AGM season: Proxy Advisor Views

Proxy Advisor approval


The AGM season is fast approaching, with companies set to face their stakeholders on key issues and proxy advisors preparing their advice on governance.

This will be the third season of the second strike rule, maintaining focus on Board and Executive remuneration – Regnan revealed in its 2012-2013 Engagement and Advocacy summary that that remuneration accounted for 34 engagements in 2012-2013, compared to 10 on diversity, five on committees and 21 on Boards.



Board Composition

ISS Group’s newly released 2013 Voting Season Preview forecasts that particular attention will be paid to remuneration outcomes at hard-hit companies, particularly those in the resources space. The Australian Shareholders’ Association has for example already flagged that it may vote against the remuneration report of troubled miner Newcrest.

As always, there will be a focus on the link between pay and performance, which our analysis reveals is better aligned to performance improvement in the smaller companies of the ASX 300 than the larger ones, despite less sophisticated policies in the smaller companies.

Aside from remuneration, AMP Capital has highlighted Board composition as an area of focus, adding that it can be difficult to make judgements on composition issues because there is little information available on Directors, leading to negative votes against Directors generally being due to poor attendance or a lack of independent Directors rather than more in-depth considerations.

To aid companies consider their positions, Egan Associates has compiled a summary of the guidelines provided by the various organisations.

It is important to note that guidelines are just that, and that an effective Board composition and remuneration policy must be tailored to the specific requirements of each organisation, which will vary depending on industry, size, maturity, performance, financial condition, historic pay for performance practices and other relevant internal or external factors.



Whatever remuneration structure and however much executives and Non-Executive Directors are awarded, disclosure is key.

CGI Glass Lewis complained in its September 2012 Proxy Talk that Australian companies are good at disclosing the what, but not the why.

If there’s full disclosure, proxy advisors can better make their own decisions about companies’ plans, preferred to using one-size-fits all judgements.

CGI Glass expects full and rational explanation of the reasons for organisations’ remuneration structure and Board composition. In its US guidelines, the organisation indicated that it would consider a no vote for poor disclosure even if remuneration appears to be set at an appropriate level.

ISS Group also indicated in its 2013 guidelines that disclosure was a significant driver of the group’s decision whether to vote yes or no on a remuneration report, while AMP highlighted it as one of its three particularly important criteria for positive reception of a good remuneration report.

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NED Cap increases

When voting on an increase in the NED fee cap, proxy advisors consider:

  • Size of the increase;
  • Quantum of proposed fees (and committee fees) relative to peer companies;
  • Explanation for increase;
  • Performance of the company under the incumbent Board and plans for Board renewal;
  • Equity ownership policies;
  • Number of Directors on the Board;
  • Planned increases to Board size;
  • Board turnover;
  • Whether the structure of NED pay promotes independence; and
  • Diversity and skills requirements.

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Most, if not all, proxy advisors recommend that no performance pay be provided to Non-Executive Directors except in certain circumstances, for example biotech or mining exploration companies where the restricted cash levels of the company make such measures necessary for the company’s survival.

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Executive Fixed Remuneration

When proxy advisors consider the appropriateness of fixed remuneration they take into account multiple factors, with those highlighted in their guidelines including:

  • Business and geographical complexity;
  • Inflation;
  • Cost pressures and targets;
  • Alignment with fixed pay increases for staff across the organisation;
  • Fixed remuneration aligned with ASX index rank, sector and industry peer groups; and
  • Enterprise value of the company.

Some advisors, including BlackRock and CGI Glass state that they use the median of selected peer groups as a guide, and expect justification if remuneration is above this benchmark. Above inflation increases to fixed remuneration raise a red flag.

The ACSI noted that increases in fixed remuneration will have a flow on effect on total remuneration, especially given other components of pay are often determined as a proportion of fixed remuneration. It believed blindly linking fixed remuneration levels to peer benchmarks based on elements such as size created perverse incentives for executives.

Most of the advisors placed value in organisations having the right balance of cash payments to equity and fixed to variable. Where exactly this balance should sit was not specified, with advisors expecting organisations to make their own choice and explain their decision.

