The ninth Remuneration and Governance Forum, sponsored by Guerdon Associates and CGI Glass Lewis, was held in Melbourne on 5 March and our third Perth Forum on 9 March. Over 160 institutional investors, company directors, management governance associations and regulators attended these Forums.
Proxy firm representatives confirmed that they would generally be prepared to consider creative remuneration structures. It was noted that applying market standard remuneration frameworks requires less explanation than more innovative frameworks, even if the usual methods of executive pay are unsuited to company’s situation. Nevertheless, CGI Glass Lewis, ACSI and institutional investors present were generally supportive of “innovation” if supported by cogent rationale.
Investors and proxy advisers also confirmed that determining equity grants using the face value of shares rather than the discounted ‘fair value’ is preferred.
Confirming the evidence from proxy adviser reports from recent years, investors prefer to see NEDs owning shares in their companies. This will likely see more companies setting NED shareholding requirements, even though this in effect may be a backward step in achieving board diversity if younger women and minority directors who have not accumulated as much wealth as established directors need to take more of their fees in cash. There was some discussion of the new equity taxation arrangements, and how this could facilitate NED alignment with the provision of share rights with certain dividend properties and up to a 15-year exercise period. It was noted that rights would not carry voting rights, which may discount their legitimacy as an alternative to a shareholding.
However, investors were clear that tax deferral of NED equity grants via performance or service conditions would not be acceptable, because of the risk this may curtail the freedom of a director to resign on a point of principle or to make room for a more appropriately skilled NED to be appointed as the board goes through its renewal process, should this become necessary. Options may be acceptable to some investors for some types of companies, but directors should not participate in the same equity plans as executives
Research was cited that companies with more diverse board skill sets will outperform others and the result will also be more diverse boards. This was reinforced by discussion of board diversity that was nuanced, and went considerably beyond the requirements for gender equality. That is, the representation of women on boards often came about from seeking more diverse skills and experience to oversee a company’s development. While deliberate targeting of the appointment of women directors has increased their numbers, it was apparent that companies and investors are moving beyond this and requiring a more diverse board skill and experience set than in the past.
There was considerable discussion regarding expanding the pipeline of directors, starting at, for example, schooling in science and mathematics. Maths was cited as an essential skill as the dynamics of new technology and service delivery require companies to develop and master sophisticated algorithms for growth. However, to cater to immediate needs there was also discussion of expanding the pipeline that feeds the pool of prospective directors via other means. This included, for example, a more relaxed attitude to executives in ASX-listed companies becoming non-executive directors at other listed companies. Points raised were too numerous to detail, but included discussion regarding time commitments and succession planning. While some directors and investors were decidedly for or against this practice, others had a more balanced and nuanced view, with individual circumstances driving much of the consideration.
The issue of pay discrimination was also raised to an extent. That is, why should successful women and minority executives a generation behind the “older wealthier white males” who dominate boards today give up a lucrative executive career to become a professional director for a drop in pay? See some of the argument HERE.
There was also discussion (at the Perth Forum in particular) of various ways a board can seek out talent diversity. For some boards this could be achieved by buying in more board advice from external sources. An example was provided where the technology challenges facing a company through market disruption were met through the board hiring its own IT adviser with C suite experience, rather than relying on management. There was further evidence of boards buying in advice to meet skill diversity requirements in their role as overseers of management. The trend to expand the diversity of skills bought in, in addition to usual audit, remuneration, governance and legal skills, is an interesting development.
The 2016 Forum will be our 10th and, as the first Forum of its type in Australia, a bit more special than usual. So make a note that it will be held in Sydney. While still in in March, it is likely to be in the third week. The Perth Forum will be on, too. We will remind you to save the dates in early December.© Guerdon Associates 2023 Back to all articles