In the past few days, consistent with their usual practice of moving the goal posts after the game is over, CGI Glass Lewis and ISS have released the proxy guidelines for the 2018 voting season.
In contrast to last year, where ISS added an additional nine pages to its guidelines, neither proxy advisor has made substantial changes, though there are still interesting changes that provide insight into adviser emphasis coming into the voting season.
In this article, Guerdon Associates notes the main changes.
CGI Glass Lewis
The standout change in this year’s proxy guidelines has been an additional section devoted to addressing alternative incentive frameworks.
CGI Glass Lewis notes that an increasing number of ASX-listed companies are replacing the traditional “fixed remuneration, STI and LTI” structure with fixed remuneration and one combined variable incentive plan governed predominantly by a one-year performance period. Their guidelines are useful to companies considering changes to their framework.
CGI Glass Lewis assesses alternative plans on a case by case basis but states that it expects:
- variability in pay outcomes for executive participants : GA comment – if you want to know if they qualified this in any way the sort answer is that they have not. This may indicate CGI Glass Lewis is re-orienting in response to Ownership Matters’ emphasis that incentive pay should be variable, irrespective of performance. That is, OM has criticised companies for persistently high incentive payments, despite tangible evidence that a company may have delivered consistently high returns. The CGI GL has presented their guideline appears to indicate that variability trumps such a requirement such as ‘consistent with performance”;
- A total vesting and post-vesting holding period should be at least five years (i.e. including the initial one-year performance period): GA comment – this is significant, as it is an explicit move to the UK standard. Prior to the amended CGI GL guidelines, only the Australian Shareholders Association explicitly required a long vesting period. As the great majority of ASX 300 companies have a 3-year vesting period it seems most companies will, at best, only receive ‘qualified support” for their remuneration reports;
- The shift to a combined incentive should be accompanied by significant shareholding requirements: GA comment – CGI GL is moving in the same direction as ACSI and OM; and
- The deferred equity component of the plan should be subject to an appropriate long term underpin/gateway measure.
In other areas, CGI Glass Lewis will now generally vote against the Nomination Committee Chairman if there is no female director.
It has also changed the wording of its guidance on environmental and social policy issues, emphasising that companies should have board level oversight of material risk to operations, including environmental or social risks. (Previously it had maintained that directors should monitor management’s performance in managing and mitigating environmental and social risks).
It flagged a more targeted approach to penalising directors for poor oversight of environmental and social policy risks with adverse votes. It will consider which directors or committees have been charged with oversight of these risks will note where such oversight has not been defined in governance documents.
It will vote against these members “in instances where it is clear that companies have not properly managed or mitigated environmental or social risks to the detriment of shareholder value or when such mismanagement has threatened shareholder value.”
The new CGI Glass Lewis voting guidelines can be found HERE.
ISS’ changes were tweaks this year rather than major additions.
- Regarding materiality thresholds for judging independence of directors, instead of making a distinction between large advisers and small advisers as regards transaction value, ISS now defines a material transaction as one greater than $50,000, regardless of the size of the advisory, law, accounting or investment banking firm involved.
- ISS has added a section stating that it will vote against members of risk committees who were in place if “a material failure in audit and risk oversight by directors is identified through regulatory investigation, enforcement or other manner; or there are significant adverse legal judgements or settlements against the company, directors or management”.
- Rather than voting against board members for a “failure to act in the best interests of all shareholders” ISS will now vote against board members for a “failure to act, take reasonable steps, or exercise a director’s duty to make proper enquiries of events, actions or circumstances of the company and those involved in management or higher, in the best interests of all shareholders”.
- ISS has clarified its guideline that it will vote against directors for material failures of governance, stewardship risk oversight or fiduciary responsibilities, by clarifying that these failures “objectively” come to light in “legal proceedings, regulatory investigation or enforcement, or other manner which takes place in relation to the company, directors or management”.
- It has also noted that it will vote against directors that do not meet its standards in their service on any other boards and warns that it considers all directors to be responsible collectively for upholding governance, and therefore considers that they have collective accountability for failures, regardless of whether they consider themselves as being directly responsible for the actions of the company.
- As regards voting against the remuneration report, ISS has added emphasis on “appropriate” performance criteria and targets against which the vesting and quantum of cash and equity bonuses are assessed.
Where ISS has not changed is its bias to relative TSR measures over financial measures. This contrasts with the approach of CGI GL and OM/ACSI, which do not blindly require relative TSR if a close peer group cannot be identified.
The new ISS guidelines can be found HERE.
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