Director Briefing with Philip Foo of CGI Glass Lewis

On 20 July, Guerdon Associates hosted a Director’s Briefing webinar featuring Philip Foo, Vice President Research and Engagement for APAC at Glass Lewis (GL). Glass Lewis is an independent governance firm providing proxy advice to institutional investors in Australia.

We, and most others, appreciated Philip’s enlightened and nuanced perspectives, although the evidence suggests that some investors and other proxy advisors are not there yet.

Two of the highlights were Philip’s comments on the need for variable pay to be more truly variable, and the validity of any pub test depends largely on its patrons.

Variability of incentive pay

The premise for variable pay arose when Philip was responding to questions on relative TSR performance, whereby he indicated his views that the 50% vesting cliff inherent in market standard RTSR schedules were a negative element of many LTI plans, and as a result  he would consider executive LTIs vesting from 25thpercentile performance to be quite appropriate if the quantum and vesting schedules were equivalently adjusted to compensate for the change on an risk adjusted basis. This is in stark contrast with the guidelines of many investors and other proxy advisors that demand at least median performance, and for some UK investors, above median performance for incentives to vest.  The premise, Philip explained, was that variable pay should, well, be variable. Pay that varies for a very narrow window of performance, say relative TSR between the median and 75th percentile, is not very variable. This overwhelmingly common practice is not truly variable. Pay does not decline for poor performance. Nor does it increase for outstanding performance.

This appears to contrast with views published by the Australian Council of Superannuation Investors (ACSI), which requires pay only to increase with “stretch” performance, and not decline for ordinary or poor performance (see HERE).

Pub test validity depends on the patrons

As the discussion progressed through the prevailing zeitgeist among investors for invariable pay, enhanced with Newspeak from some in the media on company governance and executive pay matters there were points made on the validity of pub tests. Philip made a distinction between pub patrons who were employees and those who were investors and others external to company.

Generally, employees were often better judges on governance and pay matters. They have the benefit of inside knowledge of the culture, management behaviour, and the extent that performance was dumb luck or an outcome of what they did right or wrong.

Outsiders are not in the best position to opine on how appropriate a company’s pay and governance are by way of any pub test. Unfortunately the conversation moved on before we could discuss in any detail what the various patrons were consuming, other than it is GL’s job to treat the pub test koolaid with some care to ensure judgements made on behalf of their clients were as clear eyed as possible.

Boards should know best, for most things

Consistent with the pub test discussion, GL’s view is that, generally, ASX boards follow strong corporate governance practices and that they are, like GL, aligned in seeking to build shareholder value. Given this, GL is inclined to be led by boards on strategic issues like remuneration  structure.  They will generally accept the performance measures the board is recommending be adopted as they consider the boards have done the work and know the company well. Boards are most likely to be better across aspects like the performance requirements.

GL may disagree, however, on matters like quantum, targets not considered aggressive enough, or the exercise of board discretion. To an extent, they see their role as pushing back on management’s asks. If they consider there is a misalignment between management and shareholders, they will push back.

Like Ownership Matters (see HERE), GL takes a less prescriptive approach on remuneration structures and seeks to understand the rationale for it. If the rationale is sound and evidence based, they will be supportive.

Engagement with boards

GL engages with about 200 boards throughout the year and that process assists them to better understand the rationale for different structures.

GL seeks to be readily available for engagement, but given Australia’s short AGM season, finds it difficult to engage in September to November. They are reluctant to engage after the Notice of Meeting is released.

GL is readily available for engagement with June year end companies in June, July and August.


It was suggested that GL’s recommendations to clients probably have the most influence on institutional investors with less material holdings in the company. Where there is a more material holding it can be expected that the institutional investor has done a lot of its own analysis,considered multiple proxy adviser recommendations and generally been hands on.

Issues for this 2023 AGM season

Some of the issues that warrant GL consideration for this year’s AGM season include:

  • Implementation of CPS511 requirements across the financial services sector and the introduction of more non-financial measures in incentive plans
  • Restricted share plans with underpins will be reviewed closely at the time of vesting to understand the board’s approach. Consistent with the earlier comments about being led by the board, GL is generally supportive of such structures for the right type of company circumstances. But, if they think the structures are leading to undesirable outcomes at vesting, they will then look to protest.
  • GL has noted that malus provisions are being strengthened in some cases.
  • They are expecting to see less of ‘say on climate’ resolutions being put forward.
  • As the economic climate is becoming more challenging, growth targets are starting to decline. GL recognise that setting 1- and 3-year targets in the uncertain economic environment is presenting challenges.
  • GL generally do not advocate for (or against) companies to put forward resolutions that they are not obligated to comply e.g., non-residents are not legally required to have a say on pay resolution, or others having a say on climate resolution.

