Q: Is there anything about this AGM season that’s particularly unique?
A: I think if you step back and look at the big picture the issues that concern shareholders remain roughly the same but with slightly different weight. So one of the big areas of focus remains remuneration particularly the quantum to the CEO, disclosure around any annual bonus, where there’s been a payout in short term incentives but there’s been a perception by proxy advisors and investors that it doesn’t really reflect outcomes to shareholders where the share price has dropped or the performance hasn’t really been to the level of expectation. So that’s an area that will continue to receive focus from shareholders and proxy advisors.
The other one is the election of directors. What we’ve found this year post the implementation of the ASX corporate governance principles and guidelines to publish a board skills matrix, is that proxy advisors are heavily and closely scrutinising the disclosure and are in fact already revising their approach to talk about how they’ll apply their policy to this disclosure.
So one for example is CGI Glass Lewis (which is one of the largest global proxy advisors, we find many domestic and off shore institutions subscribe to them) their Australian guidelines were updated less than two months ago to basically say if the disclosure in the board skills matrix isn’t adequate or complete from their perspective, if the skills they expect to see on a board aren’t present, which basically goes to a ‘fit for purpose’ based on the industry and the strategy of the company, then they will consider recommending against the chair of the company or the chair of the nomination committee. So they’ve already come out in their published policy to put companies on alert that they take this disclosure seriously and there will be a consequence if the disclosure doesn’t meet their minimum expectations.
We’ve also seen that the appetite of investors to hold individual directors accountable has increased. So for example where there’s been some impairments or other events that have impacted the capital structure of the company and where a director comes up for re-election who has been present from the beginning of that, they’re much more prepared even if it wasn’t the individual who was responsible to say, ‘hold on someone’s got to be accountable for that and for this reason’.
Q: Why are shareholders placing directors under more scrutiny and making them more accountable for negative events within an organisation?
A: There’s been huge structural and macro shifts in what’s happened especially post the GFC and if you distil it to the lowest common denominator the board are stewards of the shareholders and are there to ensure the strategy is met, that the right CEO is in place and the company is on track. So in an age where there are structural shifts from disruption and digitisation, shareholders want to be confident and convinced that the individuals who they voted in as stewards of their investment are up for the job. A generation ago it was also about reputationand stature of being on a board. That’s changed, now the capability of the board to have the appropriate relationship with the CEO and to be nimble in response to industry shifts and changes is integral. It’s responsiveness in a time of flux. What we’ve seen predominately in the past from market and our own research is that boards are heavily dominated with lawyers and accountants and they do bring something valuable to the table but a lot more is required in terms of industry knowledge and expertise there’s also a need for other aspects particularly in technology. The view of the board is that they don’t want people who are subject matter experts they want people who have all round expertise and industry expertise to be able to contribute to the diverse range of topics the board has to deliberate on, things like risk, audit and sustainability.
Q: What’s the best way for a board to manage the challenges around remuneration disclosure and communicate in an effective manner?
A: I think the first point is understanding the expectations of their stakeholders, so that includes not only fund managers but also governance stake holders like the asset holders who sit beneath their external fund-managers. I’m talking about super funds, sovereign funds, state sector funds – understanding the policies and the views of the proxy advisors because each one of them have guidelines which basically say ‘this is what we want to see’ in terms of performance measures and this is the level of granular disclosure we want to have access to. Every board that I know or most in the ASX 200 are actively engaging with proxy advisors at least once a year.
So there is an expectation in terms of minimum disclosure and it’s important that if you’re not providing that disclosure that you can explain the reason why. When it comes to paying short term incentives in particular, shareholders really want to know what performance an executive has achieved to provide them with the reward that’s been approved. As the ultimate beneficial owners of that company investors have a right to understand how they’re being rewarded, what the performance measures are in place and to what extent management has met those measures and on what basis there has been a payout, particularly if there has been a drop in the share price. This year we had quite a few companies that received “no votes” or even “strikes” where shareholders and proxy advisors are saying sorry the structure’s not right or the disclosure’s not right.
Q: How much of an area of focus is over-boarding for proxy advisors?
A: Shareholders and proxy advisors are really focused on how many boards individual directors sit on. So what’s happened over the past few years is that proxy advisors and shareholders have set their own limits as to what is acceptable to them. For example in the past ISS (the world’s largest proxy advisor) had more than five which meant six, if you had six or more than six you could be in big trouble. Now they’ve changed it so it’s five. The way they assess a board seat is they consider a chairmanship as two board seats, so if you’re a chairman of a company they count that as two directorships. The reasons they have taken this stringent approach is because they have a view about the time required by individuals to meet their obligations and fiduciary commitments as a director and that they have to have capacity in case of a crisis or emergency. They feel if directors are over-boarded then they’re spread too thin and all these companies potentially suffer. This is a big issue of risk management because when you need a director at a time of crisis and they can’t fulfil their commitment that’s a very poor outcome for shareholders.
Q: How important is a detailed Investor Relations strategy to how a Board operates?
A: Critical, it’s critical and it’s not something you can dust off once a year. It’s a relationship that has to be nurtured and developed, trust has to be achieved and the relationship is two way. If you go and you knock on the door of your investors at a time of trouble the reception won’t be the same as it would be if you’ve had an ongoing dialogue and built a relationship with them. So it’s essential to get the best outcome both from a voting perspective but also from making sure you’ve got the right communication with your investors.
I don’t think every company needs a fully blown program, but the layering of the register is a development which if you disregard it would be to your peril. At the end of the day you live and die by the support of your investors. They have the right to vote directors in or out. So it’s not like directors have a job for life. They are have to be accountable and remuneration each year goes up for a vote, so if you don’t have precise understanding and a clear appreciation of the views and expectations of your entire register you could be in for a nasty surprise. Risk is a big part of what a board is responsible for and this is just another form of risk management because your investors are a big part of the company and you could be exposing yourself to reputational risk unless you are effectively managing that constituency or stake holder group.