A checklist for revised investor guidelines and a very short remuneration report
Recently, directors and executives of ASX-listed companies have bemoaned the attitude of institutional investors. There have been complaints that:
- investors are too short term focussed,
- investors are not encouraging companies to take risk,
- investors are not recognising that proper risk-taking requires considerable investment and takes years to make a return, and
- they should stay focussed on the long term.
These complaints are not directed only at the short sellers, activist hedge funds, superannuation funds that loan their stock for a quick return, and the majority of large superannuation funds that hypocritically pay their executives an STI and no LTI. Those charged with developing guidelines for lodging their institutional investor proxies and their advisers can be just as culpable.
Institutional investors must also share much of the responsibility for remuneration frameworks that fail to encourage innovation and risk-taking that is appropriate for the nature of the company. It started with the non-binding vote on remuneration reports. After tentatively testing the waters for a couple of years, institutional investors found their voice, and used their muscle, to impose change.
So, it is true that, as a result, egregious and outrageous executive pay deals have been largely eliminated.
But, in their place are so-called “best practices”, as if a practice is best for all companies irrespective of their stage of growth, industry, strategy and other circumstances. These “best practices” were delineated by proxy guidelines prescribing, among other things, that:
- Non-executive directors (NEDs) cannot receive stock options.
- Executive equity grants that are not part of an LTI or deferred STI are not permissible.
- At-risk pay should only be paid for achieving stretch performance, rather than reduce for below average performance.
- Performance measures must include shareholder returns relative to other companies, even if there are no comparable companies for comparison.
- Incentive payments cannot be contingent on non-financial measures.
- Low or zero interest loans to acquire shares are out.
And so it goes on…pages of guidelines prescribing how and what companies must and must not do when paying their boards and executives.
Most companies meekly follow.
The result is lockstep pay, whereby the pay varies only by size of company. Everyone has the same incentive pay opportunity, and even have the same performance hurdles.
Many boards have been cowed by investors, and investor advisers, into not doing anything different – not being innovative, much less agile. And certainly not risk-taking.
Currently, paying employees like a Silicon Valley company would not pass any of the institutional investors’ pay guidelines. Heaven forbid, employees may become entrepreneurial.
It is suggested that institutional investors throw out the rule book. Let companies innovate. If a board wants to pay employees like a Silicon Valley company, let them. Better still, if they do not want to pay like a Silicon Valley company, and not like any other company, let them. Grown-ups govern company boards. Do not nanny them.
This does not mean that investors should not have guidelines for the consistent and equitable voting of proxies. Instead, investor guidelines for lodging proxy votes on executives and director pay can be distilled into four questions:
- How much did it cost me?
- To what extent were my shareholdings diluted with the equity granted to employees?
- How much risk and innovation did this encourage employees to take?
- What performance did I get for this cost, dilution, and risk-taking?
The other 300+ lines of tick-the-box guidelines can be thrown out.
And there is another, welcome, by-product – a short remuneration report.
© Guerdon Associates 2023 Back to all articles