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Most proxy organisations highlighted disclosure of hurdles as a pressure point, recommending that companies provided information on:

  • Which hurdles were chosen;
  • Rationale for hurdle use in terms of the overall strategy;
  • Hurdle weightings;
  • Actual targets (retrospectively in the case of commercial-in-confidence concerns); and
  • To what degree targets were being met.

Scrutiny will be turned on organisations’ where bonus outcomes don’t align with financial performance. CGI Glass has previously noted that it doesn’t give companies marks when their executives voluntarily give up bonuses. If an executive has the need to do this, CGI Glass argued, there is a problem between the link between remuneration and company performance.

It also said it would be on the lookout for bonus or long term plans where targets were set below median levels, where performance targets were lowered without justification, or where discretionary bonuses were paid after targets were missed. In general, proxy organisations desired disclosure of when discretion is exercised and why.

The ACSI expressed scepticism of bonuses that pay out for acquisitions rather than value creation and those paying out based on normalised or adjusted earnings figures, except in the case of genuine one-off costs incurred by the company.

For earnings hurdles, BlackRock also expected disclosure of how identified risks are managed and what safeguards were put into place to make sure the measures were not manipulated by risky cost cutting.

Deferred equity is considered positive for short term incentive awards, but with no set minimum level.

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Dilution of shareholder interests is at the top of many advisors’ minds, with companies expected to minimise dilution where possible. ISS Group states that the number of shares and options issued under all incentive schemes should not exceed 10% of issued capital. Both CGI Glass and ISS Group wanted amounts granted under plans and plan costs to be reasonable in the light of the financial results and the business’s value.

Enough information also needs to be provided for stakeholders to assess the value of long term incentives to executives. This includes:

  • The methodology for determining exercise price (which should not be lower than market price at grant date);
  • Proposed number of securities to be issued;
  • Time restrictions before options can be exercised and restrictions on disposing received shares;
  • Full cost of equity to the company;
  • Method used to calculate cost of equity, including any discount applied to account for probability of equity incentives not vesting;
  • Method of purchase or issue of equity; and
  • Explanation for any change of peer group.

Performance Period and Peer Group

Generally there is resistance to acceptance of long term incentive plan securities vesting before a minimum of three years. BlackRock stressed that the performance period should be related to a company’s strategy.

Retesting, especially continual retesting, is not favoured, but is generally assessed on a case by case basis.

Important is the peer group – if this is inappropriate, companies are likely to receive no votes from proxy advisors.

Performance Metrics

Despite the large number of companies using relative TSR as a performance measure in the belief they will run no risk of offending proxy advisors, there seems to be a preference for hurdles that fit the company’s strategy rather than “cookie cutter” performance measures.

BlackRock even released a paper on the issue, saying that conformity of LTI plans across organisations was leading to remuneration committees losing track of the answer to the question: does this LTI work as an executive motivator?

According to BlackRock, “doing what others may be doing is not necessarily best for an organisation. Each company and each industry is different and they should be encouraged to develop incentive reward plans that reflect their uniqueness.”

CGI Glass’ US guidelines agree:

“We recognise performance metrics must necessarily vary depending on the company and industry, among other factors, and may include items such as total shareholder return, earnings per share growth, return on equity, return on assets and revenue growth.”

Disclosure is the important point. Why were the metrics used selected? How do they lead to better performance? How do they link with the key value drivers of the business and overall long term strategy? Was discretion used to enable vesting although hurdles were not met? If so why?

Consensus was that proxy advisors will vote against remuneration reports or against plans if hurdles are not challenging enough, with analyst forecasts and market expectations often used to judge whether a stretch target truly represents outstanding performance. Minimum hurdles should represent at least median performance. The discouragement of risk taking behaviour also needs consideration in hurdle choice.

BlackRock encouraged the diversification of risk through the use of multiple performance measures. ISS Group and BlackRock provided a perspective on a number of hurdles:

  • Absolute Share Price and TSR hurdles

BlackRock stated that it does not generally support such hurdles as they are affected more by market forces than executives’ effort. ISS Group also acknowledged that they can provide rewards despite poor relative performance.

