heavily toward variable incentives, a shareholding requirement based on a multiple of constrained fixed pay translates to an altered absolute shareholding.

Speaker 2:        Right. Measuring against the total remuneration opportunity addresses this structural variable, ensuring the absolute holding reflects the overall pay package. The guidelines also outline expectations for international benchmarking.

Speaker 1:        Right. Where boards adopting global pay structures are evaluated against specific criteria, including the proportion of offshore revenue and the scale of operations.

Speaker 2:        Yes, this requires boards to demonstrate genuine global operations. If a board references international peers to inform pay, quantum, or structure, they must provide a commercial rationale and transparent disclosure of the benchmarking process.

Speaker 1:        Considerations include whether executives are based outside Australia and the weight given to international comparators relative to Australian peers. So if you are a board director listening to this update, here’s the brief summary. Glass Lewis introduced a 0 to 100 scorecard for ASX 300 companies alongside updated guidelines on CEO shareholding and international benchmarking.

Speaker 2:        And the key takeaway for the board director is that boards are evaluated on a quantitative framework requiring outcomes to be defensible if performance metrics diverge from relative total shareholder return.

Speaker 1:        Shifting gears to how boards prepare to explain these evaluated pay structures to shareholders, the AGM preparation process incorporates responses to AI-driven analysis. Proxy advisors and institutional investors utilise artificial intelligence to identify gaps in remuneration disclosures.

Speaker 2:        That is correct. The technology scans disclosures at scale. It checks for compliance against predefined governance frameworks.

Speaker 1:        Wait, let me push back on that. If AI is scanning for specific structural parameters, is there a risk that boards might align their disclosures to the algorithm’s preferences rather than executing genuine governance improvements?

Speaker 2:        Well, that tension exists. AI identifies deviations from standardised templates. According to the research published by Guerdon Associates, AI is not sufficiently nuanced to discern elements aligned with shareholder interests.

Speaker 1:        Which creates potential issues, particularly for executive director equity grants.

Speaker 2:        Right, because those grants might fail a standardised AI scan despite serving long-term shareholder value. To manage automated scrutiny while accurately reflecting company strategy, boards require clear, well-supported disclosure, especially for discretionary adjustments.

Speaker 1:        So a well-developed Q&A guide that anticipates queries allows directors to respond consistently. Let’s explore what is actually in that Q&A guide for the 2026 AGM. For CEO and executive pay, the expected questions focus on justifications for fixed pay increases when shareholder returns deteriorate.

Speaker 2:        And shareholders also query the rationales for one-off grants of rights or options asking why the intended outcome could not be achieved through the existing incentive framework.

Speaker 1:        For short-term incentive payments, inquiries target the reasoning behind payouts when dividends are unchanged or reduced or when financial performance remains flat.

Speaker 2:        Yes. Shareholders seek validation for non-financial measures, questioning why non-financial outcomes attract an STI payment if financial performance is below targets.

Speaker 1:        I imagine they also question whether non-financial measures reflect activities expected for business as usual operations.

Speaker 2:        They do. Long-term incentive design is another focal point, and this is where the mechanics involve specific calculations. The guide highlights questions regarding the use of underlying EPS that excludes impairments.

Speaker 1:        We should explain the underlying mechanism concerning value reduction there. If impairments are excluded from the EPS calculation, the metric reports earnings growth even if prior decisions resulted in a reduction in the value of the business.

Speaker 2:        Which may reward management for outcomes that diverge from the shareholder experience.

Speaker 1:        Exactly. Shareholders are asking boards to explain why an executive’s long-term incentive should vest based on an adjusted earnings figure that ignores write-downs in asset value.

Speaker 2:        Furthermore, shareholders question why dividends accrued during the vesting period are added to LTI awards that vest. Diversity disclosures are also evaluated in this AGM preparation guide, right?

Speaker 1:        Yes. Directors are expected to explain the steps taken to improve diversity in board composition and report on progress against gender balanced targets. They also face questions on the drivers of the gender pay gap among employees and whether gender differences exist in remuneration among executives performing comparable roles. So as a brief summary, the AGM checklist outlines anticipated inquiries regarding executive pay structures, incentive outcomes, and board diversity. The key takeaway for the board director is that directors should prepare to explain remuneration outcomes before the AGM, ensuring key decisions and discretionary adjustments are clearly supported by disclosure.

