CGI Glass Lewis and Guerdon Associates hosted their eighteenth annual Remuneration and Governance Forum, at the NSW Art Gallery in Sydney Australia on the 14th of March.
The event, which is held under Chatham House rules, saw speakers and panellists from major Australian investors and ASX-listed boards. The Forum always aims to address key current themes of interest to the Australian landscape and facilitate open and honest communication between the investor and director community. This year’s discussion saw particular focus on the use of non-financial performance measures in executive remuneration structures and potential ESG crises and how a board should respond.
These notes are reflective of the discussion at the forum and should not be taken to represent Glass Lewis’ views or policies.
Remuneration and Governance Forum: Season in Review
During the Forum, Glass Lewis provided an overview of 2022 Proxy voting trends. This section reviews the highlights and trends discussed at the Forum.
Gender Diversity
Progress has been made towards increasing gender diversity within Boards in the ASX300. Although, while the number of women on Boards within ASX300 have grown over the past five years, representation of women among Executive KMP ranks has largely trended sideways.
However, the past year has seen some progress here with a significant increase in the number of women in the top job, with 21 women in MD/CEO roles in 2022, up from just 15 in 2021.
Say on Climate
On the trend of Say on Climate votes, Australian companies hosted eight of the 46 Say on Climate votes seen globally. Australia is also overrepresented with respect to low levels of support for these proposals, with the three lowest supported Say on Climate votes all being Australian issuers (Woodside, Santos and AGL).
Voting Opposition
Protest votes against Directors and Remuneration reports have declined since the previous year. Votes for Directors saw 13 protest votes were recorded at above 25%, which was a slight decline from the 16 the year prior. Of the 13 above 25%, only 2 were at 50% and above. Independence concerns and overcommitment were the most frequent drivers of these protests.
Votes for Remuneration reports also saw a decline from the year prior, with 22 strikes recorded in 2022 and 26 strikes the year prior. The common issue for Remuneration report strikes were upward board discretion on bonus outcomes, generous short term bonus outcomes and informal short-term structures.
E&S Shareholder Proposals
Environmental and social (E&S) shareholder proposals generally fell into three categories, all within the theme of climate. The three categories were proposals regarding:
- Capital allocation;
- Financing policies of carbon intensive industries; and
- Climate lobbying.
Beyond lodging shareholder proposals, local activist groups now appear to also be encouraging against positions on other proposals, including: Say on Climate votes, Remuneration Report votes and on the election of directors.
See Glass Lewis’ presentation data HERE.
Panel Discussion 1 – Executive Incentives and Non-Financial Performance
The first panel of the forum discussed the topic of non-financial performance measures and their increasing prevalence. In particular, the focus was on whether scorecards have become bloated with non-financial measures, and what are the most appropriate approaches to incorporating these measures into variable incentives.
Non-Financial Metrics
The panel opened with an attempt to name the main drivers for the growing inclusion of non-financial metrics in scorecards. While it may differ by industry, the panel alluded to regulatory bodies being a major driving force in some instances. For example, the Australian Prudential Regulation Authority (APRA) and its release of CPS 511 mandated the inclusion of non-financial measures to promote effective management of non-financial risk in the financial sector. It was noted that, in some instances, boards are also the driving force for the inclusion of non-financial metrics.
The discussion moved to what the incorporation of non-financial metrics looks like in practice. The two main aspects were discussed – alignment to strategy and measurability. A well-designed scorecard should have measurable non-financial metrics that are fit for purpose and aligned with the company’s current strategy.
The importance of financial measures was also acknowledged as the component of the scorecard that ultimately funds the incentive pool. At the same time, the panel emphasised that good non-financial measures lead directly to financial results. If there is a material risk that is not managed, it will have financial consequences, and, similarly, non-financial goals that support strategy can result in financial benefits. Hence, it was pointed out that the term “non-financial metrics” is somewhat misleading as it distorts the inextricable link between strategy, culture, risk management and financial performance.
In terms of short versus long-term performance, the appropriate structure should depend on the company’s specific pathway. Generally, long-term ESG measures should have challenging, aspirational targets with milestones along the pathway included under the STI. Some noted that the inclusion of ESG metrics under the LTI can be quite problematic given the challenge of setting appropriate targets for a 3–4-year period. For that reason, some boards will be more comfortable including those metrics under the STI rather than LTI. One of the panellists suggested that if a company is going to spend capital to move a dial over a longer term, then it may not be properly captured under the STI which usually uses a year-to-year comparison as a baseline.
