Concerns with ASX Corporate Governance Council’s amended Principles and Recommendations

The ASX Corporate Governance Council sought feedback on the draft 5th edition of its Principles and Recommendations (the Draft Principles) (see our summary of major changes HERE  and the consultation papers HERE).

Guerdon Associates made an online submission expressing concern with certain aspects of the Draft Principles. This article explains our concerns in the submission that deal with remuneration (Principle 8).

Apparently, remuneration is no longer about attracting, retaining and motivating

The current edition of the Principles states in Principle 8, “Remunerate fairly and responsibly”, that “a listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite.”

Now, however, the Draft Principles have amended this principle to double down on “responsibility and fairness” (it is now mentioned twice) by requiring policies and practices to be “fair and responsible”. Value created must be long-term and sustainable and aligned to “the entity’s values, strategic objectives and risk appetite”. The Draft Principle 8 does not even refer to the need to attract, retain and motivate directors and senior executives.

Remuneration quantum and design are about getting and keeping executives who will be motivated to act in the best interests of the company, in both the short term and the long term. Boards rely on remuneration design to direct executive focus.

The proposed deletion of “attraction, retention and motivation” is regrettable. It is the fundamental basis for all employee remuneration and that which company boards state is the objective of their remuneration framework. This principle is straightforward to test and verify as boards review the effectiveness of the remuneration framework.

We agree that the remuneration of executives should align their interests with the entity’s values, strategic objectives and risk appetite. Requiring executive remuneration to be aligned with the creation of value was sufficient, rather than specifying that it must be long-term and sustainable.

Why the focus on mostly unworkable remuneration clawback?

Recommendation 8.3. has been entirely re-worked to require listed entities to have “remuneration structures which can clawback or otherwise limit performance-based remuneration outcomes” and “disclose, on a de-identified basis the use of those provisions during the reporting period”.

We have observed many, including some otherwise well-regarded consulting firms, get the wrong end of the stick by saying that the recommendation will require all companies to have clawback provisions. Clearly, the proposed recommendation does not require this.

The proposal has simply called it out as a specific method for limiting performance-based remuneration outcomes. Why do this? Either it calls out all methods – let’s face it there are only three – in period adjustments, the forfeiture of unvested remuneration (aka “malus”), and clawback (the recovery of remuneration already paid), or not specify a method (handy, in case someone invents a fourth).

Clawback is the least likely method to be applied. We have observed firsthand how boards grapple with trying to litigate to recover incentives previously paid, and how the Australian legal system limits this to very specific and unlikely circumstances.

On balance, it would be better to drop references to a method, and simply require boards to have “remuneration structures which can limit performance-based remuneration outcomes…”.

© Guerdon Associates 2024
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