Post AGM Season Report Feb 2016
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Transcript of Post AGM Season Report Feb 2016
Corporate Governance
Trends
February 2016
GPS Governance
2015 AGM Season Report
Introduction
2 Post-AGM Season Governance Report: February 2016
In the July 2015 Corporate Governance
Trends report, GPS flagged that one
of the new governance developments
to monitor during the 2015 shareholder
voting season would be the response
to the ASX Corporate Governance
Council’s Recommendation 2.2 from
proxy advisors and institutional
shareholders. Recommendation 2.2
states that a listed entity should have
and disclose a BSM setting out the mix
of skills and diversity that the Board
currently has or is looking to achieve
in its membership.
A story in the Australian Financial
Review on 18 January 2016 headlined
“Diversity tops directors’ 2016 to-do list”
stated that when a group of directors
were asked about their top priorities for
2016, “diversity was a recurring theme.
Not just gender diversity, but diversity
in the broadest sense”. The market and
governance stakeholders will therefore
be scrutinising BSM reporting, amongst
other data, to gain insights into how
companies are managing the Board
diversity challenge.
Introduction of the recommended Board Skills Matrix (BSM) disclosure for ASX-listed companies
Continued dissent around select remuneration policies; 14 companies within the S&P/ASX 300 index are hit by a remuneration strike
Rise of climate change activism via shareholder resolutions at AGMs
Highlights of the 2015 Annual General Meeting
(AGM) season:
Open Season on the
Board Skills Matrix
Background
GPS Governance
3 Post-AGM Season Governance Report: February 2016
In our preview of this new BSM
reporting recommendation,
GPS stated that it presents an
opportunity to:
Evaluate how the composition of the Board supports a Company’s disclosed strategy;
Identify perceived gaps in the collective representation of Board skills and experience; and
Facilitate the Board’s succession planning process through the identification of complimentary director candidates.
Directors should note that
corporate governance
stakeholders, particularly proxy
advisers who provide voting
recommendations to domestic
and international institutional
investors, have amended their
proxy voting policies in response
to the introduction of the BSM. The
two leading global proxy advisers,
Glass Lewis and Institutional
Shareholder Services (ISS),
updated their Australian policies in
advance of the 2015 AGM season
as follows:
“If a board has not addressed major issues of board composi-tion, including the composition and mix of skills and experience of the independent element of the board, [CGI]will consider recommending voting against the chair of the nomination committee, or equivalent. CGI Glass Lewis will evaluate the skills and experience across individual directors based upon publicly available information and will identify any apparent gaps.”
“Under certain circumstances, ISS may consider the Board Skills Matrix disclosure in its voting recommendations on the election of directors, as warranted.”
Historically, apart from director
bios Australian shareholders
and their advisers have had little
publicly available information
when independently assessing
the suitability of non-executive
director nominees for election.
Corporate governance
stakeholders believe that there
is an absence of disclosure or
recognition for the aggregate
composition of Board skills and
experience and whether it is
effectively structured to oversee
a Company’s communicated
strategy to support future
shareholder wealth creation.
GPS Governance
4 Post-AGM Season Governance Report: February 2016
And it looks as thought there’s some way to go yet. Based on insights into how
governance stakeholders assess corporate governance disclosures, GPS has
conducted a preliminary review of BSM disclosures for 161 separate ASX200
constituents that have held AGM’s between 22nd September 2015 and 18th
December 2015. This included a qualitative assessment of BSM disclosures across
four separate categories.
Qualitative Assessment Parameters of 2015 AGM BSM Disclosures (S&P/ASX 200)
Rating Description
Good
Basic
Enhanced disclosure, quantified or director specific; and an accompanying narrative; and links to strategy or discloses identified Board skills gaps.
Generally includes a simple table disclosure with brief or no narrative; and skills represented are quantified (or assessment of strength is indicated qualitatively and categorically; e.g. - strong, very strong, adequate...).
Poor
Very brief wording, no matrix, not quantified, not director specific, no skills gaps identified. Generally includes a broad list of non-attributed skillsets the Board states that it requires to effectively oversee the business.
Not disclosed Complete absence of BSM disclosure and recognition of ASX Recommendation 2.2.
Source: GPS analysis
Just as the introduction of the “Two Strikes” rule in 2011 focused the minds of
companies to better articulate and explain the alignment between remuneration
structure and performance, so it is expected that the recommended BSM
disclosure will lead to improved reporting for the benefit of shareholders and the
Company. Over time, it can be expected that companies who are perceived as
poor BSM disclosers will come under the governance spotlight and could attract
a higher amount of dissenting votes when it comes to director election resolutions.