Post retirement and termination executive shareholdings and payments

While GL might see deferred STI post-employment as a positive thing for shareholder alignment and malus purposes, it was agreed that deferred cash could be acceptable in circumstances where there are already large shareholdings by the executive. Boards will recognise the investor and proxy adviser view that accelerated payments on retirement are not necessarily appropriate.

While local institutional investors have not raised with GL the ubiquitous practice in the UK of post-employment shareholding requirements, GL nevertheless considers this a positive development.

NED equity

Consistent with Guerdon Associates’ observations, GL has not seen any increasing move to NEDs sacrificing fees for pre-tax equity. However, they would see it as a positive development to improve alignment with shareholders and would clearly make sense for younger directors.

More diverse diversity

GL has noted significant improvements in gender diversity across boards and senior management in recent years. A notable change in the diversity space is that of a number of boards taking on younger directors with the ”Google executive” type experience. They are often still working in executive roles but taking up board positions for the benefit of both.

These movements address the gender/youth/technology needs of boards and reflect the changing markets.

Geographic diversity is important so that there are directors based in the global markets in which the company operates.

There is a cost to diversity – NED fees

GL does not have a problem with differentiated NED fees to address geographic diversity issues. That is, ASX listed companies may have to pay more for US or Canadian domiciled NEDs. However, GL considers options (more common US market practice) to be performance related and thus not appropriate.

More pay for less performance may not be an issue in context

While companies are now setting performance requirements that may be lower than prior years because of prevailing economic circumstances, institutional investors are having difficulty. GL considers that boards should be setting challenging targets and would be looking to test lower targets against analyst consensus estimates. In this regard, GL expects boards would exercise discretion to ensure executive remuneration outcomes makes sense in the context of the wider workforce changes and pay movements, and reputation.

It was suggested that if a capital efficiency measure was to be lower than WACC, or EPS lower or even negative, or similar declining targets, the board would be expected to argue the case well to ensure support. So, while in principle, GL could see such lower targets being accepted, boards might want to consider underpins or a relative measure to protect against unwarranted outcomes.

GL accepts the increasing use of non-financial measures provided they make sense for the company and provided that they are generally limited to 50% or less of the weighting. Strategic milestones can be appropriate; abatement targets for GHG intensive companies; reputational metrics for other companies can all make sense in the circumstances.

GL supports relative TSR because it is an easy to understand measure, it is objective, and focuses on value creation. Philip noted he does not advocate for an absolute TSR gateway over an RTSR hurdle, noting his views that remuneration structures should be incentivising relative performance in downturns as well as the good times. The CEO who loses 5% when sector peers lose 50% is a great CEO and remuneration schemes that don’t acknowledge that risk creating very perverse risk incentives for executives.

Day job duties and pay

It is worthy of note that GL does not have an issue with incentive or variable pay being paid for the ‘day job duties’ – as others are inclined to object to. Their view is that the CEO is responsible and accountable for all aspects of company performance,  day job duties included. This is consistent with their more expansive view of variable pay.

Restricted shares

Interestingly, GL might expect the starting point for discounting for certainty when moving from performance contingent LTIs to a restricted share structure to be around 57.5% to 42.5% of face value with movement from there depending on the structure. Other proxy advisors and many investors suggest that 50% is an appropriate discount in exchanging LTI for restricted shares.

Fixed pay increases

GL would be expecting executive fixed pay increases for FY24 to be in line with the wider workforce.

Pay for a transaction

A significant concern for GL is incentive payments for completing a corporate transaction. GL is ok for an acquisition to be part of the scorecard, but GL has a problem if there is an ad hoc payment simply for completing the transaction. There is too much evidence of transactions for the sake of bulking up with poor execution following. Otherwise, it is simply further incentivising empire building and growing market cap via equity raisings that is already incentivised by higher fixed pay on a benchmarked basis. GL expects to see performance conditions attached to corporate transaction incentives.


In summary, it is fair to say that GL will take the lead from boards expecting they have done their homework and can justify and rationalise the remuneration framework. GL, however, will focus attention on quantum and targets where they think the boards are being too easy or too harsh on executives.

© Guerdon Associates 2024
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