The Agenda – November

The Trump Effect

During the US election, President Elect Donald Trump made statements that if implemented will impact the executive remuneration and corporate governance sector.

Two potential changes that will directly and significantly affect remuneration and corporate governance are:

  • An intent to repeal the Dodd-Frank Wall Street reforms

The effect of a wholesale repeal of these reforms would be sweeping, with major effects on executive remuneration disclosure. Rules facing repeal include requirements for:

  • Holding a say on pay vote every one, two or three years.
  • Disclosing additional information on golden parachute arrangements for executives in the case of acquisitions, mergers, consolidation, proposed sale or disposition of a substantial proportion of a company’s assets.
  • Managing remuneration committee composition (independence) and the appointment and oversight of remuneration consultants by these committees.
  • Disclosing the use of remuneration consultants and their fees as well as any potential conflicts of interest.
  • Disclosing the reasons for choosing an executive chairman versus a standalone CEO.
  • Disclosing a CEO to median worker pay ratio (Effective for disclosures from 1 January 2017).
  • Implementing clawback policies to recover remuneration from executives if a company is required to restate its financials due to material non-compliance with reporting requirements (This rule has not yet been adopted).
  • Disclosing the relationship between the executive remuneration actually paid and the company’s absolute and relative TSR (This rule has not yet been adopted).
  • Disclosing whether employees or Directors are permitted to hedge decreases in the market value of equity that is granted to them as remuneration.
  • An intent to roll back new overtime regulations that will be effective from 1 December.

These regulations increase the minimum salary above which employees were exempt from rules requiring the payment of overtime rates (time and a half). Previously employees were excluded if they were salaried and earned at least US$23,660 per year. The new threshold is US$47,476. Numerous employers have raised concerns about the effects this rule will have on employment and a court case is currently underway to challenge its introduction.

A list of further promised changes can be found on the WorldatWork site.

Wage Growth hits new low

Growth in the Wage Price Index has fallen to 1.9% year on year, compared to 2.1% growth last quarter, 2.3% a year ago and 2.5% two years ago. The current rate of growth is a new low for the Wage Price Index series, which has been recorded since 1997.

The public sector performed more strongly than the private sector, recording growth of 2.3% versus 1.9%. No industry recorded growth over 2.5%. Mining recorded the lowest year on year growth of 1%, while workers from the health care and social assistances industry received the highest increase of 2.4%.

ISS updates pay for performance methodology

ISS has announced changes in the way it assesses whether executive pay aligns with company performance. The new methodology will come into effect in the US, Canada and Europe from 1 February 2017.

Previously, ISS considered total shareholder return to determine alignment. Now it will also evaluate companies’ relative return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth and cash flow from operations. ISS will use a weighted average of the metrics based on the company’s GICs industry group over multiple years.

ISS will also now take the companies’ own selected peer group into account when choosing its comparison groups for Canada and Europe.

ASCI Director report

The Australian Council of Superannuation Investors and Ownership Matters have released their latest joint report into Director fees and composition, based on data from 2015 annual reports.

The report has found that while a rising number of female appointments has improved diversity within the S&P/ASX 200, the total pool of Directors has shrunk. An increasing number of Non Executive Directors (NEDs) hold multiple roles – classifying them as professional Directors. 36% of the NED roles are held by 109 professional Directors, an increase on 34% being held by 105 professional Directors in 2014.

Women held more than 21% of Board seats, an increase on 19% in the 2014 study. The number of women in executive and Board leadership roles, however, has seen little to no improvement between 2014 and 2015.

The data also showed that female Directors are likely to be professional Directors – women comprised 35% of the Directors with two or more Board seats and 45% of the Directors with three or more Board seats (an increase from 32% and 39% respectively).

The number of Directors in the ASX 100 who had no skin in the game declined by over a third and the number of Directors in the ASX 101 to 200 who had no skin in the game declined by almost 15%.

Gender pay gap on the decline

The Workplace Gender Equality Agency (WGEA) has released its most recent scorecard of gender pay equality. The WGEA calculated the pay gap for 2015-2016 as 23.1% for full time roles, down 1.6% on two years earlier.

It found that men earned approximately $27,000 a year more than women in 2015-2016 ($94,000 for top management roles) and five out of six CEOs are men, but that the pipeline of women into manager roles was improving.  42.6% of those appointed to managerial roles last year were women. 28.5% of Key management personnel roles are filled by women.

Employee Share Scheme (ESS) Document Disclosure

At the end of October Treasury released draft legislation to simplify the introduction of employee share schemes for start-ups. The proposed legislation will remove the disclosure requirements for share scheme documentation.

ESS Disclosure documents do not need to be made publicly available if:

  • the offer is of an ESS interest under an ESS;
  • the disclosure document states that ESS interests will be made available only to employees of the company or its subsidiary, and relate only to ordinary shares;
  • none of the equity interests in the issuing company or the companies in its group are listed for quotation in the official list of an approved stock exchange at the end of the issuing company’s most recent income year (the pre-lodgement year);
  • the issuing company and all companies in its group were incorporated less than 10 years before the end of the pre-lodgement year; and
  • the issuing company has an aggregated turnover not exceeding $50 million for the pre-lodgement year.

More details on the employee share scheme legislation can be found on the Treasury website.

UK probe into executive pay gains pace

Following Theresa May’s ascension to the position of Prime Minister, a review into corporate governance was launched focussing on executive pay, directors duties, and the composition of boardrooms, including worker representation and gender balance in executive positions.

Multiple submissions have now been published to this inquiry, with a swathe of suggestions made to improve executive remuneration, including only providing executives with salaries, requiring shareholders to approve a maximum level of CEO remuneration each year, and forcing companies to publish a ratio between the CEO and the median employee. Binding votes on executive pay and including workers on Boards were other recommendations.

In a similar vein, the UK Investment Association, an industry body that represents investment managers managing £5.7 trillion in assets, has released an updated Principles of Remuneration based on the findings of the Executive Remuneration Working Group, which we reported on in August.

The Principles were amended to acknowledge that remuneration cannot be “one-size-fits-all” – they no longer promote a single remuneration structure. Additionally, the Investment Association expects companies to focus on the quantum of CEO remuneration in their disclosures, providing the pay ratio between the CEO and the median employee and between the CEO and the executive team for context. The new principles also highlight the importance of shareholder consultation.

Also in the UK, the Prudential Regulation Authority has finalised rules that will govern buy outs of unvested equity where employees are moving between banks, building societies and regulated investment institutions.

The new employer cannot undertake a buy-out unless they receive a remuneration statement from the former employer. When they receive such a remuneration statement they must ensure the buy-out does not exceed the value of the unvested remuneration and they must make use of clawback or malus in the event of employee misbehaviour, material error, or material failure of risk management. The amount of the buy-out that would be affected by the clawback will be set out in a reduction notice from the prior employer.

The idea of the new rules is to “not blunt the beneficial incentive effects of the existing rules on malus and clawback, or allow employees to avoid the proper consequences of their actions.” The new rules apply to buy-outs agreed after 1 January 2017.