The Australian Council of Superannuation Investors (ACSI) represents industry superannuation funds that account for about 25% of the Australian market’s capitalisation.  In August it released its biennial revision of its governance guidelines for superannuation trustees to monitor listed Australian companies.

 

ACSI provides an assurance that it is not a “box ticker”.  Their guidelines say they take a pragmatic approach to governance and aim to consider the specific circumstances of each company on a case by case basis when determining voting recommendations.

 

ACSI emphasises the importance of engagement.  In our experience we have always found ACSI’s behaviour to be consistent with this emphasis.  That is, they have always been happy to discuss a company’s situation and remuneration issues.  But then, we have always been careful to make sure engagement occurs outside of proxy season.  We urge directors to do the same.

 

In making its assessments, ACSI may take into account factors such as the materiality of the issue, company market capitalisation, the length of time over which shortcomings have occurred and whether they are ongoing or historic, the history of any dialogue between ACSI and the company on the particular issue and whether there has been any improvement in company behaviour.

 

Key points from the guidelines in relation to executive remuneration (as interpreted by Guerdon Associates, where necessary) include:

 

·          Executive remuneration should

–       promote superior long-term company performance [against comparable companies]

–       be aligned with shareholder interests

–       be reasonably comparable with companies of similar industry, size and business focus

·          Fixed pay should not be so high that STI and LTI become irrelevant

·          STI and LTI should be at reasonable levels as a proportion of fixed pay and should be underpinned by clear and relevant performance hurdles (the bulk of executive pay should be delivered in equity vesting over time)

·          Any use of equity for senior executives and directors should be subject to approval by shareholders

·          Prior shareholder approval should also be required where any single share or option scheme could result in allocations of shares equal to 5% or more of total issued ordinary shares

·          The total number of shares and options for executives and employees, under all schemes, should generally not exceed 10% of issued ordinary shares; ACSI will consider share and options schemes with a potential dilution impact of 5-10% on a case by case basis

·          ACSI will not support equity plans where the total number of options and shares granted in any one year, expressed as a percentage of total issued ordinary shares (the ‘flow rate’) exceeds 2%, and will consider flow rates of 1-2% on a case by case basis (a flow rate of less than 1% is generally acceptable)

·          Ordinary remuneration practices (fixed pay, STI and LTI) should normally provide anadequate retention incentive

·          Where paid, retention or sign-on benefits should be subject to a holding lock of 1 to 3 years, and fully disclosed

·          ACSI encourages the use of relative and absolute LTI performance conditions in combination, but will accept the use of a single relative performance condition that requires the achievement of out-performance against relevant and disclosed external benchmarks. (From this, it would appear that ACSI will not accept a single absolute LTI performance measure)

·          Boards should stress-test proposed performance metrics to ensure they are sufficiently robust

·          “Where a relative performance measure is used, ACSI will consider relative performance in light of absolute returns to shareholders” (it appears that this means ACSI is not supportiveof relative performance measures that allow payment if absolute performance is negative)

·          ACSI supports increasing LTI vesting on a sliding scale according to the level of company performance achieved

·          Performance hurdles should be clearly explained, with sufficient information provided to enable investors to determine whether executive reward is aligned with long-term corporate performance

·          ACSI generally favours annual LTI grants and opposes re-testing

·          ACSI supports imposing a holding lock of 1 to 3 years after LTI vesting

·          ACSI does not support automatic full vesting of LTI options and performance rights on a change of control but is prepared to consider pro rata vesting to the date of the change of control

·          Limited-recourse loan-funded share plans may be acceptable where the loans are on commercial terms and challenging performance hurdles apply (ACSI views loan plans as analogous to option plans) and, preferably, new-issued shares are used to minimise potential cash loss

·          Hedging of vested equity by directors and senior executives should be disclosed by the company within 2 days

·          All elements of remuneration, including variable components, must be properly disclosed, valued and expensed.

 

The guidelines do not address the continuation of LTI performance periods past termination, although such provisions support good governance.

 

The 2011 ACSI guidelines can be found HERE

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