The 18th Annual Remuneration & Governance Forum, co-hosted by Glass Lewis and Guerdon Associates, convened on the 27th of February 2024 in Sydney.

This year’s forum concentrated on examining the trends and outcomes of the 2023 proxy season in Australia, addressing the pervasive issue of short-termism in executive pay and navigating the complexities of shareholder activism and advisory resolutions within corporate governance. It served as fertile ground for candid discussions on critical themes shaping corporate governance and remuneration strategies, enriched by the collective wisdom of board directors, institutional investors, and governance specialists. Below we present a summary of the event sessions.

These notes reflect the discussions held at the Forum and should not be interpreted as representing Glass Lewis’ views or policies.

Highlights of the 2023 Proxy Season in Australia

The forum opened with a deep dive into the 2023 proxy season in Australia, examining the evolving sentiments and voting patterns of shareholders.

An unprecedented level of opposition to remuneration reports emerged this season with a record-breaking number of strikes, which occur when at least 25% of shareholders vote against the proposal. In fact, 2023 has seen the highest tally of strikes since the two-strikes rule was introduced in 2011, indicating the highest level of shareholder opposition in over a decade. Four companies received over 65% voting opposition, compared to no companies with over 65% opposition in 2022, further highlighting the contrast with previous voting patterns.

Director elections followed a similar, albeit less marked, trend. Shareholders are typically more inclined to express dissent on say-on-pay proposals rather than targeting individual directors specifically.

Amidst this climate, shareholder activism intensified, with campaigns by major investors leading to notable board changes and calls for remuneration reform. Prominent campaigns include Sandon Capital’s campaign at Magellan Financial Group, Tanarra Capital’s focus on Healius, Bell Rock’s advocacy at Whitehaven Coal and Australian Super’s successful opposition to the sale of Origin Energy.

Conversely, the year saw a downturn in environmental and social (E&S) proposals. Only a total of 13 E&S proposals have been submitted across the ASX300, involving just 7 companies. This marks a decrease from the 32 proposals involving 13 companies in 2022. Similarly, the number of say-on- climate votes decreased from 8 in 2022 to 3 in 2023.

See Glass Lewis’ presentation.

Short-Termism in Executive Pay

The Critical Role of Trust and Transparency in Executive Remuneration

The panel opened with a candid acknowledgment of the prevailing focus on short-term performance in executive remuneration within Australia. A spotlight was shone on the multifaceted nature of this issue, recognising that while some strides have been made towards improvement, the overarching structure of executive pay has been bolstered through reactive measures stemming from historical events such as the global financial crisis (GFC). This has led to an increased call for transparency due to eroding trust between investors, boards, and executives. Consequently, transparency has often been used as a makeshift remedy for trust issues, emphasising the deep-rooted challenges of trust that persistently affect executive pay practices.

Trust emerged as a central theme, with discussions highlighting its importance in the relationship between boards, executives, and investors. Rebuilding and maintaining trust necessitates transparent actions and communications, especially in an environment where information asymmetry exists between company insiders and the market.

The TSR Conundrum

The panel also critiqued the overreliance on total shareholder returns (TSR) as a performance measure for long-term incentives (LTI), noting that its effectiveness is questionable, particularly in a concentrated market like Australia where peer comparisons are difficult. This conundrum painted a picture of executives being steered towards fleeting market sentiments rather than enduring development strategies.

Furthermore, the opacity of the TSR calculation process and its perception as being akin to a lottery was noted as a significant issue, potentially leading to the undervaluing of LTIs by executives. Standard remuneration models in Australia, with equal parts short-term incentive (STI) and LTI, may lead to a de facto short-term focus, as executives tend to undervalue deferred compensation due to “hyperbolic discounting.”

Regulatory Impacts and Market Realities

The Australian Prudential Regulation Authority’s (APRA) CPS 511 was highlighted as a pivotal regulatory development. This regulation mandates a balanced inclusion of financial and non-financial measures in all variable remuneration, further complicating the design of LTIs. The difficulty in measuring non-financial metrics that are transparent and verifiable against external standards, was contrasted with financial metrics, which are well-defined and audited.

While aimed at fostering a long-term outlook, the regulation also exemplifies the tension between prescriptive regulatory requirements and the flexibility needed to tailor remuneration structures to individual company contexts. The panellists noted that while regulations can steer companies towards desired practices, they often struggle to accommodate the diverse strategic needs and market positions of different firms.

Global Trends: U.S. and UK Practices

The discussion shed light on international trends, noting a stark contrast between Australian incentives and those in the U.S. and UK. In the U.S., LTIs commonly reach up to five times an executive’s salary, contrasting with Australia’s more cautious approach, where LTIs are typically around one times the salary. Meanwhile, the UK is seeing a shift towards enhancing LTIs and fostering long-term ownership among executives, with revised guidelines from the Investment Association supporting a broader inclusion of equity in remuneration. This shift reflects a growing acknowledgment of the need for remuneration models that incentivise sustainable growth over short-term gains.

Nuanced Remuneration Frameworks

The dialogue underscored a critical shift towards remuneration frameworks that are not one-size-fits-all but are tailored to the unique strategic goals, industry contexts and lifecycle stages of each company. Such frameworks would potentially include a mix of financial and non-financial metrics, equity-based remuneration and incentives tied to ESG outcomes. This customisation is intended to incentivise executives in a manner that directly supports their long-term objectives and corporate values, thereby addressing the challenges of short-termism effectively.

