On Tuesday 12 February 2008, some 80 representatives from the four main governance constituencies – major superannuation funds, fund managers, non-executive directors and senior executives – met to discuss key current issues in the area of executive and non-executive remuneration. The Remuneration Forum was sponsored by remuneration advisers Guerdon Associates and proxy advisers CGI Glass Lewis. It was hosted in Melbourne by Allens Arthur Robinson.
News media was excluded from the event to allow free and frank discussion. Chatham House rules applied.
This Forum provided the foundations for executive and director remuneration changes in 2008 and 2009.
A copy of the full Communique can be found HERE.
What follows is a summary of the Remuneration Forum Communique prepared by a representative panel of Forum attendees.
Boards, executives and institutional investors have made significant progress in coming to terms with executive and board remuneration levels, structures, reporting requirements and voting. On the whole there is more understanding, better compliance, improved communications and more variety tailored to better meet specific company situations. However, there remain significant opportunities:
• The current compliance regime requires too much that is unwieldy, complex and obscure, adding unnecessary detail, length and complexity to remuneration reports. • Nevertheless, some companies continue to omit material information on executive remuneration, contributing to negative votes on remuneration reports.
• Better reporting standards need to be developed to communicate meaningfully the value of equity remuneration.
• Too many companies adopt remuneration structures based on safe havens (i.e. that investors have accepted) but these safe havens are often ineffective and inappropriate for the circumstances of the company.
• Alternative structures that depart from perceived safe havens would in many cases be more effective and so, if accompanied by meaningful explanation, could be supported by institutional investors.
• Executive remuneration frameworks, in particular, could be better attuned to the specific value drivers of the business.
• Overall, companies should design, apply and explain clearly and transparently to investors policies and structures that will safeguard and grow shareholder value in the company’s particular circumstances and why those policies and structures will do so.
• Well structured and operating boards are perceived to add substantial value (conversely, poorly structured and operating boards are perceived to be a substantial risk). The cost of good non-executive directors (NEDs) on good boards is a small price to pay. Hence, institutional investors could support well-explained increases in rewards to attract and retain good NEDs.
• A strong consensus emerged on the desirability of NEDs having ‘real skin in the game’ through substantially enhanced equity holdings and on the need to develop new methods of achieving that, including for NEDs who could not otherwise afford to buy the shares themselves.
• Pending any legislative review of the current compliance regime, companies are encouraged to divide their remuneration reports into two parts. The first part of the remuneration report should describe transparently and in plain English the company’s executive and NED remuneration policies and structures for the year under report, any pending or proposed material changes to those policies and structures and the reasons why those policies and structures or proposed changes are appropriate to the company in the company’s circumstances. The first part of the remuneration report should pay particular attention to any areas where the company’s policies or structures are unique to the company, unusual, otherwise depart from generally accepted best practice or, on rational analysis, raise a material question to be answered. It should also clearly show the amounts or values of each element of the remuneration of the directors and disclosed executives for the year under report. This should include the meaningful value of executive equity remuneration and how that has been calculated. This will enable investors to understand the operation of the company’s remuneration policies and structures in practice and to assess the overall comparability and reasonableness of the executive’s and NED’s remuneration for the year. The second part of the remuneration report should contain the other information required to be included in the report by the current disclosure regime. This ‘two part’ approach is perfectly permissible under the current regime. In particular, the regime does not mandate a particular layout or prevent the inclusion of additional information.
• Investors should have the capacity to competently assess remuneration policies and practices.
• In 2008:
o Listed companies should expect institutional investors to continue to critically evaluate their remuneration policies and practices, while extending their reviews to smaller companies.
o Increasing resources and experience in evaluating remuneration policies and practices will give institutional investors greater confidence in their capacity to make valid assessments of those policies and practices. They will support with their affirmative votes boards and companies that they perceive handle these issues well and take boards and companies to task that they perceive do not, including, if they think appropriate, by voting against their remuneration reports and other remuneration resolutions.