Who has the most say at AGMs, superannuation funds or fund managers?

Guerdon Associates held a Director Briefing in July for a number of non-executive directors to hear from the Heads of Responsible Investment at First State Super and Colonial First State Global Asset Management. FSS is one of Australia’s larger asset owners with more than $60bn invested and CFSGAM is one of the larger fund managers with FUM in excess of $200bn.


We thought it would be of interest for directors to understand the way asset owners and the managers they appoint interact prior to voting on remuneration, director election and other AGM voting matters. In this regard, both FSS and CFSGAM are typical exemplars of the process. FSS, as an owner, chooses to retain the mandate to vote. Some directors are critical of superannuation funds that outsource investment management and retain voting power because they believe it is the portfolio managers, such as CFSGAM , who best know the issuers. They argue that the asset managers should determine how a vote is used.


However, many would not be aware that large superannuation funds doing this, such as FSS, engage with their portfolio managers on contentious cases prior to the vote being lodged. Likewise, the portfolio managers at CFSGAM make an effort to contact their clients to present their point of view prior to vote lodgement.


Some of the key messages from the Briefing discussion included:


  • Both FSS and CFSGAM are keen to ensure directors understand their governance and voting processes and both encourage directors to engage if there are issues or concerns.


  • FSS has oversight of voting on all of its investments. So, FSS will override a manager voting if that vote is contrary to FSS’ view. FSS’ voting on its domestic investments is consistent across its holdings.


  • When FSS has a remuneration or governance concern, it will proactively seek engagement with the issuer. Surprisingly, not all directors willingly engage, and some even refuse to engage. The converse implies that if you do not hear from FSS, they do not have a current concern with your remuneration, governance or sustainability.


  • Fund managers and asset owners are now concentrating their focus on quantum. Directors are well advised to ensure any pay increases are soundly based and supported by independent benchmarking that can withstand challenge.


  • Fund managers and asset owners want to see more transparency and detail around the quantum of pay, and the performance metrics for the award of incentives. Not surprisingly, this request attracted director comments about the lack of transparency in the funds management industry about what is paid, to whom and for what. It was noted that the fund managers voting on remuneration and governance are not subject to the same level of scrutiny when, perhaps, they should be.


  • Many directors still find it difficult to identify the person with whom they should be engaging – is it the asset owner who controls the vote? Or the fund manager? Or a combination of both?


  • There was agreement among directors about an obsession of many investors on hard financial measures for incentives. It was agreed that non-financial measures are critical factors that, if successfully achieved, could lead to long-term sustainable performance. It was argued by some directors that if you get the non-financial measures (like culture, innovation, productivity, safety, customer focus among others) right, the financial outcomes will follow. Some directors initially had the mistaken belief that proxy advisers, among others, have been responsible for this obsession on hard measures. The truth is that the perspectives of the different proxy advisers on the application of non-financial measures varies.


  • Along these lines, both FSS and CFSGAM agreed that culture is important and have no objection about it being included for incentives, provided it is measurable, transparent and clearly linked to strategy.


  • An observation from some directors was that companies still find it difficult to adopt a remuneration framework that is fit for their purpose as external stakeholders ‘just don’t get it’. Companies outside the ASX 200 find themselves forced to go the route of traditional frameworks to get capital support.


  • This appears to conflict with the requirement of the asset owners and fund managers for simpler, more transparent structures. There is clearly a desire for less complex remuneration structures, remuneration reports, and performance objectives. The cry for simplicity was loud. There was general agreement that current frameworks are a result of issuers responding over the last 15 years to investor and stakeholder demands by adding layer on layer. Directors would like to be trusted to fix it for their company, but do not believe they can get investor support. Particularly as it will take a number of years to see the outcome.


The  theme of this Briefing from directors was that they should be given the freedom, and trusted, to act in the best interests of the company as they best see it. Investors and proxy advisers could step back and let their actions take their course – recognising this will play out over a number of years.


© Guerdon Associates 2023
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