Current issues for this AGM season from a proxy adviser and an institutional investor

On 28 July 2016 Guerdon Associates hosted a briefing for Non-executive Directors (NEDs) to hear the views of ISS’s Australian Head of Research and Governance, Vas Kolesnikov, and those of Pru Bennett, Blackrock Inc.’s ASPAC Head of Governance, and express their concerns with investor and proxy firm engagement.

This was a timely opportunity to discuss and debate the remuneration and governance issues that are top-of-mind before the start of the 2016 AGM season.

The approach to assessing the issues

Vas Kolesnikov explained how he and the team at ISS approach the remuneration and governance issues on which they will be making recommendations for ISS’s clients. ISS looks at each issue from four perspectives:

  •  Shareholder outcomes
  • Company outcomes
  • Company targets
  • Shareholder alignment

This view is refreshing if it means that proxy advisers (or at least ISS) may be moving away from the approach of looking at the “means rather than the outcomes”.

The ISS approach, we were told, is to ensure the team prepare balanced reports that capture both the positive and negative elements identified by the team. They are seeking to inform ISS’s clients of the relevant remuneration and governance issues.

Blackrock Inc is a significant and influential investment manager in Australia. As the world’s largest fund manager, Pru Bennett explained that it has investments in more than 400 companies in Australia and uses the services of two proxy advisers to inform its own research and thinking. Some critical insights provided by Pru included:

  • Blackrock wants to see Boards structure the remuneration around the strategy
  • There is no such thing as ‘best practice’ remuneration structures as the Board is in the best position to determine what is the best structure for the company
  • Blackrock typically defers to the judgement of the directors, as they are the ones who have been appointed to oversee the company.
  • Both EBITDA and EPS hurdles for the LTI are carefully scrutinized because they can be readily manipulated.


A number of directors expressed concern that proxy advisers are unlikely to be fully informed when they take exception to the quantum of remuneration. Directors are continually faced with the risks of losing key people to competitors and falling behind market levels. The quantum issue becomes even more difficult when directors are seeking to recruit from the US or the UK.

ISS takes a view on the whole package and seeks to determine if the balance between fixed pay, STI and LTI is consistent and appropriate. In its assessment of the LTI structure, ISS will consider what was granted, how much of that has vested and what are the outcomes for the company on vesting.


A view was put that ISS reports tend to follow the global policy on a strict basis and have little regard for the particular facts and circumstances. An example of this can include its approach to reporting on the ‘overboarding’ of directors. Many directors hold positions on the board of a range of companies and typically will include many smaller companies.

They face the issue of ISS recommending against their election on the basis of being overcommitted without having any regard for or knowledge of the particular commitments.

It was suggested that in these scenario, ISS should be taking a more inquisitive approach and engaging with the chairman and the director to better understand the circumstances.

Vas Kolesnikov did note, however, that ISS has global policy and does look to follow it for good reason. Directors should, therefore, recognize the necessity to proactively communicate their position and recognize that it’s a ‘two-way street’. The corporate governance statement is ideal for addressing these types of issues.

Institutional investors like Blackrock Inc are looking to understand the extent of the director’s spare capacity in the event of a transaction or other occurrence at one of the board positions that consumes much of their time attention.

STI and LTI structures

Vas Kolesnikov explained that ISS did not have a particular policy on how the number of LTI instruments are determined – whether it be face value, fair value, or adjusted fair value. ISS just wants to ensure it is clear and transparent. They will look at the LTI grant from the lens of the ‘shareholder experience’.

ISS has previously indicated that it has an issue if STI payments are made in a year when there has been negative shareholder return. Vas Kolesnikov indicated that ISS may recommend against a remuneration report disclosing such a practice.

Guerdon Associates noted on that earlier occasion and again at the briefing that such an approach does not recognize the ‘look-back’ perspective of the STI vis-à-vis the ‘look-forward’ perspective of the LTI. Similarly, it was noted that it does not sit well with ISS’s focus on the shareholder experience and being outcomes-focused.

Mr Kolesnikov explained it was not unusual for companies to habitually make impairments and underlying adjustments to earnings. Such companies are more carefully scrutinized by ISS.

Interestingly, on the discussion of performance hurdles, Pru Bennett noted that Blackrock would be concerned if a company had an ROE CAGR of 18%, or an EPS CAGR of 20%. It was felt that hurdles like these create excessive risk and there is a stronger case for a more reasonable and consistent growth rate.

© Guerdon Associates 2024
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