As the AGM season approaches and annual reports are avidly perused by proxy advisors and institutional investors alike, Directors will be engaging both proactively and reactively to explain their remuneration and corporate governance decisions.
As in prior years, Egan Associates has summarised the views found in the policies and guidelines of select proxy organisations and institutional investors. This year we have broadened our remit to include a larger group of investors, considering the policies of top Australian and global organisations.
Director performance and Board accountability was one key theme. If a company is not performing, voting organisations will consider whether the Board as a whole and the Directors as individuals deserve shareholders’ trust to have stewardship of the company. In particular, organisations will be looking for Board renewal, including the appointment of Directors that enhance the Board’s diversity as well as skill set. Workload is another key factor, as voting organisations consider whether Directors have the capacity to carry out their duties in a thorough manner.
In general, performance will have a significant effect on investor and advisor decisions. If things are going well with a company, proxy organisations are willing to be lenient if the company has not adopted what is considered to be best practice. Yet if companies are not producing the results expected, voting organisations will be critical of such divergence.
As always, voting organisations will be looking to see whether remuneration aligns with performance and will come down heavily on “pay for failure”. Disclosure has also become very important, with many voting organisations considering that if they don’t know what a company’s practices are, they are unlikely to reflect good governance. In particular, a number of organisations will be monitoring disclosure of performance metrics this season. There will also be significant attention on whether targets chosen are sufficiently demanding and do not reward business as usual behaviour.
There appears to be increasing recognition that Boards deserve leeway to implement the best remuneration and governance systems for their company, yet this leeway only lasts as long as performance continues and remuneration outcomes follow a consistent, transparent process. Voting organisations prefer it if incentive plans are designed so they will in most cases be independent of Director Intervention, with discretionary decisions likely to be inspected very carefully.
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