Changes to proxy advisor guidelines

CGI Glass Lewis and ISS have just released their updated proxy voting guidelines in time for the 2017/2018 proxy season.

While CGI Glass Lewis’ guidelines seem to have remained fairly constant, ISS has added 9 additional pages to its guidelines. Ownership Matters does not publish its guidelines on its website, but will forward these to a nominated email address (see HERE), although if you do not receive them we suggest you check your spam mail box. In any case, Ownership Matters does not appear to have changed their guidelines since January 2016. (Note that in an earlier version of this article we said that OM did not publish guidelines. This may have misled some readers, so we apologise unreservedly to Ownership Matters and these readers.)

This article addresses the CGI Glass Lewis and ISS guidelines as they have been revised.

As Guerdon Associates has observed in past years, it seems that while proxy advisers do not tolerate companies moving the goalposts of their incentive plans part way through a financial year, some proxy advisers cannot let a year go by without changing their goalposts that determine the scores they apply for AGM resolution voting.

This can be disconcerting. Boards spend a year monitoring the impact of their company’s policies, planning and testing changes, which may include consultations with external stakeholders including proxy advisers, before approving changes to find that, subsequently, they find that policies no longer meet proxy adviser guidelines. While proxy advisers can be fairly reasonable in forgiving transgressions in the initial year of a changed guideline, it does take more time than institutional investors and proxy advisers realise to evaluate and implement changes to such things as board renewal and diversity, measures of executive performance for incentive purposes, and other matters impacted by proxy adviser guidelines.

CGI Glass Lewis

Little change from CGI Glass Lewis – but beware changes in emphasis

CGI Glass Lewis’ guidelines are largely unchanged, with areas of changed emphasis including:

  • The assessment of director skills and criteria
  • Gender diversity (gender ratios across the board, executive KMP and the total workforce)

Director Skills

CGI Glass Lewis considers current director matrix disclosures to be so generic and cookie-cutter as to be fairly useless. Therefore, it has provided its own basis for evaluating whether a board has sufficient skills. CGI Glass Lewis considers these requirements when analysing whether a new director will add to a board’s composition and where gaps may be occurring.

Appendices to its guidelines provide a list of skills it considers pivotal for each GICS sector, as well as criteria to be met for a director to be considered to have these skills.

Common skills that also appear to be required across all companies are M&A and/or capital markets, audit/and or corporate finance, as well as “international”. These blanket applications require specific director experience which may not be particularly relevant for some ASX 300 companies. Yet, within the CGI Glass Lewis guidelines, there appears to be some inconsistency. For example, “international” would require companies to have at least one director to:

  • Be a current or former executive role in an overseas market where the company has operations
  • Be a current or recent advisory role in an overseas market where the company has operations
  • Be a current or recent executive role in an overseas market where the company has operations
  • Have proven knowledge of the overseas markets in which the company operates

Yet, despite the guidelines saying “international” is required across all companies, the detail in the appendices say “for companies with international operations”. Obviously, this is not all ASX 300 companies.

Other skills highlighted for specific industries include public policy, environmental, technological awareness, customer service/communications/marketing.

According to the guidelines, CGI Glass Lewis may recommend voting against the chairman of the nomination committee if the board has not addressed major issues of board composition or has not disclosed its board skills matrix.

Gender Diversity

CGI Glass Lewis has rebalanced its emphasis on diversity policies. While referencing ASXCGC Recommendation 1.5 that recommends the establishment and disclosure of a board diversity policy and disclosure of the proportion of women on the board, in senior executive positions and in the whole organisation, it has placed an increased emphasis on the pipeline of women in management ranks. In effect, this is a recognition of the fact that the arguably over-boarded few women ASX 300 directors are from a small pool, and the only way to increase the pool is to increase the pipeline. While some boards do not yet have enough women to satisfy many investors, it is apparent that CGI Glass Lewis is looking beyond this.

Where companies have not finalised a policy, CGI Glass Lewis expects an explanation on an “if not, why not” basis. Where the company has a poor track record on diversity or has not implemented the ASXCGC recommendation, it may recommend a vote against the nomination committee chairman or equivalent.

In terms of the actual proportions, CGI Glass Lewis will be tracking these going forward, but the numbers will not as yet have any adverse vote consequences. This may change in the future as the pipeline of female talent accelerates.

