‘Out with the old, in with the new’ evident at Forum
Two decades and still energising; Guerdon Associates and CGI Glass Lewis’ 20th annual Remuneration and Governance Forum on March 3rd saw highly engaged panellists and attendees representing a full range of ASX 200 company directors, executives, and institutional investors.
Two of our panels dove into discussions on whether shareholders should have a greater say in capital allocation and rethinking the ASX Corporate Governance code.
Whilst we can’t disclose specifics due to the forum operating under Chatham House rule, we can provide a high-level summary.
The ASX needs to review and update existing Listing Rules. In particular Listing Rule 7.1 which caps newly issued equity at 15% of outstanding securities before a shareholder vote is required. There is a focus on fixing existing exemptions to the rule under Listing Rule 7.2 and the waivers to the rule. A proposed happy middle ground for investors and companies is removal of the waiver system and increasing the cap to 25% of issued equity, being the global market practice.
There was less agreement re Listing Rule 14.4 which requires director election at least every 3 years. Some investors are pushing for the implementation of annual director elections to bring Australia in line with other markets. This may alleviate the issue of inequity when only the directors up for election are targeted during a bad year. Whilst there was debate on this, some investors are content with giving up the 2-strikes rule for greater investor control over decision makers. The stigma of receiving a strike is no longer as important to some companies, especially those with consecutive strikes. Don’t think the Remuneration Committee is doing a good job? Vote those directors off specifically.
Views were also expressed on several aspects of the ASX Corporate Governance Principles, including :
- How the nature of diversity has changed. No longer are we focused solely on gender and ethnic representation but more so on diversity of thought. As we navigate the AI revolution, we need younger directors who are on top of AI developments, risks, and opportunities.
- Directors need more skin in the game. Investors feel that directors having an ownership mindset when sitting around the boardroom table will result in better outcomes for all. Instead of using a simple “shares held equal to x% of board fee”, share ownership should be meaningful relative to personal wealth.
- Differentiated rules for large and small listed companies. There was consensus that rules which create good governance and business outcomes for larger companies can create unnecessary oversight and compliance costs for smaller companies. What is applicable to an ASX 50 company director is often not applicable to a director on the board of a company with a $200m market capitalisation.
Other topics discussed included:
- Directors may lack understanding of ASX listing rules and regulatory requirements. They should have awareness of strategy, M&A and legal matters and refrain from over-reliance on advisors and lawyers. The example was raised of directors being pushed into M&A deals by investment bankers in order for the bankers to receive their own bonuses.
- Remuneration report votes are largely symbolic and used to capture all investor concerns with the company as a whole, not just remuneration issues. This leads to remuneration report strikes that are not directly related to remuneration structures or outcomes. The proposed solution was to review LR 14.4 and requiring annual director elections, taking pressure off remuneration report voting. The issue is deciding who is accountable as board decisions are intertwined with many directors.
- Finally, there was much discussion on the issue of over-regulation. Questions raised included:
- Is the regulatory environment getting in the way of good business?
- Are private companies sufficiently incentivised to IPO?
- Are boards constrained by overly prescriptive rules?
- Are current and proposed rules game-able? And,
- Should guiding principles, trust in boards, and a slimmed down framework replace our highly-regulated business environment?
The consensus is that we are heading in the right direction, though there is a feeling that changes need to hurry up. Most investors and directors are receptive to change, and both sides are prepared to make concessions to achieve it. Whilst there is debate on methodology, there is agreement on the desired outcome: efficient capital markets that deliver better returns.
See HERE for a summary of the remuneration topics discussed during the forum and HERE for the seasonal review of proxy voting trends.