GPS Governance
5 Post-AGM Season Governance Report: February 2016
BSM Disclosure Rankings – 2015 AGM Season (S&P/ASX 200)
4
46
79
32
0
10
20
30
40
50
60
70
80
90
Good Basic Poor Not Disclosed
Num
ber o
f Com
pani
es
Source: GPS analysis
Key Takeaways
In context of this analysis, Boards should be aware that the identification of
inadequate skills or competencies in one specific area is not indicative of a
dysfunctional Board. Those Boards that are apprehensive about disclosing
skills gaps need to be cognisant that such disclosure can be effectively
counterbalanced with a robust narrative explaining why the mix of non-executive
director skills and experience supports the current requirements of the business.
Shareholders can also appreciate that the skills and experience of the Board is
required to evolve in recognition of changes to a Company’s operating
environment, investments and/or strategy, which results in the requirement to
add or strengthen specific skillset representations on the Board over time.
At this early stage in the evolution of the BSM disclosure, it is reasonable to expect
that many Australian Boards are looking to their peers to assess the level of detail
that is being disclosed around the aggregate mix of Board skills and experience.
As depicted in the chart above, 2.5% of companies that held an AGM during the
2015 voting season provided enhanced disclosure. These companies were namely:
BHP Billiton, Suncorp Group, South32 and Liquified Natural Gas. This stands in sharp
contrast to approximately two-thirds of ASX companies that held an AGM in the
second half of 2015 that did not disclose a BSM or provided relatively poor
disclosure.
GPS Governance
6 Post-AGM Season Governance Report: February 2016
As 2015 marked the fourth full year that the ‘two strikes’ say on pay legislation
has been in effect for ASX companies, there was expected to be relatively minimal
controversy around executive remuneration heading into the 2015 AGM season.
The majority of S&P/ASX 300 companies (excluding new entrants or listings) have
had sufficient time to digest the expectations of governance stakeholders,
shareholders and their advisers on what is considered to be appropriate
remuneration policies, disclosures and pay outcomes for senior executives.
Based upon GPS analysis, the following observations are made in regards to voting
results on remuneration-related resolutions during the 2015 AGM season for S&P/
ASX 300 constituents:
Companies Continue to Strike Out
Of the 221 remuneration reports that were voted upon, 14 of these companies (6.3%) received a remuneration strike.
Of the 14 companies that received a strike, the highest level of dissent recorded ‘against’ a remuneration report was 62.4% of votes cast, whilst the median rate of dissent for S&P/ASX 300 companies that incurred a strike was 34.3%.
Of the 207 companies that did not incur a strike, the median level of dissent recorded ‘against’ a remuneration report was 2.5% of votes cast.
Of the 202 Executive Director long term incentive (equity) grant resolutions put forward for shareholder approval, all were passed on a majority vote.
The highest level of dissent ‘against’ an Executive Director LTI grant resolution was 48.7%, whilst the median vote ‘against’ for all 202 resolutions was 2.7% of votes cast.
Of the 36 resolutions put forward to shareholders requesting an increase to the Non-Executive Director fee cap, all were passed on a majority vote.
The highest level of dissent ‘against’ a requested increase to the Non-Executive Director fee cap was 29.6%, whilst the median vote ‘against’ for all 36 resolutions was 1.9% of votes cast.
GPS Governance
7 Post-AGM Season Governance Report: February 2016
One aspect to executive remuneration that received substantial shareholder focus
during 2015 AGM season is the treatment of exclusions from cash earnings, such
as write downs and impairments, when determining short term incentive and long
term incentive payment/vesting outcomes to senior executives.
One proxy adviser has taken a strict approach towards such accounting
treatments:
They recommended that shareholders vote against the remuneration
report for one major Australian bank, citing a change in accounting
policy towards capitalised information technology (IT) software that
was subsequently written off and as a result, was perceived to have
triggered the payment of variable incentives to executives under the
remuneration policy’s primary earnings measure. In this instance, it
was argued that there was a misalignment between executive pay
outcomes and true financial performance. The bank countered by
stating that the change in accounting policy was necessitated by the
requirement to reduce the value of the software more quickly due to
rapid changes in technology. As such, the write off had not resulted
from poor management decisions. Ultimately, shareholders lodged a
16.5% vote ‘against’ the bank’s 2015 remuneration report, which was
up from 2.8% ‘against’ the previous year and matched the highest ‘no
vote’ for a major Australian bank on its remuneration report since the
2012 AGM season.
GPS Governance
8 Post-AGM Season Governance Report: February 2016
They recommended ‘against’ the proposed re-election of an
executive director of an ASX100 Company that had been present
when the business completed an asset acquisition that subsequently
incurred substantial impairments and associated restructuring
expenses during the 2015 financial year period. The recommendation
was made to signal the accountability of the executive director for
past investments.
