Succession the Hot Spot for Investors

p>AMP Capital has this month released its 2013 full-year report for corporate governance.

Succession is front of investors' minds

Investor focus is firmly on rebuilding, according to the report, with questions focused on whether corporate Australia has the management required to steer, develop and grow companies as they move forward. This places a focus on skills and talent rather than harder assets. Given this, investors expect Boards to keep CEO and leadership succession front of mind.

AMP Capital noted that it has supported an increasing proportion of resolutions over the last five years and that since the two strikes rule began, the number of companies seeking to engage with AMP Capital had risen considerably.

AMP Capital highlighted areas where it had voted against resolutions, which we will summarise below:

Share and option incentive plans

AMP did not support 18% of the incentive resolutions it voted on, down from 21% in 2012, 28% in 2011, 36% in 2010 and 43% in 2009.

AMP Capital voted against plans that had:

  • Poor disclosure of terms;
  • Performance periods shorter than three years;
  • No performance hurdles or hurdles that weren’t sufficiently aligned with shareholder interests;
  • NED participation in plans; and
  • No improvement despite prior comments from AMP.

It also noted that change of control provisions were important in its consideration of incentive plans.

Board Composition

AMP voted against 8% of Director elections, up from 6% in 2012, 7% in 2011 and 2010, and 9% in 2009.

AMP Capital noted that this continued to be one of its most important issues. It generally cast votes against Directors for poor Board attendance, an insufficient number of independent Directors or poor governance.

It stated that there had been positive momentum in terms of gender diversity.

In its assessment, there is a positive correlation between a company’s governance quality and the number of women on its Board. It found that on average, companies with no gender diversity have:

  • Almost triple the related party issues;
  • Twice the Board composition concerns (such as board independence); and
  • Twice the remuneration concerns.

Looking back over its voting records for the year, it noted that it supported fewer resolutions at companies with no women Directors, especially around remuneration.

Remuneration Reports

AMP voted against 17% of remuneration report resolutions, down from 25% in 2012, 27% in 2011, 26% in 2010 and 37% in 2009.

AMP Capital voted against remuneration reports with:

  • Poor disclosure;
  • Poor alignment with shareholder interests;
  • NEDs participating in incentive plans;
  • Excessive quantums; and
  • Poorly structured performance hurdles (for example hurdles that were based purely on absolute share price, not challenging, too short term, purely accounting based or allowing too many re-testing opportunities).

NED Remuneration

AMP Capital noted that 49 companies in its portfolio sought an increase in their NED fee pool and that it had considered most increases to be reasonable when taking into account the company’s:

  • Size;
  • Complexity;
  • Performance;
  • Board composition;
  • Policy on option payments for Directors;
  • Policy on retirement payments for Directors; and
  • Reasons for the increase.

Termination Payments

AMP Capital noted that 11 companies in its portfolio sought approval for termination payments. It voted against three, which it judged based on:

  • The potential windfall following change of control;
  • The duration of the approval’s validity; and
  • The level of Board discretion for vesting.

For more details, the AMP 2013 corporate governance report can be found here.

Voting Guidelines

For your reference, the voting guidelines of different proxy advisors and major investors can be found below:

EGAN Associates