  • Relative TSR:

ISS prefers this hurdle to absolute share price targets or accounting measures of performance, but states that no vesting should occur for sub-median performance, and the peer group should not be “cherry picked”. BlackRock went further to say that it is not a good hurdle for use with a general index peer group as this measures performance against unrelated companies with different risk profiles and business cycles. If a more specific peer group is chosen, there is the risk of a large swing in reward for small changes in performance. BlackRock also has concerns about the hurdle’s ambivalence to risk.

  • EPS

ISS Group notes that accounting related hurdles such as EPS do not necessarily translate into shareholder value. BlackRock also has concerns about this hurdle, which along with EBIT and NPAT hurdles is subject to manipulation through timing of accounting for expenses and revenues. BlackRock also stressed that if accounting measures are used, the remuneration report needs to explain why the hurdle range represents exceptional performance.


BlackRock stated in its guidelines that this is appropriate where a significant investment is required and the business is capital intensive, but notes that capital efficiency ignores growth and that efficiency can be raised by selling a firm’s assets.

  • EVA and Economic Profit

Considered valid for capital intensive industries as it ensures the cost of capital is covered before executives are rewarded, but BlackRock also notes that these measures are complex, complex to communicate and rely on management assumptions.

  • Milestones

Considered good where there is a clear goal for a company, for example a start-up, but there can be concerns about whether goals are difficult enough.


BlackRock does not support this hurdle unless there is a good reason as it enables organisations to purchase assets that don’t provide long-term value to shareholders but increase debt.


ISS Group and BlackRock prefer a sliding scale hurdle to one where 100% vests when a target is reached.


Mainly, proxy advisors are not favourable to dividends being paid on unvested shares (although deferred STI can pay dividends as the executives have already earned the shares). If dividends are to be paid on unvested equity, companies need to be aware of the incentives that circumstance gives executives.


ACSI recommended clawback in the case of excessive risk taking or failure to manage identified risks.


One of AMP’s bugbears was a lack of change to plans following feedback to the Board, which it indicated would likely lead to a no vote.

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Termination payments, sign-on and retention bonuses

Disclosure and explanation of rationale were the catch phrases for all of these situations, with evidence required that payments would benefit shareholders.

Proxy advisors were against retention and sign on bonuses without a clear purpose, with the preferred vehicle for payment being equity with time vesting conditions.

AMP has been concerned by the excessive termination payments made to some departing executives, particularly as actual payments were often very different to agreed levels.

The ACSI and ISS Group oppose termination payments over 12 months pay where an executive retires from office, has resigned or has been terminated for poor performance. For good leavers and genuine retirements, ACSI expects incentives to be tested on a pro rata basis, with Board discretion exercised depending on the departure circumstances, while BlackRock would expect equity to vest in the original time frame against the original performance hurdles. Change of control provisions were considered in a similar light.

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Remuneration Report votes and spill votes

There is reluctance among proxy advisors to cause a Board spill unless other avenues have been exhausted as they believe a spill is not ideal for shareholders.

AMP Capital would rather withhold its vote on the remuneration report and begin communication with the Board than record a no vote for minor problems that have previously not been raised with the Board.

ISS said that it is negatively inclined to the remuneration report vote if companies use the current on-market exception to buy shares for executives and Directors without shareholder approval, an area where Ownership Matters has also expressed concerns.

CGI Glass was originally opposed to the two strikes rule, given that there was already a certain level of control provided by the ability to vote for Directors. In its September 2012 proxy presentation, representatives stated that the organisation would only use the spill vote as an option of last resort once it had already had the opportunity to vote against all the Directors during a three-year rotation.

When considering Board spill resolutions arising from the two strikes rule, the ACSI considers:

  • Performance of the company, Board and management;
  • Materiality of remuneration issues; and
  • Shareholder engagement and changes made to address concerns.

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Board Composition

While problems with remuneration will lead to a no vote against the remuneration report or against the Remuneration Chair, Board composition issues can lead to votes against the re-election of the Chair of the Board, against Directors not considered to be independent or suitable, against the chair of the Audit Committee or the chair of the Nomination Committee.

A majority independent Board is generally desired, although proxy advisors will judge Boards on a case-by-case basis, taking into account company size, for example, or whether non-independent Directors are founders and integral to the company.

Committees should also be majority independent if possible, (except the audit committee which should ideally be entirely independent and have at least one member with financial expertise) and be chaired by an independent Director who doesn’t chair other committees or the Board.


