CGI Glass Lewis and Guerdon Associates held their fifteenth annual Governance and Remuneration Forum, virtually, over two days on the 23rd and 30th of March.

The event, which is held under Chatham House rules, saw speakers and panellists from major Australian investors and major Australian ASX-listed boards. The Forum always aims to address key current themes of interest to the Australian landscape, and this year included sessions on:

  • The annual presentation of the 2020 proxy season in review.
  • Implementation of ESG measures in variable remuneration schemes.
  • The boardroom challenges of governing a global company versus a local company.
  • How boards can best respond to matters of bullying and harassment in companies as well as executive in-house consensual relationships.

 

Proxy season review insights included:

  • Remuneration strike numbers in 2020 remained at the same level as the prior year despite adverse impacts of COVID-19 on earnings. Remuneration committees have frequently reacted to COVID-19 by giving out nil bonuses, deferring all bonuses into equity, and/or reducing fixed remuneration for both executives and non-executive directors.
  • In order to get around difficulties in setting long-term targets due to COVID-19 volatility, two trends emerged:
    • LTI performance rights were replaced with restricted shares/alignment rights plans. and
    • LTI performance rights were replaced with share appreciation rights or options.
  • There was a decrease in shareholder protest against board-endorsed director elections in 2020. On the other hand, the number of non-board-endorsed candidates substantially increased, though typically saw negligible shareholder support.
  • Independence concerns and accountability for controversies (both at the company at which a director sits, and at external entities) were the main reasons for significant shareholder protest against board endorsed candidates.
  • A lack of gender diversity may become a more common protest matter as boards with only one female director may be pushed for further progress.

 

Insights on ESG performance measures within remuneration schemes included:

  • Companies have received remuneration strikes that are perceived to be against ESG measures, however, there is a lot of noise in these examples, making it unclear how much of the protest should be attributed to the measures.
  • When selecting ESG measures, factors to consider include:
    • Business strategies and associated risks in achieving organizational goals.
    • That measures need to be able to demonstrate value-add, be quantifiable, be meaningful, and be able to uphold purpose throughout the performance period.
    • The need to reflect executive priorities.
  • Material risks identified by the Sustainable Accounting Standards Board is a good place to start when looking to create robust ESG measures.
  • ESG consequences may extend beyond executives’ tenure. An appropriate ESG measure should serve as a glide path that a company wants to follow and allow for transmission towards targeted outcomes.
  • Boards need to exercise justifiable discretion to deal with unintended consequences. Transparent disclosure of the procedure undertaken to address such outcomes is important from shareholders’ point of view.
  • Non-financial measures that are considered part of executive’s day job (e.g. fatalities) are often well suited to be included as gateways or modifiers.
  • Compliance may not directly affect earnings but can have adverse impacts on earnings due to regulatory and compliance risks. Awards can be appropriately granted to the CEO or executives in charge of risk functions if material improvements are made to ensure a robust control environment.
  • To ensure CEO/executives are accountable for high-profile ESG controversies, boards need to consider shareholder expectations before deciding remuneration outcomes and whether discretion should be exercised.
  • Prompt and adequate responses to ESG controversies are important to avoid accelerated reputational damages.
  • There is a balancing act between meeting legislative compliance and public sentiment.

 

Insights on the challenges of global boards include:

  • Overseas directors bring with them different backgrounds and perspectives to enhance board diversity.
  • Challenges to recruiting international executives include different expectations of remuneration structures and ability to attract and retain offshore executives and directors of high caliber.
  • U.S. directors often struggle to appreciate Australian governance structures and compliance arrangements, consequently some offshore directors may find some activities that are ordinary to an Australian director to be a waste of time, or otherwise not a priority.
  • When governance practices including remuneration structures are designed in ways to address geographical dispersion of executives, it is important that the rationale underlying such designs is effectively communicated to shareholders to provide opportunities for better understanding and evaluation.
  • Time zones are painful to manage across; but doing so does demand discipline from a board, which has positive elements.
  • Conversely, predominantly local boards have greater flexibility in terms of meeting time. However, such flexibility may result in less discipline and focused discussion.
  • Directors and executives with community knowledge are important to ensure local issues are effectively dealt with.

 

Insights on responding to workplace bullying and harassment include:

  • Prompt and effective responses to raised concerns of this nature are critical.
  • Internal communication to the board regarding these issues must be open, fast, and effective to minimise potential reputational damage.
  • While reliance on legal and external consultants can be useful and is often essential, it is important that such procedures are not overly heavy-handed and legalistic. It takes considerable time to get external consultants involved and prepare reports. Slow response sends negative signals to stakeholders. In most cases, complaints were not made to result in legal consequences, rather simply for such behaviors to stop and be fixed.
  • Internal surveys provide valuable insights for boards to look closer into issues which may consequently turn out to be controversial concerns.
  • Adding diversity to the board, specifically in terms of backgrounds and gender, is important to bring constructive comments and different lenses to address these issues.
  • Boards need to establish a culture that enables open and constructive communication.
  • Conducting due diligence and reference check are an important process to have confidence about a candidate before taking them on board.

CGI Glass Lewis and Guerdon Associates would like to thank all speakers, panelists, and attendees who participated in the successful event.