Speaker 1:        Moving on to our next story, the structural advice boards rely on for these AGM disclosures often comes from external firms, which brings us to an evaluation of potential conflicts of interest.

Speaker 2:        Right. A submission by Guerdon Associates responds to the treasury’s consultation paper on regulating Australian accounting, auditing, and consulting firms.

Speaker 1:        The submission examines broad-based audit firms known as the big 4, providing remuneration advice to boards while simultaneously providing services to management, such as taxation, IT, and risk management. The fees generated from management services are multiples of the fees derived from board remuneration advice.

Speaker 2:        The board remuneration committee commissions remuneration advice because management faces a conflict of interest in setting their own pay, performance metrics, and incentive arrangements, yet boards often delegate the process for selecting their board advisor to management.

Speaker 1:        That delegation introduces the structural issue. Broad-based audit firms are already providing a range of services to management. This dynamic is akin to a restaurant reviewer simultaneously operating the marketing agency for the venues they evaluate. The financial incentives overlap, compromising independence.

Speaker 2:        The overlap creates specific financial incentives. Broad-based audit firms discount board remuneration fees as a lever to win work for higher fee non-board related services. Management is more likely to favour audit firms they currently employ.

Speaker 1:        Consequently, audit firms are less likely to challenge the advice management provides to the board regarding their own pay, positioning themselves to win or retain fees from work commissioned by management. But the Corporations Act 2001 contains provisions intended to address independence though.

Speaker 2:        Those provisions are ineffective in this context due to broad exemptions for accounting, legal, and actuarial advice. Advisors provide advice that is not captured by the defined remuneration recommendation in the act.

Speaker 1:        So there’s no transparency or disclosure of conflicted fees. The treasury consultation paper suggests applying corporate disclosure standards to audit firms to resolve these conflicts.

Speaker 2:        Applying corporate disclosure standards will not resolve the issue. We have to look at the structural difference between a corporation and a partnership. Audit firm partners are owners and management in one.

Speaker 1:        Meaning there is no agency issue to resolve through standard disclosure.

Speaker 2:        Precisely. In a corporate model, disclosure addresses agency issues between management and shareholders. In a partnership model, that mechanism does not apply.

Speaker 1:        Overseas markets maintain different safeguards. The UK utilises the Remuneration Consultants Group of Code of Conduct. US stock exchange listing rules govern compensation advisor independence.

Speaker 2:        Suggested remedies for Australia include full fee disclosure for board and management advice or implementing US stock exchange style rules to assess potential conflicts of interest.

Speaker 1:        To summarise, a regulatory submission details how broad-based audit firms face conflicts of interest when providing remuneration advice while simultaneously consulting for management. The key takeaway for the board director is that boards would benefit from US style exchange rules or disclosure of fees for both board and management advice to assess potential conflicts of interest. Transitioning to a specific retention mechanism used to incentivise the management teams we just discussed.

Speaker 2:        Yes. An analysis published by Guerdon Associates evaluates loans to key management personnel or KMP across the ASX 100.

Speaker 1:        Under section 2M.3.03 of the Corporation’s Regulation 2001, all loans to KMP must be disclosed in the remuneration report with additional detail for loans over $100,000.

Speaker 2:        The evaluation indicates that 12% of ASX 100 companies, which equals 12 companies, disclose loans to KMP. Nine of these 12 companies are financial institutions.

Speaker 1:        Right. These financial institutions provide loans at arm’s length interest rates representing personal or mortgage financing. There is an optical contradiction of bank executives obtaining mortgages from competing financial institutions. That affirms why nine of the 12 companies are banks.

Speaker 2:        The disclosures for these loans are located in the remuneration reports and financial statements. The remaining three companies disclosed distinct arrangements.

Speaker 1:        Which were one ongoing loan-funded share plan, one franchise funding loan, and one tax equalisation loan. Across the ASX 100, the number of loan-funded share plans decreased to one company, changing from two companies in 2022.

