Remuneration Forum 2012 – understanding the rules of engagement

The 6th annual Remuneration Forum, sponsored by Guerdon Associates and proxy adviser CGI Glass Lewis, was held in Sydney on 5 March 2012. Once again it brought together participants from all sides of the executive remuneration debate – including directors, institutional investors, and management.

The focus this year was on assessing the impact of the two-strikes rule, after its first AGM season, and on improving methods of engagement between investors and companies.

Developments in Australia were considered in the context of increasing controls on executive remuneration and a greater focus on engagement around the world. The say-on-pay resolutions in the US and the UK Stewardship Code are two aspects of this.

Views differed on several issues, which was expected given the range of interests represented at the Forum. Overall, however, there was broad consensus on key matters, including:

  1. The two-strikes rule, and the previous non-binding vote on the remuneration report, have substantially increased the dialogue between shareholders and companies, particularly on remuneration matters. This was considered positively by most directors and investors, despite the additional workload.
  2. Neither investors nor companies want the two-strikes process to get to the point where a board is spilled on remuneration issues – both sides will work hard to avoid a spill. Until the Forum, many directors had not appreciated that investors are now quite proactive in addressing their concerns with companies.

Other points to note from the forum include:

  • Related to point 2, above, there is a widely held view that the focus on remuneration and the remuneration report is excessive, and a distraction from issues that more fundamentally affect company performance.
  • Most investors are more concerned with the structure of a company’s remuneration, and the extent to which this encourages company performance and risk management, than with the quantum of remuneration, while recognising that quantum is a sensitive community issue. For at least one fund manager, however, the focus is on how much executives are paid relative to performance irrespective of how the pay was arrived at, with a no vote on the remuneration report if pay feels too high.
  • Voting on remuneration reports is often influenced by factors other than remuneration – poor company performance may attract a big ‘no’ vote, even where there has been no change in remuneration.
  • There is greater scope for the two-strikes rule to be used for non-remuneration purposes in smaller companies, especially where the prohibition on KMP and their closely related parties voting on the remuneration report eliminates a majority of the votes that could be cast.
  • Compliance with governance requirements is a significant drain on the limited resources of smaller companies. Even at larger companies, this has resulted in a big increase in the workload of members of the remuneration committee.
  • While it is generally acknowledged that the whole board is responsible for remuneration matters, some investors are prepared to hold the chairman and members of the remuneration committee accountable by voting against their re-election; other investors will not do this. Some directors were strongly of the view that as all directors are jointly and equally accountable, selective voting is inappropriate.
  • Investors are looking for sufficiently detailed explanation of STI to enable them to understand the awards that are made, but are not looking for disclosure of confidential information.
  • There is some concern that the pressure to achieve a 75%+ vote on the remuneration report encourages a ‘retreat to the middle ground’ of remuneration practices that are easy to explain and conform to proxy adviser and investor guidelines, and discourages innovative arrangements that are carefully adapted to the specific needs of a company but which require individual explanation.
  • Engagement needs to start early, well before the AGM season.
  • Companies need to make sure they engage with the people who make the voting decisions, and understand how voting decisions are made. This information is available.

The 7th annual Remuneration Forum will be held in March 2013.

© Guerdon Associates 2023
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