The Agenda – December 2016

Remuneration is complex, even for Boards

newspaperRio Tinto Chairman Jan Du Plessis has told a UK parliamentary committee that executive remuneration is so complex even he struggles to get his head around it..

“Many years ago, 30 years ago now, when I first started with long-term incentive plans, they were very simple with almost no performance criteria,” he told the committee.

“And over time people have brought in more and more criteria by which they want to measure performance. I’m the first one to say that in many British public companies’ incentive plans are too complex by far.

“Even in the case of Rio Tinto, elements of our remuneration are so complex that even I struggle to understand it – and that’s a big statement.”

Super funds to act on remuneration

AustralianSuper CEO Ian Silk has warned Boards that the super fund will not be taking a passive stance on remuneration issues, but rather will be ramping up its scrutiny. “We will take an independent, reasoned view – but increasingly we will take an active view,” he told investor relations professionals at an event in November.

Remuneration was “a very good bellwether of how Boards are discharging their responsibilities on behalf of shareholders,” he stated. He believed Boards should be more firm against managements’ calls for higher remuneration, admitting that disclosure had led to upwards pressure on pay, but also saying that “greedy executives don’t write their own pay checks”.

It is likely that the leadership of other superannuation funds hold similar views.

Super funds also face scrutiny

Minister for Revenue and Financial Services Kelly O’Dwyer has announced the government’s intention to reintroduce legislation mandating that superannuation fund Boards be comprised of a third independent Directors.

Consideration of the Bill had been delayed in 2015 so that former Treasury Secretary and Reserve Bank of Australia Governor Bernie Fraser could conduct a review into the industry’s governance.  The review was due to report in April 2016, however, it has still not been published. The government has waited long enough, according to O’Dwyer, who believes superannuation funds should meet the same governance standards as other financial institutions such as banks.

“My question for you all today is, are you serious about lifting governance standards in this sector or do you want to cling to outdated practices which do not reflect the size; the scale; nor the enormous importance of this industry?”  she asked the industry at a recent conference.

Industry Superannuation Australia reportedly did not support O’Dwyer’s suggestion that superannuation funds be held to the same standards as banks.

“If super funds had been responsible for systemic failures in financial advice, failure to pass on interest rate cuts, excessive executive remuneration and other forms of profit gouging by banks, there would have been a royal commission into super funds in a flash,” the organisation’s Chairman reportedly said.

“It is abhorrent and unacceptable in the minds of most Australians that the standards for super funds should be the same as those tolerated for the banks.”

Bad bank executives could be named and shamed

Treasurer Scott Morrison has indicated the government’s support for a number of measures proposed by a parliamentary committee into the Banks, including that Banks should have to report senior executives responsible for significant breaches of their financial services licences to ASIC.

Such reports would be made within five days of the breach and would include why the breach occurred and if the senior executives suffered any consequences. If executives were not terminated following the breach, the Bank would need to justify the decision to keep them in the team. ASIC would compile an annual report on the industry that would disclose misconduct and the names, companies and advisors involved.

“Simply put, when customers are continually let down, bank executives should be fired,” Committee Chairman and Liberal MP David Coleman said. “This is not occurring at present.”

In the same vein, ASIC Chairman Greg Medcraft continued his culture crusade in November, stating that Boards should be doing more to improve the behaviour within their organisations and should sign a Banking and Finance Oath.

“Having seen in Australia the financial advice scandals, the responsible lending scandals, the life insurance, the general insurance [scandals], one of the biggest issues for organisations is they have to recognise is often it is not just a case of a few bad apples, at a point there is some problem with the tree,” Medcraft reportedly told the Banking and Finance Oath panel.

Although high profile leaders such as ANZ Bank CEO Shayne Elliot and Chairman David Gonski have signed the oath, others such as Commonwealth Bank CEO Ian Narev have not, stating that the oath only echoes the Commonwealth Bank’s existing expectations of him.

Focus on Clawback

ISS has reportedly urged Woolworths shareholders to pressure the supermarket chain to make use of its clawback provisions if the ACCC was successful in its case against the supermarket. The competition regulator had alleged that the supermarket acted unconscionably when it sought money from suppliers to make up for profit shortfalls. The court however ruled that Woolworths had not acted illegally, so ISS’ suggestion will not be tested.

Australian CEO tenure now higher than the global average

PWC’s annual CEO research has found that Australia and New Zealand CEOs now have a higher median tenure (5.5 years) than the global median of 5.3 years.