Speaker 2:        Given that capital is tied up in these loans, why would a board implement a loan-funded share plan instead of relying on standard performance rates?

Speaker 1:        Well, let’s look at the distinction which lies in the repayment mechanism and downside exposure. The mechanics of a loan-funded share plan function differently from full recourse loans.

Speaker 2:        In a full recourse loan used for asset acquisition or tax obligations, the executive is liable for the repayment of principal and interest.

Speaker 1:        But in a loan-funded share plan, the company grants a limited recourse, interest-free loan for the sole purpose of acquiring shares at their market value. Those shares are placed under a holding lock for the term of the performance investing period.

Speaker 2:        So what happens at the end of that period?

Speaker 1:        The balance repayable on the loan is the lesser of the value of the shares and the loan balance at the repayment date. If the share price is greater than the loan balance, the executive receives the share price appreciation.

Speaker 2:        And if the share price drops below the loan balance, the repayment is the value of the shares at that time.

Speaker 1:        Exactly. The reduction in share value is borne by the executive. This aligns their financial experience with a shareholder’s experience. In contrast, standard performance rights do not expose the executive to the same capital reduction.

Speaker 2:        The capital tied up in these plans could otherwise be invested in future profit generating activities such as growth, technology, or research and development.

Speaker 1:        That is the trade-off. However, the analysis states this remains a viable option for companies with stable long-term earnings to increase executive shareholding. It aligns executive performance with share price growth and dividend yield. So in summary, an evaluation of the ASX 100 shows that 12% of companies provide loans to key management personnel, predominantly within financial institutions.

Speaker 2:        And the key takeaway for the board director is that for companies with stable earnings, loan-funded share plans are an option to align executive performance with share price growth, though they require a clear rationale due to the company capital involved.

Speaker 1:        Shifting gears to the outcome of these retention tools and pay structures, recent turnover metrics illustrate shifts in leadership stability.

Speaker 2:        Global CEO turnover metrics maintained by Russell Reynolds Associates establishes the broader baseline. In the first half of 2026, ASX 200 CEO appointments changed from 11 to 14, representing an increase of 27%.

Speaker 1:        Concurrently, global CEO appointments observed minimal change while global departures changed from 118 to 101. The average global outgoing CEO tenure is recorded at nine years.

Speaker 2:        It establishes a contrast.

Speaker 1:        The current environment resembles two separate climate zones. The global landscape is observing an extended period of calm with nine-year tenures while the ASX 200 is recording an influx of executive appointments.

Speaker 2:        We also observe differences in executive background. The proportion of CEO appointments with prior illicit experience was 35% in the ASX 200 compared to the global average of 23%.

Speaker 1:        What drives that 35% rate of experienced hires in the ASX 200?

Speaker 2:        Well, hiring experienced executives provide stability. However, it suggests potential shortfalls in internal succession pipelines. Boards are looking externally to proven public company executives rather than promoting from within.

Speaker 1:        And this dynamic is compounded by a restricted available talent pool in Australia, differences in CEO remuneration and distinct remuneration governance parameters compared to international markets.

Speaker 2:        Yes. According to the articles published by Guerdon Associates, women’s CEO appointments in the ASX 200 reached 43% in the first half of 2026. This metric was matched by the Euronext 100.

Speaker 1:        The global proportion of women’s CEO appointments was 16%. In the S&P 500, the proportion was 9% representing three appointments out of 32.

Speaker 2:        So the ASX 200 metrics point to a different demographic shift in appointments compared to the broader global sample.

Speaker 1:        To summarise, in the first half of 2026, the ASX 200 recorded 14 CEO appointments and 43% women CEO appointments diverging from global turnover stability.

Speaker 2:        And the key takeaway for the board director is that with a restricted talent pool and specific governance parameters, boards may consider whether their executive remuneration framework effectively supports talent retention and succession planning.

Speaker 1:        That brings a review to a close. Thank you for joining us on the Guerdon Associates podcast. Before you go, consider this. If artificial intelligence analysis becomes the primary evaluator of governance disclosures and proxy voting scorecards, boards might eventually design remuneration frameworks optimised entirely for algorithmic approval rather than human talent retention, altering the fundamental purpose of executive pay in public markets.