However, panellists noted that while this approach seems theoretically ideal, it presents significant challenges in practice, notably in balancing flexibility with transparency, meeting regulatory requirements and managing stakeholder expectations.

Toward ‘Long-Termism’: Refining Executive Pay

In a rapid-fire round, panellists were asked for their singular most impactful change to foster healthier executive remuneration systems. Their responses shed light on innovative solutions to drive the shift towards long-term value creation in executive pay:

  • Embracing large time-vested stock grants, especially for newly appointed executives
    • Advocate for the acceptance of significant time-vested stock grants not contingent upon performance guarantees.
    • Align executive remuneration closely with long-term company success, positioning such stock grants as a long-term investment akin to a pension plan.
  • Prioritising equity-based compensation:
    • Emphasise equity-based rewards that correlate with the company’s equity value growth, mirroring practices in private businesses.
    • Acknowledge the varied life stages of executives by offering flexible, performance-based equity remuneration with a three to five-year deferral period, ensuring inclusivity and adaptability to individual circumstances and interests of each executive.
  •  Attracting strategic investors:
    • Highlight the necessity of attracting investors who prioritise and support long-term strategic goals over immediate financial gains.
    • Suggest a re-evaluation of investor relations to foster an investment climate conducive to sustainable growth and long-term executive incentive alignment.

Voluntary and Advisory Resolutions in Corporate Governance

The panel discussion delved into the evolving landscape of corporate governance, focusing on voluntary and advisory resolutions, their impact on remuneration, climate action and the annual director elections.

Advisory resolutions, often proposed by shareholders, offer recommendations for the company’s management or policies without binding force. Voluntary resolutions, on the other hand, are initiated by the company to seek shareholder opinion on certain matters, again without the weight of mandatory implementation.

Remuneration and Stakeholder Engagement

The conversation commenced with a focus on remuneration reports for non-Australian companies and equity grants, underscoring the value of such resolutions in enhancing investor insight into company operations. Panellists highlighted the utility of advisory resolutions in signalling shareholder sentiments towards company policies, particularly around executive remuneration.

The implications of the two-strikes rule were explored, highlighting its dual impact on shaping corporate remuneration policies and enhancing shareholder influence over executive pay practices. By offering shareholders a voice on remuneration matters, companies can align executive interests with long-term shareholder value. However, the convergence towards a one-size-fits-all remuneration model was identified as a potential downside, possibly stifling innovation and adaptation in rapidly evolving markets. The conversation pointed out the need for flexibility and customisation in remuneration policies to attract global talent and foster long-term company growth.

The Climate Conundrum

The discussion shifted towards the burgeoning area of say-on-climate votes, reflecting a global trend of increased shareholder activism on climate issues. Panellists recognised these votes as a critical instrument for shareholders to express their views on a company’s climate policies and strategies. However, the nuanced nature of climate resolutions and the evolving methodologies for assessing climate action pose significant challenges.

While acknowledging the value of shareholder resolutions in mirroring investor sentiment, concerns were raised about their potential to limit board flexibility. When faced with overwhelming support, these proposals might unintentionally limit a company’s ability to adapt to new challenges or pivot strategies based on emerging information, risking strategic rigidity. The panellists contemplated the balance between setting definitive long-term objectives and retaining the agility to adapt to emerging climate science and policy developments.

Director Elections: Annual Reviews and Collective Accountability

The panel discussion delved into the frequency of director elections, and in particular the topic of voluntarily putting the entire board up to vote annually, a practice that puts directors under annual scrutiny, contrasting it with the staggered term approach common in Australia. The debate highlighted how such continuous scrutiny, prevalent in the UK, offers potential benefits in terms of increased transparency and governance. Annual elections can enhance director accountability and provide shareholders with regular oversight. Conversely, concerns were raised about the potential disruptive effects of board spills during crises where an entire board can be turned over.

The discussion also underscored the principle of collective accountability, highlighting the importance of recognising the board as a unified body responsible for corporate decisions. Targeting individual directors for decisions made by the entire board could undermine this principle of collective accountability. The discussion revealed a tension between the desire for increased governance oversight and the need to maintain a strategic, long-term perspective in board decision-making.

The discourse suggested a need for a nuanced solution that aligns the direct oversight afforded by annual elections with mechanisms that preserve the continuity and strategic foresight essential for effective board governance.

The discussion concluded with reflections on the potential for annual director elections to induce short-termism within boards. While some panellists expressed concerns that focusing on annual re-election could shift board priorities towards short-term outcomes, others argued that, based on precedents, it doesn’t necessarily lead to short-termism. It was suggested that the approach could instead close the gap between directors and shareholders, enhancing trust and potentially aiding in addressing broader governance issues on a case-by-case basis.

Final Thoughts: A Path Forward

The panellists converged on the notion that while advisory and voluntary resolutions play a pivotal role in enhancing corporate governance through increased transparency and shareholder engagement, their implementation and aftermath require careful consideration. Key takeaways from the discussion were as follows:

  • Proactive Engagement: Continuous dialogue between companies and investors is crucial for understanding and integrating shareholder perspectives into corporate governance.
  • Balanced Flexibility: Advisory resolutions should guide but not constrain strategic decision-making, allowing companies the flexibility to adapt to changing circumstances.
  • Informed Decision-Making: Deepening transparency through advisory resolutions enables investors to make more informed decisions and fosters trust between companies and their stakeholders.
  • Evolving Governance Models: The corporate governance landscape is evolving, with a greater emphasis on sustainability and accountability. Companies must navigate these changes while maintaining their strategic agility.