“Say-on-Pay” of Proxy Advisers & Institutional Investors

In our February 2012 Newsletter, we reviewed the operation of the recently introduced “Say-On-Pay” legislation in the US. Similar to its Australian counterpart the “Two-Strikes” Rule, this legislation gives shareholders the opportunity to let boards know what they feel about executive reward practices and payment levels.

In the US, institutional shareholder votes are heavily influenced by proxy advisers. Recent research has revealed that more than two-thirds of US companies say their executive compensation program is influenced by the policies and voting recommendations of these proxy advisers. Further, a majority of corporate boards are likely to change CEO compensation to gain a favourable say-on-pay recommendation from these firms. Questions are being asked whether these proxy advisers have now gained too much influence as a consequence of the new “Say-On-Pay” reforms.

Against this backdrop, it is interesting to note recent press highlighting possible breaches of the new remuneration standards by the proxy advisers themselves. In the context of our broader discussion on productivity, greater attention needs to be directed towards the broader governance practices and specific remuneration practices of these proxy advisers. for more backgorund and viewpoint follow this link:Exec Comp Programs Influenced by Policies, Voting Recommendations of Proxy Voting Advisers.

In Australia, significant voting power similarly rests in the hands of institutional shareholders. In this respect, we note the recent announcement by the Financial Services Council on a new transparency and governance benchmark for superannuation funds (an increasingly significant institutional shareholder in Australia). The proposed governance policy includes an increased focus on executive remuneration in superannuation (including disclosure of executive remuneration where paid from the trust). It is hoped that similar standards are introduced for other institutional shareholder groups in Australia.

We further postulate whether these principles embraced by Government will extend to other stakeholder communities including union members regarding executive pay arrangements while also voting for a fee pool for board members?

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