The annual CGI Glass Lewis and Guerdon Associates sponsored remuneration forum brought together over 100 directors, superannuation fund and institutional investors, regulators, and management. It might be expected, therefore, that views would be split on the merits of the government’s latest executive remuneration ‘reforms’ (contained in the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011).
Not so. There was consensus on almost all issues.
No-one disagrees with the ban on executives hedging unvested equity (most companies already have and disclose policies for this, in accordance with the ASX Corporate Governance Principles and Recommendations), or the bans on KMP and their associates voting on resolutions relating to KMP remuneration, or even with the prevention of ‘cherry picking’ by proxy holders.
There were some differing views on the ‘no vacancy’ rule, though no one can see its connection with executive remuneration.
The 2-strikes test and the regulation of remuneration consultants were more controversial. There was some support for the 2-strikes test on the basis that it will compel delinquent companies to respond to shareholder dissatisfaction with executive remuneration, although this support was offset by significant concerns about the effects this measure is likely to have on directors and board processes.
There was no opposition to the disclosure of remuneration consultant conflicts, but there were strong views that the bill demonstrates that the government does not understand how boards work, or how boards and management use remuneration consultants, or the extent to which legal and accounting advice (which is now excluded from disclosure) is relevant to KMP remuneration.
Particular points to note from the forum include:
· The ‘black letter law’ approach taken in the government’s executive remuneration amendments to the Corporations Act will provide a far inferior outcome to a principles-based approach, and will result in greater complexity, cost and problems with application and enforcement, and provide more distractions from the really important issues confronting companies.
· In particular, the 2-strikes provisions risk making life a lot more difficult for non-executive directors. There were concerns that many NEDs would resign before risking a second vote on the remuneration report and the possibility of a spill resolution, and that boards that have incurred a first strike will find it difficult to recruit new directors, despite this being a critical time for the injection of new experience on boards. And if there is a spill of non-executive directors, the MD/CEO whose remuneration was likely to have been the key issue will have greater influence than ever over a new, inexperienced board!
· The rules for the engagement of remuneration consultants are now so diluted by the definitions of ‘remuneration consultant’ and ‘remuneration recommendation’ as to be virtually worthless as a means of ensuring shareholders are informed of the sources and independence of advice boards receive on executive remuneration.
· Somewhat counter-productively, if the aim is to encourage independence in board decision-making on remuneration issues, the law is having the opposite effect. The greater complexity of executive remuneration resulting from legislative interventions (viz. terminations payments provisions, employee share plan taxation, disclosure and engagement of remuneration consultants) is forcing non-executive directors to become more reliant on specialist management staff. This coincides with the new regime for engaging remuneration consultants that discourages boards from obtaining independent external remuneration advice.
· The Parliamentary Secretary David Bradbury confirmed that the government would not remove the taxation of employee equity at cessation of employment, as recommended by the Productivity Commission and APRA, and almost everyone else! This one measure would do more to improve the long-term focus on shareholder value and good governance than all of the government’s ‘reforms’ put together.
On a more positive note:
· Institutional investors and proxy advisers indicated that they are prepared to support remuneration structures designed to meet the needs of individual companies, as long as the arrangements are properly explained, are linked to strategy, include proper controls and take account of risk.
· The flexibility of proxy advisers and institutional investors extends to a willingness to consider LTI performance conditions other than relative TSR. However, there was criticism that some proxy advisers require relative TSR in LTI plans. It was noted that relative TSR remains inapplicable to most companies, and may encourage excessive risk taking.
· All sides agree that there is, and remains, the need for a high level of engagement between directors and shareholders.
· The general view seemed to be that as the bill will be passed in its current form, we should all just get on with it and do the best we can!
The 5th annual CGI Glass Lewis and Guerdon Associates Remuneration Forum was held in Sydney on 21 March 2011 at the offices of Allens Arthur Robinson.
The 6th Remuneration Forum will be held in March 2012.© Guerdon Associates 2022 Back to all articles