Guerdon Associates’ June  Directors’ Briefing included guests Andrew Gray of King & Wood Mallesons and Philip Foo of CGI Glass Lewis.

The discussion considered, among other things, the extent that boards can exercise positive executive pay discretion in light of ASX guidance on Listing Rule 6.23.3. (SEE HERE). Key points from the briefing are summarised below.

Has anything changed?

The short answer is no. Listing Rule 6.23.3 has always been there, albeit not well understood. The issue of the December 2023 ASX compliance update (see HERE) indicates that the ASX will be paying closer attention to companies’ application of positive discretion which in many circumstances is not permitted under this listing rule.

What do boards need to be aware of?

What ASX LR 6.23.3 prohibits is making a change to the terms of the option (including share rights unless the specific discretion is disclosed at time of grant). Companies cannot do anything that reduces the exercise price, increases the exercise period or the number of instruments. Any change to a performance hurdle or milestone which makes it easier to achieve, or ignored, is prohibited by the rule.

What can be done?

Boards can apply for a waiver. The ASX is also clear in their guidance that they will be reluctant to grant a waiver unless the ability to make a change has been disclosed. Reference it in the notice of meeting and then to the remuneration report on how discretion works.

In addition, while granting the waiver is not contingent on having shareholder approval, experience has been that the ASX will ask for it.

Is the ability to apply general discretion enough?

Equity plan rules and offer letters usually provide the board with general discretion. This is not enough when considering Listing Rule 6.23.3.

The ASX is looking for the ability to make specific changes rather than the application of general discretion. This means that boards need to ensure that plan rules and offer letters are explicit in what circumstances and how discretion will be applied.

What happens if you get to the end of the vesting period and the board remco thinks discretion may be needed? Boards need to have this identified before the remuneration report and notice of meeting goes out, receive legal confirmation that a resolution is needed, seek an ASX waiver and subsequently a resolution from shareholders.

The alternative is to have the ability to delay the vesting and buy the time you to get things sorted. Boards need to make sure that, if investigation is necessary, there is the ability to delay vesting in the offer letter and plan rules. This is already common in the financial services sector.

Discretion and relative TSR

Discretion can be considered to have been applied in circumstances where the TSR peer group has been changed and results in a vesting outcome that previously would not have occurred. Glass Lewis’ Philip Foo presented an example where companies have been removed from the peer group due to delisting. The company being measured went from being at the 49^th percentile to 51^st percentile, triggering a 50% vesting of the relative TSR LTI.

Discretion and change in control

A change in control typically results in accelerated vesting. Discretion is considered to have been applied. To comply the discretion should be in the plan rules and disclosed.

From Glass Lewis’ point of view, they prefer the board to retain discretion so it can be applied on a case-by-case basis. Automatic vesting may provide an incentive bias to head towards the change in control.

What are the consequences of a breach of Listing Rule 6.23.3?

There are full range of enforcement options. In the case of a LR 6.23.3 breach, KWM’s Andrew Gray expects a speeding ticket to be issued. The compliance update suggests that we will start to see more focus and sanctions in this area.

ASIC Information Sheet 245

ASIC’s information sheet seemingly advocates for discretion, stating among other things, the effectiveness of board oversight and the exercise of discretion on executive variable pay outcomes can be enhanced by being guided by frameworks and processes that result in the active, timely and consistent exercise of discretion.  Andrew believes the listing rules and information sheet are talking about the same thing, although not said outright, the information sheet is talking about having clear guidelines for applying negative discretion/malus. (See HERE).

Disclosure is key

In FY23, 22 ASX 200 boards exercised positive discretion. Despite investors and proxy advisers being wary of positive discretion, only 4 got strikes. The key message from Glass Lewis’ Philip Foo is to disclose that discretion has been applied. Articulate why discretion was applied, how it was applied and the quantum the board landed on. This applies equally to negative discretion.

What about when discretion is considered but not exercised? Glass Lewis prefers disclosure especially if an event is known to have occurred. Disclosing that discretion has been considered sends the message to investors that the board acknowledges the event, rather than ignoring it and reflects positively on the board.

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