Board Adjustments & Discretion
Next, the panel discussed the need to make adjustments to scorecard metrics when the company’s circumstances change. For example, a metric can be brought in and out of a scorecard when it requires focus or development. However, a metric which was, but no longer is included in the scorecard would suggest that the goals were achieved, and only require oversight rather than development efforts. Generally, the panel agreed that having a balanced scorecard with too many measures that do not have meaningful weighting on their own will not be effective in motivating desired performance.
Incorporation of a financial or non-financial gateway is viewed as a good practice. It can alleviate some concerns with incentive structures including the inclusion of business-as-usual metrics or the vesting of the non-financial component when financial performance disappoints.
The use of board discretion was also discussed. While we are seeing a more generous attitude towards boards applying discretion on the upside, it is still one of the main drivers of shareholders’ protests against remuneration reports. The panel noted that positive discretion may be appropriate in circumstances that were unforeseeable. Financial measures and targets can only be incorporated into a scorecard to the extent their outcome is somewhat predictable. The panel also conveyed that during an unforeseen event, executives tend to be faced with additional workloads which may form the basis for positive discretion. The emphasis needs to be put on providing a clear and convincing rationale. The board should also consider the experience of shareholders and other stakeholders when considering if discretion is appropriate.
Reputation as a Metric?
The panel received a question about whether reputation should be used as a metric and whether it is a holistic assessment of non-financial performance. A panellist noted that some relative reputation score measures can provide skewed results due to the low response rate and the limited number of stakeholders captured. Reputation can be a good metric depending on the industry or whether the appropriate stakeholders are engaged.
When asked if the pendulum had swung too far towards the inclusion of non-financial metrics, panellists differed in their opinions. A panellist opined that scorecards had become too crowded, and had lost focus, with the addition of many non-financial measures. Others felt non-financial measures had a rightful place and that measuring additional factors helps us drive value in a more sophisticated way.
Panel Discussion 2 – What is Keeping You Up at Night? ESG Crises & Priorities
The second panel of the forum discussed ESG crises and priorities for directors and investors.
The panellists began by discussing what they considered to be the most important ESG issues today. Two areas stood out – governance and climate change.
Investors and directors need to have a clear dialogue on what investment risks might materialize and how a company is managing these potential risks. Investors need to understand what will materially impact a business, and then how company objectives such as a decarbonisation strategy can be improved to satisfy all parties’ risk appetite.
When a major ESG crisis occurs, the panel agreed that transparency and communication were vital. There can be a mad rush to get all the answers immediately, however transparency may simply not be possible immediately following a crisis.
This is where communication needs to make up for the lack of transparency, when full disclosure surrounding the crisis may not be possible. Investors still want to know that someone or some part of the company is taking accountability for the crisis, and that both the response and preventative measures are being worked on.
Investors want to understand how they got to a point where an ESG crisis occurred, how it is being managed, and what timeframes are required to resolve the crisis.
The panel opined that when it comes to safety incidents, complacency plays a major role in the lead up to a crisis. However, continuous changes in disclosures requirements are keeping boards on their toes.
When a mistake is made which leads to a crisis, there is always the possibility that the board is accountable to some degree. The panel observed that annual elections for boards would be useful to allow investors to better hold directors accountable. Currently there are few ways to hold a board member who is not up for election accountable.
The panel concluded with a discussion on greenwashing. Companies need to be mindful of what was promised and how it is being tracked to ensure that they are going to fulfil their commitments. There are now real consequences for greenwashing claims if companies slip up and fail to meet targets. This can deter companies from setting targets in the first place.
The Fireside Chat with Grok: Active Investors on Climate Change
The Fireside Chat session was a discussion on a unique funds activities and view of the world. Due to Chatham House rule specifics are not disclosed, however the conversation covered climate investing, including investment in industries that need to reduce emissions and the role of technology in decarbonising industry.
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The summary above has been modified from an initial summary prepared by Guerdon Associates with the assistance of CGI Glass Lewis. The summaries were initially posted on the Guerdon Associates website HERE.
CGI Glass Lewis and Guerdon Associates would like to thank all speakers, panellists, and attendees who participated in the successful event.
Contact us to learn about our approach to board diversity, executive compensation and proxy voting:
GROW@glasslewis.com (Institutional Investors) | ENGAGE@glasslewis.com (Public Companies)