Speaker 1:        Welcome to the Guerdon Associates Podcast.

Speaker 2:        Hello,

Speaker 1:        I am thrilled you are joining us for this deep dive, today. We are exploring topics based on the June, 2026 issue of Guerdon News, which comprises the monthly newsletter articles published by Guerdon Associates.

Speaker 2:        We have quite a bit to cover.

Speaker 1:        We do, so I will give you a quick overview. This deep dive examines the recent outcomes of the ASX advisory group on corporate governance and the structural considerations required for total shareholder return methodologies. It explores the 2026-27 federal budget changes to capital gains tax and how these alterations interact with employee share schemes and loan funded share plans. Finally, it outlines the regulatory landscape concerning consulting firm conflicts of interest in Australia compared to international markets.

Speaker 2:        That is the roadmap for today. We are going to unpack the mechanics of each of these areas step-by-step.

Speaker 1:        We’ll start right at the top looking at the overarching governance frameworks that guide board operations. Before we get into the remuneration mechanisms, those boards oversee, we need to establish the rule book. According to Guerdon Associates’ original research, the ASX advisory group on corporate governance held a meeting on the 8th of May, 2026, and they released a communicate shortly after on the 11th of May.

Speaker 2:        Yes, that is the timeline. So during that session, the group reviewed a complete draught of the revised principles. The outcome recorded in the communicate is that the draught retains the existing eight principles. It also continues to utilise the former council’s work, and it maintains the if not why not framework.

Speaker 1:        I always find this framework interesting for you listening. You can think of the if not, why not concept, A bit like the house rules and a shared living arrangement.

Speaker 2:        Oh, how so?

Speaker 1:        Well, the landlord sets out a standard list of expectations for how to keep the property running. You do not have to follow every single rule to the letter, but if you decide to do things differently, you are required to leave a very clear note on the fridge explaining why your alternative method works for the household.

Speaker 2:        I mean, I like that framing and to build on your house rules analogy, the framework does not mandate rigid compliance with every recommendation, but it does enforce transparency. Right. If a company deviates from a standard recommendation, the board explains the alternative practices they adopted. They document why those specific practices are appropriate for their specific circumstances,

Speaker 1:        Which keeps the market informed without forcing a one size fits all structure onto entirely different businesses.

Speaker 2:        Exactly.

Speaker 1:        So along with keeping those eight principles in place, Guerdon Associates articles indicate the draught retains the current non-executive director remuneration recommendations.

Speaker 2:        Yes, those are retained.

Speaker 1:        Furthermore, it introduces no recommendation relating to the frequency of director elections.

Speaker 2:        The parameters regarding those elements were kept in their current state. The communicate also provided the timeline for the next steps.

Speaker 1:        Then what are those next steps?

Speaker 2:        A public consultation period commences in mid-July. That consultation period lasts for six to eight weeks. Additionally, the advisory group meets again on the 8th of July, 2026.

Speaker 1:        Okay. So if you are sitting on a board right now, what is your immediate priority? The takeaway for a board director is that they must monitor the mid-July public consultation period regarding the eight principles.

Speaker 2:        Yes, it is a defined window to understand the finalised expectations.

Speaker 1:        Moving from those overarching governance frameworks, we transition into a specific long-term incentive mechanism that boards have to govern carefully. That mechanism is total shareholder return or TSR.

Speaker 2:        This is where we get into the mechanics of performance testing. According to Guerdon Associates articles, TSR incorporates two primary components, share price appreciation, and dividend yield.

Speaker 1:        But getting the final number is not as simple as checking a stock ticker, is it?

Speaker 2:        No. It involves several other variables, things like averaging periods, the volume weighted average price, often called VWAP and foreign currency adjustments.

Speaker 1:        Let’s break those down. Why do we need an averaging period instead of just looking at the closing price on a given date?

Speaker 2:        Well, we use averaging periods, which are often applied at the start and the end of the performance period to smooth out short-term market volatility. If you measure based on a single day and the broader market experiences a random anomaly on that day, it distorts the entire multi-year performance record.

Speaker 1:        That makes sense. And then the volume weighted average price or VWAP takes this a step further.

Speaker 2:        It does. VWAP factors in the number of shares traded at specific prices over a given timeframe. This provides a representation of the trading activity and volume. It avoids relying on a closing price that might’ve been driven by a single low volume trade right before the bell.

Speaker 1:        Right, and I imagine foreign currency adjustments come into play when you are benchmarking against global peers?

Speaker 2:        Precisely. When comparing companies across different global regions, foreign currency adjustments are applied to account for exchange rate fluctuations. This isolates the company’s actual performance from the background noise of currency markets.