Tailored remuneration structures – careful because “deferred STI only” may not cut it

CGI Glass Lewis has been leery of some “alternative” remuneration frameworks that have been appearing in the past 18 months. In particular, they are concerned that structures that effectively replace traditional LTIs with deferred STIs may not be fit for purpose, or aligned with shareholder interests. It will expect disclosure where companies have adopted non-traditional remuneration structures regarding the appropriateness of such structures, which performance measures were chosen and what mechanisms are in place to prevent excessive vesting in years of poor shareholder experience.

The CGI Glass Lewis guidelines can be found HERE.


A lot more to deal with, but at least ISS provides a handy checklist

ISS has included a large new section in its guidelines that discusses remuneration in general and provides a summary of the issues that will be taken into account when deciding whether to recommend a vote against the remuneration report. This is a summary of the factors most investors would consider important, so serves as a good reference for all ASX-listed directors. The factors are:

  • The quantum of total fixed remuneration and short term incentive payments relative to peers;
  • Whether any increases, either to fixed or variable remuneration, for the year under review or the upcoming year were well-explained and not excessive;
  • The listed entity’s workforce (we are not sure what this means….);
  • Financial performance and alignment with shareholder returns;
  • The adequacy and quality of the company’s disclosure generally;
  • The appropriateness and quality of the company’s disclosure linking identified material business risks and pre-determined key performance indicators (KPIs) that determine annual variable executive compensation outcomes;
  • Whether targets for the STI or LTI are disclosed in an appropriate level of detail;
  • Whether performance targets in the STI and LTI are measured over an appropriate period and are sufficiently stretching;
  • Any special arrangements for new joiners were in line with good market practice;
  • The remuneration committee exercised discretion appropriately; and
  • The alignment of CEO and executive pay with the company’s financial performance and returns for shareholders based on the ISS Quantitative Pay-for-Performance Evaluation.

In common with CGI Glass Lewis, ISS notes that multiple small breaches may not lead to a no-vote while one significant breach generally will.

ISS’ proprietary P4P rating – the most contentious element?

Guerdon Associates has described ISS pay for performance assessment before (See HERE). The ISS’ in-house P4P evaluation considers:

  • The percentile ranks of a company’s CEO pay and TSR performance compared to an industry peer group (11-24 companies selected via market capitalisation, revenues and/or assets referencing GICs) over a three-year period
  • The CEO’s pay as a multiple of median pay of the comparison group
  • The trend of the CEO’s annual pay and the value of an investment in the company over a five-year period

The considerations reflect the roll out of ISS P4P assessment across most ”Say on Pay” countries (with Australia being among the last). It appears (see HERE) that the CEO’s total pay will include the earned STI for the financial year and the granted LTI (face value for share awards and fair value for option awards – whether discounted for performance conditions or not is unclear). The latter will bear no relation to vested LTI, which will not enable any real analysis of the link between pay and performance.

Therefore, it will be in the board’s interests to do more to demonstrate the relationship between relative CEO pay positioning and relative TSR positioning using a more transparent method. While we are careful not to promote Guerdon Associates services in these articles, on this aspect we suggest you call us, as it could become very important to ASX listed companies with a large proportion of overseas investors. If disclosed transparently we believe that the ISS local Australian operations will be more open rather than blindly follow the outcomes from their own data driven analyses (in contrast to ISS operations in most of their other countries).

ISS will not place full emphasis on pay for performance results using this methodology until after 30 June 2018.

Pay Increases

Pay increases should be in line with general increases at the company. Remuneration committees are discounted from market benchmarking for pay reviews, unless it is applied infrequently (three to five years).

This is an interesting and curious guideline that appears to heed inequality concerns expressed most vociferously in overseas markets, rather than Australia. For example, average Australian CEO pay has declined most years since the GFC, and the ratio to average wages has reduced. Yet it is doubtful that boards would have held down executive pay as much unless they had the evidence from annual market reviews. It also appears contrary to directors’ duties to minimise risk of turnover or, on the other hand, excessive costs, associated with pay being out of alignment with market levels.