CEO tenure has been trending upwards since 2012, according to the accounting firm, which attributed the rise to four drivers:

  • Increase in internal selection and promotion activities
  • Desire for stability after a period of major adjustment
  • Reduced number of short-lived CEOs, bring up median tenure across ASX CEOs
  • Improved succession practices amongst ASX companies

Other insights included:

  • Although external CEO appointments have reduced by half since 2004, Australian companies still appoint 16% more external CEOs than the global average.
  • The largest companies on the ASX are more likely to promote an insider than the smallest companies.
  • Internal CEO appointments are more likely to have a longer tenure and achieve higher total shareholder return than external CEO appointments.
  • During forced turnovers, 75% of companies appointed a CEO from inside the organisation. For planned replacements, 65% of companies appointed internal CEOs.

What are the attributes of newly appointed ASX 200 Directors?

An Australian Institute of Company Directors’ report into ASX 200 Director appointments from 1 January 2014 to 1 January 2016 has found that business operations and general management were the most common skill sets among new appointees, followed by finance and accounting. Most of the appointments were in the finance sector and drew their new Directors from the banking, finance and insurance sectors. The report also noted that the majority of appointees did not already hold an ASX 200 role at the time of their appointment.

Penalty rate reduction to benefit shareholders: Citigroup report

A Citigroup report to investors has reportedly stated that a reduction in weekend penalty rates would lead to employers keeping increased profits for the benefit of shareholders or passing on minimal savings to consumers. Earnings per share for certain retailers would increase from 5% to 8%. There was no mention in the report of additional jobs or hours arising from the reduction in rates, which the retail industry has generally used as its selling point for reform.

The analysis also noted that most of Australia’s listed retailers had expired enterprise bargaining agreements (EBAs). “The reason most retailers have expired EBAs in our view is the hope that wage reform will be implemented lowering penalty rates,” the group reportedly stated.

The Productivity Commission recommended in a December 2015 report that Sunday penalty rates for the hospitality and retail industries be brought in line with Saturday rates because they were “inconsistent across similar work, anachronistic in the context of changing consumer preferences, and frustrate the job aspirations of the unemployed and those who are only available for work on Sunday”.

Traditional roles still attract

Although focus in many HR departments is on offering flexible work conditions to employees, it appears such flexibility may not be as prized as originally thought.

A survey conducted by a US university into career trends found that 81% of respondents preferred traditional work arrangements – a full time job, generally conducted at the office with some flexibility. Competitive remuneration was also more prized than flexibility.

Judge halts US overtime rules

A Texan court has issued an injunction against new legislation that increases the threshold above which employees are not entitled to overtime from US$455 a week to US$921 a week. The rules were due to come into effect on 1 December. The judge thought that the 50 corporations that had sought the rule to be blocked had a good chance to win their case and were likely to suffer significant financial harm if the rule was implemented.

UK corporate governance reform

The UK government has released a green paper outlining options for strengthening the UK’s corporate governance framework.  Some of the issues discussed in the paper are summarised below.

Options for voting on the remuneration report:

  • Hold an annual binding vote on elements of pay for the year that has passed (either pay in its entirety or purely variable pay elements). Such a rule could be applied to all companies or only those companies that have encountered significant opposition to the remuneration report in prior years. The report acknowledged that such a change could cause payment and contract issues. It could also cause uncertainty in the case of an adverse proposal as to what the right pay package should be, leading to the need for processes to put a revised remuneration report forward for approval.
  • Change the requirement for the next remuneration policy vote. (The remuneration policy vote in the UK is separate to the advisory annual vote on the remuneration report. It occurs every three years or the year after a no-vote on the remuneration report.) Under the change, backing from a supermajority of shareholders would be required to approve the policy following an adverse advisory vote.
  • Require companies to set an upper threshold for total annual executive pay and require a binding vote on remuneration in any year where actual executive pay exceeds the threshold. The paper acknowledges that setting an upper threshold on pay elements linked to the company’s share price is difficult and suggested that share awards could be excluded from the threshold or that the threshold could be based on a maximum number of shares rather than a maximum value.
  • Require the binding vote on the pay policies to be held more frequently than every three years or allow shareholders to bring forward a binding vote depending on company circumstances.

Options to increase remuneration transparency include:

  • Require companies to disclose a CEO to worker pay ratio.
  • Strengthen requirements around reporting performance targets for bonuses and LTIs via removing commercially sensitive exceptions or requiring retrospective disclosure.

Improving LTIs:

  • Grant restricted shares based on tenure rather than performance tensioned equity to reduce complexity. The award could also be set at a 50% discount than current LTIs.
  • Extend the minimum holding period for options to 5 years.

Other options canvassed included creating stakeholder advisory panels, designating NEDs to engage with key interest groups (including employees), appointing stakeholder representatives to company Boards (such as employees) and strengthening reporting requirements around stakeholder engagement. The issue of privately-held businesses was also covered, with the paper considering whether corporate governance standards for listed companies should also be applied to private companies.

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