Speaker 1:        Got it. Once we have that TSR value calculated, we move to the vesting calculation. Vesting forms are structured as either absolute or relative. Absolute TSR measures performance against fixed growth targets. Relative TSR, which is common in these frameworks, measures performance against peers. And for relative TSR, the methodology must define the comparator group and the percentile ranks.

Speaker 2:        The definition of the comparator group is foundational Here. It establishes which companies are used as the benchmark throughout the performance period, you are effectively setting the peer group against which the executive’s performance is judged.

Speaker 1:        This brings me to an analogy. Imagine you are baking a cake. You have your flour, your sugar, your eggs, but depending on the specific mixing bowl you use in the order you stir things in your end result could be a massive, tiered cake or a completely flat pancake, even with the very same ingredients.

Speaker 2:        That is a great way to visualise it.

Speaker 1:        Because Guerdon Associates’ original research notes. There are nine distinct methods for calculating that percentile rank. You have your ingredients, the companies and their TSR values, but if the board does not document the specific steps for mixing those ingredients, the outcome changes completely. Nine different corporate bakers could use nine different calculation methods and arrive at completely different vesting outcomes using the very same base numbers.

Speaker 2:        That analogy illustrates the underlying complexity perfectly. The choice among those nine methods dictates how a company is positioned within the peer group. A company could be sitting right on the threshold of a payout, and the specific percentile calculation method chosen dictates whether they crossed that threshold or fall short. The methodology also requires roles for special circumstances to ensure consistency. For example, Guerdon Associates’ articles state that companies de-listed due to liquidation have a TSR of -100%.

Speaker 1:        Oh, I see. There are also regional market practices regarding how these vesting scales are structured. For ASX and FSE markets, the practice is 50% vesting for the 50th percentile. And 100% vesting at the 75th percentile. Can you explain how that works?

Speaker 2:        Yes, so there’s often straight line interpolation between those points. If performance lands between the 50th and 75th percentiles, the vesting amount increases proportionally along a straight line.

Speaker 1:        In contrast to the ASX and fussy scales, US and Canadian listed companies generally use scales starting at the 25th percentile and those end at the 80th or 90th percentile.

Speaker 2:        The parameters for determining the outcome change depending on the listing jurisdiction, different markets operate under different structural expectations for baseline performance and maximum reward thresholds.

Speaker 1:        So, bringing this back to the boardroom, the takeaway for a board director is that the board must approve and document a replicable TSR testing methodology. Defining components like dividend treatment and rounding to ensure consistent results. You cannot leave the recipe open to interpretation.

Speaker 2:        Absolutely. Now, having explored how equity performance is measured for the TSR, we need to examine how that equity is taxed. This is prompted by the 2026-27 federal budget.

Speaker 1:        All right. Let’s get into the tax side. Based on articles written by Guerdon Associates, the 50% capital gains tax discount transitions to a CPI cost base indexation model. This transition happens on the 1st of July 2027.

Speaker 2:        And under this new framework, a mandatory 30% minimum tax floor on net gains is introduced.

Speaker 1:        Let’s examine how this interacts with employee share schemes, specifically Division 83, a startup options. These options usually carry a nominal exercise price.

Speaker 2:        When we say a nominal exercise price, we are talking about a strike price that is set low,

Speaker 1:        Like close to zero, right?

Speaker 2:        Yes, because the exercise price is nominal, it provides a low cost base for the CPI Indexation model. Under the new rules, the indexation for inflation is applied to that cost base. If the base is new zero, the indexation provides very little adjustment against the final taxable gain.

Speaker 1:        Okay. Furthermore, from the 1st of July, 2028, discretionary trust distributions carry a 30% minimum tax floor.

Speaker 2:        Yes.

Speaker 1:        If a trust distributes to a beneficiary at a 14% tax rate, the policy changes the rate to 30%.

Speaker 2:        The framework applies a minimum threshold to those trust distributions. It establishes a baseline tax rate regardless of the beneficiary’s personal tax bracket.

Speaker 1:        I want to make sure I follow the timeline here because the transition has specific mechanics. Can you clarify how the 30th of June, 2027 grandfathering rule functions for legacy gains?

Speaker 2:        Of course, according to Guerdon Associates’ original research, the framework states that gains made in the period up to the 30th of June 2027 continue to be eligible for the 50% discount. The new CPI Indexation model and the 30% minimum tax floor applied to the gains made after the 1st of July, 2027. Therefore, the gain must be separated into two distinct periods to apply the two different tax treatments.

Speaker 1:        Guerdon Associates articles also mentioned that Guerdon Associates will submit to the government consultation regarding the retention of startup concessions.

Speaker 2:        Yes, they will.