Incentive plans that vary from traditional practices

ISS, in common with the other proxy advisers and many investors, are leery of unusual pay arrangements. ISS will assess unusual plans by considering:

  • How far the remuneration practices are consistent with the good practice principles set out in the voting guidelines;
  • The linkage between the remuneration practices and the company’s strategic objectives;
  • Whether or not there is an appropriate long-term focus;
  • The extent to which the proposals help simplify executive pay; and
  • The impact on the overall level of potential pay. Any proposal which provides for a greater level of certainty regarding the ultimate rewards should be accompanied by a material reduction in the overall size of awards.

Plans that will increase complexity will be viewed sceptically. This is also a practical consideration, given the additional (and expensive) time required to assess unusual plans. While some companies are complex, or are in an unusual stage of development requiring unusual plans that are better fit for purpose, other companies with large numbers of overseas shareholders may be better off sticking with the tried and true methods of paying executives.

STI and LTI targets

If STI or LTI targets are lowered, ISS expects incentive potential to also be reduced.

Companies that do not retrospectively disclose STI and LTI targets due to commercial in confidence concerns should commit when they intend to disclose these targets.

ISS does not generally support special one-off bonuses.

Where non-financial performance objectives are used as performance conditions, the majority of the payout should be triggered by financial performance conditions.


ISS considers one-off retention awards to be ineffective and does not typically support them.


ISS does not support retesting or the repricing of options “under any circumstances”.

Less dilution tolerated than prior

ISS appears to have halved its guideline regarding dilution and incentive plans, changing its guideline from “aggregate number of all shares and options issued under all employee and executive incentive schemes should not exceed 10% of issued capital” to “commitments to issue new shares, when aggregated with awards under all of the company’s other schemes, must not exceed 5% of the issued ordinary share capital, adjusted for share issuance and cancellation”.

Malus and clawback

ISS notes that investors expect performance-related remuneration to include provisions that would enable the company to recover sums paid or withhold sums yet to be paid, with the circumstances under which this might occur to extend beyond material misstatements of the financial statements.

Minimum shareholding

ISS states that investors expect directors and executives to hold a minimum number of shares, which cannot include unvested holdings in share-based incentives.

New joiners

Where the board intends to increase pay if a newly appointed executive proves themselves in the role, ISS expects the roadmap for increases to be disclosed at the time of appointment. This policy may become a two-edged sword, as it would appear to commit the company to increases irrespective of market conditions.

In general, ISS does not support sign-on awards.

Communicating and engaging after a remuneration report vote protest

ISS expects companies to disclose the number of votes for, against and withheld for the remuneration report resolution, as well as relevant percentages.

Where a company has received a significant level of dissent (generally seen as, but not necessarily, 25%) ISS will consider how the company sought to understand the reasons behind the vote result and how it communicates its response to the dissent.

Scope of Voting Guidelines

ISS has stated that its benchmark policy applies to companies in the S&P ASX 300 index, excluding certain types of investment trusts, noting that smaller companies may not have the resources to be able to comply with corporate governance recommendations.

ASX Listing Rule 10.14

ISS has strengthened its objection to the cave-out for grants of shares where companies do not have to seek approval for equity awards to directors where shares are to be purchased on-market rather than being newly issued. Instead of merely being considered a negative factor in the consideration of the remuneration report vote, ISS has stated that it will generally now vote against the remuneration report if a company utilises this carve-out.

Related-Party Transactions

ISS has introduced new guidance on the factors it considers when voting on resolutions seeking shareholder approval for related-party transactions.

Voting on director nominees in contested elections

ISS has included guidelines surrounding its voting on resolutions to appoint directors where elections are contested. There have been a number of cases over the last year where such elections have come to pass. The following are considered:

  • Company performance relative to its peers;
  • Strategy of the incumbents versus the dissidents;
  • Independence of directors/nominees;
  • Experience and skills of board candidates;
  • Governance profile of the company;
  • Evidence of management entrenchment;
  • Responsiveness to shareholders; and
  • Whether minority or majority representation is being sought.

With the main focus to be placed on two central questions:

Whether the dissidents have proved that board change is warranted; and

If yes, whether the dissident board nominees seem likely to bring about positive change and maximise long term shareholder value.

ESG Resolutions

Where ISS considers that ESG proposals were reasonable and warrant shareholders support, but the board seeks to deny a vote at the meeting, it might weigh against voting for the re-election of the chairman or other relevant directors.

The ISS Guidelines can be found HERE.


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