CGI Glass Lewis and Guerdon Associates hosted their seventeenth annual Remuneration and Governance Forum, as a webinar, on the 17th 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 diversity at board and executive management level, and on differences in remuneration structures between value and growth companies.

These notes are reflective of the discussion at the forum and should not be taken to represent Glass Lewis’ views or policies

Governance: Board and Executive Diversity

The discussion began with the question of whether less than robust board decisions are the result of boards being filled with people who have similar beliefs and experiences. In these environments, poor decisions are not as likely to be challenged. This diversity issue is exacerbated further by overboarding, when the same people are on many boards.

The panel noted that board and executive diversity can allow for better talent and as a result better business outcomes. Employees increasingly want to work at a company that is reflective of who they are. Clients wants to deal with companies that are reflective of the community they are operating in.

Beyond Gender?

The Australian focus on gender has dominated the diversity discussion to date, with lesser focus on other elements such as ethnicity, age and background. That said, it can be hard to say how Australia is tracking on these other elements, as data on areas of diversity other than gender is lacking in Australia and the Asia Pacific region.

Whereas US and UK companies have started including disclosures on gender, race and ethnicity, there is no quantifiable racial or ethnic data on board members presented in Australian annual reports. In Australia companies have been reluctant to seek this information as it involves engaging with their workforce in a way that could be considered intrusive.

However, while increased gender diversity has been the primary focus for board and executive diversity, knock-on effects can be seen in other areas. By changing the considerations involved in director appointments and forcing companies to consider a new pool of talent, the emphasis on increasing gender diversity has inadvertently increased age and career background diversity on boards as well.

Value vs Values

Shareholders prioritise value over values, and that will not change. However, the two are not mutually exclusive. Communication is necessary to show shareholders why ESG targets, including those related to board and management diversity, are relevant to the value of the business and therefore the shareholders’ investment.

Manage the Pipeline to Management
The panel observed that companies without a diverse pool of talent internally available should consider developing their pipeline so that in 5 – 10 years there are more options to fill management-level roles.

Remuneration: Considerations for Value vs Growth Companies

The panel established that regardless of the growth stage of a company, the key issues that need to be addressed for remuneration quantum and structure are as follows:

  • The incentives must be simple to understand for both employees and shareholders.
  • KPIs for STI and LTI need to be relevant, measurable and as objective as possible.
  • KPIs need to be achievable.
  • The incentive needs to be fair for both management and shareholders.

However, when it comes to implementing these ideas, the panel identified important distinctions depending on company size, stability and outlook.

Different Stages Require Different Incentives

Stable companies are able to set traditional annual (STI) and long-term (LTI) incentive targets with narrow performance ranges. Share rights are the preferred vehicle and can account for dividends, if shareholders want to prioritize dividend yield, as well as share price appreciation.

Companies that are in risky transitions requiring capital expenditure, higher gearing and longer investment periods to deploy capital may have difficulty in setting long-term KPIs. Instead, they can use STIs and consider unhurdled share appreciation rights or options to reflect their high growth opportunities.

For mid-stage growth companies, setting long-term targets for a traditional LTI can be difficult. Frequently granted and vested equity without performance conditions could replace or partly replace a traditional LTI.

Early-stage growth companies often have difficulty setting acceptable performance parameters for both STI and LTI due to how fast the company is changing. Rather than devising a complex reward structure that may be out of date before it’s paid out, incentives can be provided by paying salary as a mix of equity and cash.

Offsetting Market-Wide Movements

During major cyclical sector rotations, market forces may have greater input on shareholder value than management. These cycles can take 3-7 years to play out, in some cases lasting longer than management’s tenure. A way to incentivise management is to give them equity subject mandatory shareholding requirements, to provide long-term alignment with shareholders.

Integration of ESG metrics
Rather than differing based on the growth stage, integration of ESG metrics differs based on the individual company. Considerations need to be around the business model and how they can use ESG metrics to de-risk the company for shareholders.

NED Remuneration

The panel also discussed NED remuneration, observing that the composition of fees can vary for companies in different stages of their lifecycle. Although not standard practice in Australia, North American companies partially pay NEDs with equity. Lower cash fees and higher equity may have an inadvertent impact on age-related diversity. Younger directors may require cash for their lifestyle, which needs to be considered when structuring fees.

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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)

 

Alicja Bielawska co-authored this report.