Speaker 1:        For a board director navigating this timeline, the takeaway is that boards must secure independent market valuations before the 1st of July, 2027. This is to grandfather historic gains and review the structure of strike prices.

Speaker 2:        The budget modifications extend beyond startups. We need to look at how these identical tax policy changes apply to established corporate equity structures, specifically loan plans.

Speaker 1:        Articles published by Guerdon Associates explain the mechanics of these structures. Loan plans provide an interest-free limited recourse loan to buy shares at market value upfront.

Speaker 2:        And these shares are taxed under the capital gains tax regime upon disposal.

Speaker 1:        Right. Let’s apply the previously discussed federal budget parameters to these specific plans. Pre July, 2027, the 50% discount applies?

Speaker 2:        Yes.

Speaker 1:        If we calculate that the top marginal rate of 47% multiplied by 50% was 23.5%. That was the framework for the taxation on disposal.

Speaker 2:        Post July, 2027. The CPI indexation and the 30% minimum floor applied to the real gain to split the gain for shares held past the 1st of July, 2027 evaluation is required.

Speaker 1:        And how is that valuation handled?

Speaker 2:        For listed companies? They use the volume weighted average price or VWAP. For unlisted companies, a formal valuation is required.

Speaker 1:        A good way to visualise this apportionment process is drawing a line on a calendar right on the 1st of July, 2027.

Speaker 2:        Okay. I’m picturing it.

Speaker 1:        You have a single asset, your loan shares, but that line divides it into two distinct tax environments. The growth that happens on the left side of the line gets the 50% discount treatment and the growth on the right side gets the indexation and the 30% floor. You need the valuation right at that line to figure out how much growth belongs in each environment.

Speaker 2:        That visual model represents the apportionment process accurately. When reviewing these structures, remuneration committees evaluate loan plans against alternatives to determine their ongoing utility performance rights, for example, operate differently.

Speaker 1:        How So?

Speaker 2:        They avoid loan funding entirely, and they’re taxed at marginal rates as employment income. At the deferred taxing point.

Speaker 1:        The loan shares have different structural features.

Speaker 2:        They do. Loan shares retain the upside of dividend yield. This is because the shares are owned outright from the grant date, whereas performance rights typically do not accrue dividends until they vest and convert to shares.

Speaker 1:        So, the takeaway for a board director here is that the remuneration committee must secure valuations by the 30th of June 2027, and they evaluate the ongoing use of loan plans compared to alternatives like performance rights.

Speaker 2:        Now, to navigate these intersecting challenges of TSR documentation and taxation shifts, boards rely on external advisors,

Speaker 1:        Which brings us to the regulatory environment governing those advisory relationships.

Speaker 2:        Yes. According to Guerdon Associates’ original research, Australian regulatory responses to consulting firm conflicts of interest are muted compared to international standards.

Speaker 1:        The international standards demonstrate several distinct regulatory frameworks that require strict separation. Right?

Speaker 2:        Yes. In the United Kingdom, regulations mandate the operational separation of audit functions from consulting functions within the same firm.

Speaker 1:        When they say operational separation, they mean those divisions essentially have to run as distinct entities?

Speaker 2:        Correct, the framework requires them to operate independently and in the United States and the European Union Service prohibitions bar audit firms from providing other advice to a company.

Speaker 1:        Meaning if a firm audits the books, they cannot provide remuneration consulting to the same company.

Speaker 2:        Yes. Furthermore, US stock exchanges mandate independence standards and conflict of interest disclosures specifically for board compensation committee advisors.

Speaker 1:        Those are the structures present in those respective jurisdictions. Given these differences between local regulations and the cited international standards outlined in Guerdon Associates articles, how do Australian boards navigate this landscape?

Speaker 2:        The responsibility rests with the boards themselves. They cannot rely on external regulatory prohibitions.

Speaker 1:        So what is the takeaway for a board director?

Speaker 2:        Remuneration committees must proactively utilise established frameworks to identify and manage conflicts of interest with professional service providers. They must establish internal assurances to verify independence before engaging an advisor.

Speaker 1:        Which brings us to the end of the research and structural changes we have covered today.

Speaker 2:        If we connect all of these intersecting pieces from governance frameworks and performance testing methodologies to taxation changes and advisor independence, it raises an interesting consideration for you as a listener.

Speaker 1:        What is that?

Speaker 2:        As taxation frameworks evolve and potentially alter the net returns of equity-based compensation, will future corporate environments shift away from traditional equity models entirely and pioneer completely new philosophies of executive remuneration?

Speaker 1:        That is absolutely something to ponder as you look at the future of corporate governance and incentive structures. Thank you for joining us on the Guerdon Associates Podcast. We hope this deep dive has given you a clear view of the mechanics shaping today’s boardroom decisions. Until next time, take care.