The recently released annual review by AMP Capital discusses how ESG (environmental, social and governance) factors serve as predictors for a company’s financial performance. The report also provides insight into proxy voting.
For several years, AMP Capital has compared the ESG attributes of individual companies and considered how these factors impact relative value and the long-term sustainability of company earnings. Their research focuses on a broad range of factors such as demographic trends, climate change, technological advances, risk management, supply-chain management, employee engagement, leadership, company culture, board diversity and occupational health and safety performance. The reason AMP Capital undertakes they can sum this research up best in their report:
“Unsurprisingly, when company earnings rely on them taking short- cuts and exploiting under-priced pollution, under-paid labour or weak regulation, the current level of their earnings may not be sustainable.”
AMP Capital separates into two categories factors that drive company value:
- Drivers that relate to the entire industry (including relevant demographic, regulatory and technological change)
- Intangible drivers that focus on each company’s response
CEO pay: How much is too much?
While AMP Capital asks the above question in their report, their answer is not definitive.
However, as AMP Capital notes, CEO pay tends to be determined by the pay of CEO’s at peer companies rather than the value of an individual, specific CEO. AMP Capital does concede that using benchmarking to set CEO pay is difficult to avoid since CEO’s are very unlikely to accept a position that pays less than their peers. AMP Capital also says that this serves to create a cycle of continuous high pay for CEOs, although this is difficult to justify given the decrease in pay across some sectors as CEOs turnover and are replaced by lower paid CEOs..
AMP Capital questions whether the value of a CEO really is double that of the next highest paid employee.
Unfortunately, the AMP Capital analyses have to be compromised by a methodology that relies on the statutory earnings disclosures in annual reports. As most directors realise, the accounting standards on which the disclosures are based make comparison meaningless.
Gender diversity: Will the gender diversity of boards reach 30 per cent?
According to AMP Capital’s report, the most significant governance factor for shareholders is director quality and board effectiveness. To assess a board, AMP Capital considers the following: the combination of director skills, time availability an individual director has to carry out his or her role, independence of directors and gender diversity.
The issue of gender diversity on boards has evolved from the mindset that an all male-board is “normal” to the idea that a gender diverse board is both “smart” and “necessary.” In 2010, only 40% of company boards had at least one woman director; however, this increased to 79%. Though this does not mean that 79% of boards actually have equal gender representation,.
According to AMP Capital, “… companies with two or more women directors tend to exhibit better governance, with fewer issues around board composition, the quantum and boards with already good governance are probably more likely to create a gender diverse board. However, “when issues are approached from different points of view, it is likely discussions will be more robust and decisions more rewarding.” Further, many women joining the boards have diverse backgrounds, especially in mining, medical and scientific fields.
AMP Capital Proxy Voting Record and Their Guidelines
AMP Capital did not support 10% of “incentive related” AGM resolutions. We assume they mean resolutions to grant equity to a board director. Reasons include:
- poor or non-existent performance hurdles – too short term
includes both non-executive director and
- company executives in same plan
poor disclosure of terms
automatic vesting on change of control
AMP Capital did not support 7% of “NED remuneration” resolutions. We assume they mean requests for an increase in the fee pool. Reasons include:
- new fee levels were too high
- board too large or ‘poorly’ composed
- NEDs continue to accrue retirement benefits.
AMP Capital did not support 4% of director elections because:
- too many affiliates
- no independent
- poor committee composition – need for more relevant skills – board too large
AMP Capital did not support 16% of remuneration reports because of concerns regarding the terms of:
- non-salary compensation
- poor disclosure
- unsatisfactory director retirement
- and executive termination benefit
Key proxy guidelines boards should be aware for their 2016 disclosures are highlighted below.
- Board Composition: AMP Capital does not support directors who are predominately self-nominated or non-board-endorsed candidates were not considered ideal. Further, it will abstain from re-electing a director if there could be a higher representation of independent directors with the election of a new director.
- Remuneration reports – Reasons AMP Capital will vote against a remuneration report include: overly generous retention benefits, low performance hurdles, retrospectively changing performance hurdles, structural concerns, and a board’s unlimited discretion to allow incentives to vest upon a CEO’s termination and poor disclosure.
- Share and option incentive plans – Reasons to not support equity grant resolutions include: poor incentive plan disclosure, a plan with a performance period less than 3 years, no performance hurdles or hurdles that do not align with shareholder interests, NED’s participating in executive incentive schemes, and plans to increase value to employees but not to shareholders.
- Non-executive director remuneration – AMP Capital votes against the granting of options to NED’s.
To read the original report, see HERE© Guerdon Associates 2023 Back to all articles