For the first time, our annual Remuneration Forum program has been extended to Perth. Sponsored by Guerdon Associates and proxy adviser CGI Glass Lewis, the Forum was held in the Perth offices of Allens on Monday 11 March 2013.  As with the east coast Forum, the Perth Remuneration Forum brought together participants from all sides of the executive remuneration debate – including directors, institutional investors, regulators and management. 

 

The Perth Forum focussed on investor responses to the different remuneration practices of resources companies, and the engagement process for WA based companies.

 

The keynote address was delivered by The Hon. Bernie Ripoll, MP, Parliamentary Secretary to the Treasurer. Mr Ripoll outlined the government’s policy approach for achieving a system that is internationally competitive, and that rewards executives appropriately but with shareholder input.  The two-strikes process is the centrepiece of the government’s approach, which aims to align executive pay with company performance and to drive cultural change in Australian boardrooms.  According to Mr Ripoll, the success of two-strikes is to be measured by the number of companies without strikes, because the process impacts all companies, which suggests company remuneration policy/practice is already changing. Interestingly, and pre-empting the government’s response to submissions on the new disclosure regime being proposed, Mr Ripoll indicated that the government was aware of the UK’s “single figure” approach, but believed that multiple methods of reporting pay levels remained appropriate. Mr Ripoll’s speech is similar to the one he made at the Melbourne Forum, which can be viewed HERE. 

 

Our comments on the Forum proceedings are necessarily limited by the Chatham House rule. But we can make general observations.

 

In putting together the Perth Forum we wondered if the tyranny of distance explains the issues Perth based resources companies have with their east coast investors. The answer was resounding. Unfortunately it was both yes and no! Voting evidence presented indicated clearly that Perth based resources companies have a harder time with investors than other companies. Anecdotally, the contentious issues appeared more heavily focussed on executive and non-executive equity grants than on other issues.  While there were instances of resource company directors pleading “mea culpa” with regard to excessive dilution or grant value in some cases, the voting evidence presented also indicated that some institutional investor guidelines do not cope with the need for cash-poor resources companies to provide equity in lieu of cash. The issue has been compounded by the need to adapt equity pay policies to comply with unforgiving tax law, and accepting that these pay policies fail to meet some investor guidelines, especially for non-executive directors. Some frustration was evident that unhelpful equity tax frameworks, as well as the high cost of doing business in Australia, was driving resources boards to direct investments to Africa.

 

Another interesting feature of the Perth forum was the experiences of directors and investors with alignment. It was clear that very few investors make the effort to engage with Perth-based companies. Those that did found the experience rich and rewarding in both expanding their understanding of remuneration issues and in the opportunity to have an almost immediate impact on resource companies’ governance. They found resources company directors open and responsive to governance suggestions. Likewise, both resources and non-resources company directors received valuable and constructive feedback from their investors. However, most of the initiative had to come from company directors to engage. Proactive engagement from investors and their advisers has been limited, but from the evidence presented by investors present that have proactively engaged in the West, it is well worthwhile.

 

There was also anecdotal evidence of the differences in approach between the larger, better-resourced WA-based companies, and the smaller, less well resourced companies. Directors of larger companies engaged with investors as part of a proactive process, even if no issues were readily apparent. Directors of smaller companies on the whole were reactive. They engaged when remuneration vote outcomes were in danger of going awry.

 

Our observations of the Perth Forum suggest that resources companies elevated into the ASX300 will continue to experience transition issues as directors adjust to the scrutiny and voting power of new institutional investors. It was also evident that, apart from the few proactive investors at the Forum, most proactivity has to come from board directors to investors. Where engagement is part of the usual board process, companies generally are able to better navigate the often capricious and inconsistent investor guidelines. But while the larger company boards manage to take this in their stride, smaller resources companies are on a steep learning curve, with many continuing to struggle.

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