The Agenda – November

AICD Reports Increase in Director Sentiment

Director sentiment has risen to its highest level in two years following the appointment of Malcolm Turnbull as Prime Minister, the Australian Institute of Company Directors (AICD) has found.

The overall sentiment in the second half of 2015 is up 9.6 points on the last survey, reversing the downward trend evident since the second half of 2013.

Ipsos MediaCT conducts the Director Sentiment Index (DSI) survey twice annually on behalf of the Australian Institute of Company Directors. A random sample of 500 directors across many sectors were asked about a range of issues concerning business, government and general economic conditions. The purpose of the survey is to ascertain Directors’ views, current priorities and future intentions.

The increase in the DSI has resulted from greater optimism for business conditions and regulations, despite a decline in sentiment across economic indicators, tax, credits M&A and infrastructure as well as Directorship Conditions.

Key findings of the survey include:

  • Directors have become less pessimistic about the Federal Government’s effect on business since the first half of 2015:
    • 34% of Directors view the Federal Government’s performance as having a negative effect on their business decision making, down from 60%
    • 51% view the Federal Government’s performance as having a negative impact on consumer confidence, down from 90%
  • Global uncertainty and low productivity growth continue to be the key economic challenges facing Australian business
  • Directors are of the opinion that infrastructure, transport and a reform of the taxation system should be the main priorities for Malcolm Turnbull’s Government in the next 3-6 months, followed by modern workplace practices and free trade agreements

2016 Earnings Forecast for ASX 200 Companies

Almost 90% of the S&P/ASX 200 companies have now released their annual reports, which has given a clearer picture of earnings potential for 2016.

The AGM season has resulted in 42 downgrades to earnings estimates and 36 upgrades, Citi strategist Tony Brennan has found.

Mr Brennan stated that the result has seen a further lowering of market growth forecasts by approximately 1%. The downward shift is mainly from the deteriorating conditions of the banking, mining and energy sectors as well as food retailers.

Utilities were the best performer, up 19%, followed by industrials that are up 16%, health up 13% and consumer discretionary up 9%.

Nevertheless, EPS growth is not expected until 2017, with -2.2% expected in 2016, while growth of 9.2% is expected in 2017, which will arise from an improving mining sector.

Analysts believe that sustained low interest rates at 2% and low yields in other assets including government bonds and residential property have been driving investors into the riskier equity market.

You can read more here and here.

Remuneration in the International Sphere

ISS Implements a P4P Model for Europe

In 2016, Proxy Advisor ISS (Institutional Shareholder Services) will introduce a quantitative pay for performance (P4P) assessment for European companies in the STOXX Europe 600.

The model will provide quantitative elements, which consider both relative P4P alignment compared with peer groups and absolute P4P alignment. The methodology will be similar to that which ISS currently utilises for companies in the US and Canada.

The relative evaluation involves ranking CEO pay and performance relative to peer companies, while the absolute evaluation compares CEO pay relative to shareholder return for the subject company.

Both are considered from an investor’s perspective in evaluating the efficacy of top Executive pay packages over time. For the relative evaluation, peer groups are designed to compare pay and company performance within a group of companies that are similar in terms of industry profile and size.

All figures in the model are based on vested pay. Thus, the CEO’s total remuneration includes the cash benefit values actually paid, and any amounts exercised or earned from incentive grants.

ISS uses Total Shareholder Return (TSR) as its primary performance measure.

US CEO and CFO Compensation

BDO USA LLP, an accounting and consulting organisation, has found that CEO and CFO compensation has been rising at a more measured pace compared to last year.

CEO compensation grew by 0.7% this year compared to 12.6% in 2014. CFOs had a slightly higher increase in compensation of 4.9%, but this is still lower than the 8.2% increase during the same period last year (2013).

Randy Remirez, a Senior Director at BDO, said that there is a sense of cautious optimism due to the economy’s skittish performance.

Mr Remirez stated that CFO compensation may be benefiting due to the increased responsibility placed on CFOs to leverage market momentum in order to realise the company’s financial vision.

UK Pay for Performance

New international research suggests that greater disclosure of annual bonus targets by companies is strengthening the link between executive pay and performance.

The PwC report, Sunlight is the Best Disinfectant, analysed FTSE 100 companies’ executive bonus pay outs versus performance over the last five years, and found that a correlation between the two increased significantly after the Government’s proposals for better pay disclosure were announced. The trend strengthened further in 2013 and 2014 when the disclosure requirements came into force. The correlation value for the companies making the best disclosure is more than twice that of the other companies. (36% of FTSE 100 companies making full disclosure versus the other 64%)

Fiona Camenzuli, pay, a partner at PwC, stated:

“Executive pay has remained broadly static in real terms and has become harder to earn since the financial crisis, but trust in the system remains low.

“Distrust in executive pay is driven by the belief in some quarters that bonuses don’t reflect performance. Our research suggests that the discipline of better disclosure of how bonus targets are set and met is significantly improving the link between pay and performance”

Pay Equity

US research has found that Chief Executives are less likely to be overpaid when women are on a Board’s compensation committee.

The findings are based on an analysis of almost 2,000 US companies, and show evidence that gender-diverse compensation committees are associated with lower levels of CEO compensation as well as excess compensation.

Co-author Zoltan Matolcsy, professor of accounting in the UTS Business School, says the research makes an important contribution to the public policy debate about gender diversity on boards.

The UTS research also showed positive returns on assets for companies with CEOs who were paid excess compensation only when women were on the committees.