Most advisors have their own definition of what “independent” means, but they are very similar. They consider Directors’ independence to be compromised when they:

  • Were employed by the company in the last three years;
  • Were a senior employee of a “significant” professional advisor in the past three years;
  • Owned over 5% of voting rights in the company’s shares or was the officer, Director, representative or employee of such a shareholder;
  • Were employed or served as a Director of another company in which the main company has invested over 5% of the share capital;
  • Were a major supplier or customer of the company, receive fees from the company considered significant in relation to the Directors’ fees or have a material contractual relationship with the company;
  • Benefitted from a related party transaction, have a relationship with a related party, or have relationships that could materially interfere with acting in the company’s best interests (or be thought to be capable of doing so);
  • Take part in an incentive scheme;
  • Participate in a counterparty bid during a takeover attempt;
  • Have served an overlong tenure on the Board – the definition of overlong depends on the proxy advisor and the case;
  • Hold cross Directorships or have significant links with other Directors through the involvement in other companies or bodies; and
  • Are a relative of a substantial shareholder or founder of the company (even if the founder is no longer a substantial shareholder).

Most advisors won’t set a minimum or a limit on Board size, with the size of the Board reflecting complexity and the number of Directors required for the Board to be majority independent.

Important is that Boards have the right mix of skills, with renewal and succession plans in place to ensure there are no skill deficiencies now or in the future. Proxy advisors advocate Board evaluations to identify future skills needs and review Director workloads.

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Considerations for Director Election

When assessing whether to vote a Director in, proxy advisors will consider factors such as:

  • Company performance and strategy;
  • Evidence of management entrenchment;
  • Director age – this is generally handled on a case-by-case basis.
  • Director tenure – anywhere from nine to 20 years may be considered too long depending on the advisor, with the risk being Director complaisance;
  • Director performance on other Boards, with material failures of governance, stewardship, risk oversight or fiduciary responsibilities likely leading to votes against re-election;
  • Director attendance at Board and committee meetings (generally a minimum of 75% attendance expected);
  • Director skills – particular skills required may depend on the company;
  • Director workload – some advisors set a limit on the number of unrelated Boards a Director can serve on (for example five), while others look at appointments on a case-by-case basis; Important is that Directors have spare capacity in the case of a major transaction. This particularly speaks against Chairmen serving on multiple Boards;
  • Director independence and relationships;
  • Director agenda;
  • Director alignment with shareholders through shareholdings;
  • Overall Board composition (including skills, diversity and number of independent Directors);
  • Engagement with shareholders;
  • Board endorsement for the appointment.

Proxy advisors encourage disclosure of Director information so that votes on Board composition can be informed. Examples of disclosure considered necessary are:

  • Descriptions of Director skills, current roles, and history;
  • Any material historical, actual or potential legal proceedings involving Directors;
  • Any relationships that might affect the Directorship; and
  • If a Director has investments subject to margin calls that make up 2% or more of the issued capital and if so, the margin call prices and the number of shares subject to margin calls.

In general, advisors prefer that the Chair be independent and not be the CEO, in order to avoid concentration of power and a diminished degree of accountability. However, in some situations, for example, when the Executive Chair is the founder or associated with a majority shareholder, advisors can decide differently.

Given that the workload of the Chair is considered to be at least twice that of a normal Director, more care needs to be taken when nominating a Chair in deciding whether the Chair has the capacity to do their role effectively. One advisor, for example, would rather not have the Chair of an organisation holding another chair role. Others are less prescriptive.

If the Chair is not independent, a lead independent Director should be appointed. BlackRock sets out the responsibilities of the lead independent Director as:

  • Presiding at all meetings of the Board where Chair not present;
  • Authorised to call meetings of independent Directors;
  • The principal liaison officer on Board-wide issues between independent Directors and the Chair;
  • Approving meeting agenda items, improving the quality, quantity, appropriateness and timeliness of information sent to Board members as well as ensuring the number and frequency of Board meetings and meeting schedules allow sufficient time for agenda item discussions;
  • Authorised to retain outside advisors and consultants who report directly to the Board of Directors; and
  • Being available for shareholder consultation.

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