2021 proxy season top 5 remuneration issues

The AGM season is approaching. Remuneration reports are out. Engagement meetings have been held. The die is cast (with little wiggle room).

Following discussions with clients post their investor and proxy firm engagement and a review of expectations within the investor community, the following are predicted to be key themes for the upcoming voting season.

#1: Jobkeeper and STI payments

Any companies which received JobKeeper during the financial year and paid STIs on results inclusive of JobKeeper payments will likely see adverse voting outcomes. Last season proved no rationale could make such payments acceptable to investors and proxy advisers. Hence, this season should see an even less tolerant response.

Given recent media coverage on government wastage, it is less likely this year that any STI payments can be made when JobKeeper was received and not paid back without a strike. Some may escape by excluding JobKeeper months from results and incentive calculations. This may make sense given the volatile nature of revenues arising from high lockdown frequency in some states.

#2: Retention

Explaining a second year of zero incentive outcomes may be a bridge too far for many. This reduces executive total remuneration by 50%, or more in some cases. Some executives have sought jobs elsewhere. Boards are tackling risk arising from unwanted turnover. We expect to see some creative solutions for retention. Two proxy advisers have expressed understanding of the problem. This is not to say they will accept the solutions. There will be likely mixed results as regards remuneration report voting responses to the various retention efforts.

#3: ESG

ESG Shareholder AGM proposals are far from last year’s phenomenon. Key investor groups (such as industry super funds and US passive funds) are lending them weight – support percentages for the most recent ESG proposals are relatively high. A recent analysis published by the Australasian Centre for Corporate Responsibility (ACCR) indicated that Australia’s 50 largest superannuation funds supported ESG proposals in 42% of instances last financial year (see HERE). This proxy season we expect most resolutions for a “say on climate” vote originating with the company or the two major activists (ACCR and Market Forces) will receive majority support.

As regards director votes and remuneration reports more specifically, the absence of sufficient diversity will be a trigger for voting against male and pale directors, Major ESG concerns that have not led to a reduction in executive pay may also trigger a strike against the remuneration report.

Directors are adapting to the new reality which exposes previous scepticism in regard to the “social licence to operate” phrase in the 2018 draft ASX Corporate Governance Principles and Recommendations as short sighted.

But directors should be discerning  – while investors are increasingly clamouring for ESG measures to make their way into executive remuneration metrics, our read of the engagements is that investors are just as focussed on the bottom line as previously, with most requiring that action on ESG initiatives make a “material” contribution.

Realistically, given behavioural consequences of stuffing too many metrics into scorecards, and the reality that investors are still unlikely to accept payment on ESG outcomes if financials are not tracking to plan, will ultimately lead to more gateways, modifiers, and  ESG metrics in long term incentives. In regard to the latter, one influential proxy adviser appears to have turned almost 180 degrees for the 2021 proxy season, from outright non-support of ESG dependent LTI to asking “why not?”.

#4: Fixed pay increases

We expect some significant fixed pay increases this year. The increases will be evident in industries with high relative TSR, such as technology, resources, and even banking. Many will be supported. According to one proxy adviser, industries such as technology which are dependent on international talent or have significant operations overseas and pay competitively based on these markets should not expect special treatment based on this reality.

#5: Pressure on disclosures

As always, market practice continues to shift year on year, especially as regards disclosure. Companies may find their disclosure weighing against them in a remuneration report vote where there were no issues apparent in prior years. This is a governance reality that makes  an improvement narrative important.

This year sees continued and heightened pressure to disclose the actual targets as well as achievement levels for STI KPIs, LTI targets (even if there is a prospect that these disclosures may be considered a form of guidance), what the board considered for the exercise of discretion prior to incentive vesting, and the extent and methods that incentive plans accommodate ESG considerations. “No” votes are unlikely to arise from not disclosing much on these matters alone, but non-disclosure could be straws that cumulatively contribute to a strike.

© Guerdon Associates 2024
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