The Agenda – January

John Egan quoted in Herald Sun

John Egan has been quoted in an article in the Herald Sun regarding the use of fair value accounting in long-term bonus schemes for Executives. The article comments on the pricing of  share packages which often lack transparency and confuses shareholders.

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Do Directors need skin in the game?

There is an ongoing debate as to whether Directors need to have “skin in the game”, or shares in the company they preside over, so that the Directors’ financial interests are more closely aligned with those of shareholders.

This is the scenario typically preferred by proxy advisors and institutional investors; The Australian Council of Superannuation Investors (ACSI) recently revealed that nearly 11% of ASX 100 Non-Executive Board seats are held by Directors with no shares in the company, which it believes is a “poor result”.

Indeed, Director ownership was a key focus for the 2015 AGM season, and several companies, including Super Retail Group and Cardno, have since introduced “minimum securities holdings” requirements.

However, the Australian Institute of Company Directors (AICD) cautions that it is a matter of balance.

AICD Managing Director John Brodgen stated that, although there is an argument that everyone should have “skin in the game”, Boards also need independent Directors who only take a fee so that they make decisions independent of their own interests.

SEC to complete final rules for compensation disclosures

The Securities and Exchange Commission (SEC) is due to complete the disclosures mandated by the Dodd-Frank Act in the next year. The SEC has so far adopted final rules for 7 mandatory provisions related to Executive compensation, with 5 more proposed. Some of the key rules yet to be adopted include:

Recovery of Executive Compensation

This rule is designed to improve the quality of financial reporting and enhance accountability to  investors by requiring Executive officers to pay back incentive based compensation that they were awarded erroneously. Companies would be required to develop and enforce recovery policies that, in the event of an accounting restatement, “claw back” from current and former Executive officers incentive based compensation they would not have received based on the restatement.

Hedging Disclosure

The hedging disclosure requirements would require companies to disclose whether they permit any employees, officers or directors, or any of their “designees,” to purchase financial instruments or otherwise engage in transactions that are designed to have the effect of hedging or offsetting any decrease in the market value of company equity securities: (a) granted as part of compensation; or (b) held by them, “directly or indirectly.”

Pay v Performance Disclosure

Under this Rule, companies would be required to disclose:

  • The relationship between the compensation actually paid and the company’s total shareholder return
  • The relationship between the company’s TSR and the TSR of its peer group
British CEOs highest paid in Europe

A study among top companies on Executive pay in Europe, undertaken by the Vlerick Business School, has revealed that Britain’s CEOs are paid an average of €5.65 ($AUD 8.76) million each year, ahead of €4.26 ($AUD 6.6) million in Germany, €3.15 ($AUD 4.88) million France, and €2.91 ($AUD 4.51) million the Netherlands.

The UK has the highest variable component of remuneration, with the average CEO receiving 74% of his or her remuneration from short and long term incentives (bonuses and shares). The next highest is Germany, with an average of 61%, followed by the Netherlands with 50%. CEOs in France and Belgium have the lowest variable components; they receive the majority of their pay from fixed remuneration (65 and 64% respectively).

However, the study also revealed that the share based component of remuneration has declined in recent years. The number of European companies granting share based remuneration decreased from 45% in 2007 to 23% in 2014, while in the UK over 86% of firms issued shares as pay in 2013 which dropped to 75% in 2014.

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AGM process under scrutiny

The Australian Institute of Company Directors (AICD) has revealed that a third of Directors believe the AGM process is dysfunctional and outdated.

“The old company AGM no longer meets its purposes. We’re getting fewer and fewer people attending, and many of the decisions are made well and truly before the AGM is opened’ said AICD CEO John Brogden.

“The concept that through democratic capitalism shareholders come along to an AGM where they vote and decisions are made is long gone.”

Mr Brogden said that shareholders have plenty of options to be heard which do not necessarily involve showing up in person. He suggests interactive web casts, which would make it easier for shareholders to become more involved.

However, the Australian Shareholders Association (ASA) Board member Don Hyatt said that technology could not replace the face-to-face experience of an AGM.

“I think this is the one time of year that the Directors and Chief Executives actually have to face the shareholders and ultimately it’s a great opportunity to actually look the Directors in the eye and interact with them” he said.

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