The CFA Institute Centre for Financial Market Integrity globally administers the highly regarded Chartered Financial Analyst qualification. This qualification is fast becoming the de facto requirement for all professionals in Australian investment banking and funds management, despite relatively high failure and dropout rates. The Institute is dedicated to promoting fair and open markets on behalf of its more than 92,000 investment professional members in 135 countries and acts as an advocate for investor protection and high professional standards. The Institute can therefore be expected to have a considerable influence on institutional investment management and how institutions may vote on remuneration matters.
The Institute has recently released its global manual, The Compensation of Senior Executives at Listed Companies: A Manual for Investors, which provides a comprehensive examination of executive remuneration and associated risks for investors.
The Institute regards executive compensation as an important component of the evaluation by investors and investment professionals of the governance and strategic direction of public companies. The Institute believes investors, shareowners, and investment professionals must have the information needed to determine whether the complex arrangements and strategies used to pay senior executives will provide long-term value to the companies they manage. For example, the Manual demonstrates the risks of limiting shareholder input to the selection and election of board members (however, this is more of an issue in the US and Japan than in Australia, the UK and most other countries with significant funds under management).
The Manual is structured in two parts:
• Part 1 outlines some common corporate governance structures instrumental in setting compensation and describes the purpose and implications of each
• Part 2 considers the principal elements of executive pay and describes the reasons each compensation element is offered, how it may influence the actions and decisions of company managers, and the factors investors and investment professionals should consider with regard to each.
The manual complements the CFA Institute’s The Governance of Listed Companies: A Manual for Investors, which is part of the Level I CFA exam curriculum. The Institute suggests that the Manual should be a ‘go-to’ resource for investors and analysts, investor relations professionals, and even corporate boards and business media. They hope that with the Manual, investors will hold companies and boards more accountable for their compensation practices.
Guerdon Associates’ review of the manual finds that it contains a couple of minor factual misinterpretations of option expensing under IFRS 2 and US FAS 123(R), and they seem to mix up the timing of Forms 3 and 4 requirements under Sarbanes Oxley and the coincident ceasing of US backdating practices. However, there is nothing in the manual’s guidelines that should be a major concern to boards and companies with already well governed executive pay polices and practices. In fact, condensing the manual down to a checklist would be useful to most remuneration committees and company remuneration professionals.© Guerdon Associates 2022 Back to all articles