Consequently, ASX companies must continue to evolve their governance
engagement program with institutional shareholders and their advisers to stay
abreast of shareholder voting sensitivities (particularly remuneration-related
concerns), the rationale for continued amendments to proxy voting policies and
emerging thematics across the Australian corporate governance space. GPS
continues to assist Australian companies with developing their stakeholder
governance engagement program, in addition to the determination and
finalisation of governance structures and disclosures across Board membership,
remuneration practices and environmental and social risk exposures.
There were three companies that had a shareholder resolution on ballot at
their 2015 AGM that was put forward by the Australian Centre for Corporate
Responsibility (ACCR). These resolutions requested an amendment to the
Company constitution in regards to the reporting and management of climate
change risk exposures. The content of these resolutions are detailed as follows:
Shareholder Activism – Climate Change
Company Shareholder Support
Content of the Shareholder Resolution
AGL Energy Special Resolution to Amend the Constitution
That, at the end of Clause 31 ‘Notice’ the following new sub-clause 31.5 is inserted:
5.2% of votes cast on this resolution were cast in favour
Powers/Disclosures Requested
Disclosure of business model diversification; emissions reporting and benchmarking.
ANZ Special Resolution to Amend the Constitution
To amend the constitution to insert at the end of Clause 5 ‘Powers of the Board’ the following new sub-clause 5.4: “The Company in general meeting may by ordinary resolution express an opinion or request information about the way in which a power of the Company partially or exclusively vested in the directors has been or should be exercised. However, such a resolution must relate to an issue of material relevance to the Company or the Company’s business and cannot either advocate action which would violate any law or relate to any personal claim or grievance. Such a resolution is advisory only and does not bind the directors or the Company.”
10.7% of votes cast on this resolution were cast in favour
The power for 100 shareholders or shareholders owning >5% of issued capital to file non-binding resolutions; disclo-sure of business exposure to carbon emitting invest-ments; setting and disclosing targets for reducing the bank’s climate change ex-posures.
GPS Governance
9 Post-AGM Season Governance Report: February 2016
“That, (a) the Board must prepare a business model that demonstrates sufficient diversification of the power generation and supply activities of the Company to ensure continued profitability under pathways that limit the world to 2C warming; and (b) include in future annual reporting to shareholders, at reason-able cost and omitting any proprietary information, information about ongoing power generation and supply chain emissions management benchmarked against that model.”
Ordinary Resolution
“That in order to address our interest in the longer term success of the Company, given the recognised risks and opportunities associated with climate change, we as shareholders of the Company: (a) requesting that the Board of Directors report to shareholders by end-August 2016, at reasonable cost and omitting proprietary information, their assessment of our exposure to climate change risk and carbon intensive business in our lending, investing and financing activities (utilising whatever metrics the Board finds most appropriate) and (b) express our view that it is in the best interests of our Company that, by end-August 2016 our Board set public targets and a timetable for reductions in the extent of that exposure.”
10.5% of votes cast on this resolution were cast in favour
GPS Governance
10 Post-AGM Season Governance Report: February 2016
Origin Energy
Special Resolution to Amend the Constitution
“That, at the end of Clause 8.3 ‘Notice of general meetings’ the following new sub-clause 8.3(e) is inserted: “Each year from 2016, at reasonable cost and omitting any proprietary information, routine annual reporting will include further information about ongoing power generation and supply chain emissions management, generation portfolio resilience to the
6.5% of votes cast on this resolution were cast in favour
Carbon emissions reporting; setting of carbon targets linked to senior executive variable remuneration opportunities, disclosure of corporate climate change policy.
GPS Governance
11 Post-AGM Season Governance Report: February 2016
International Energy Agency’s (IEA’s) scenarios; relevant strategic key performance indicators (KPI’s) and executive incentives; and our public policy positions relating to climate change.”
Source: Company Announcements. Note: Special Resolutions require >75% of votes cast on the resolution to be in favour for it to pass. Ordinary Resolutions require >50% of votes cast on the resolution to be in favour.
None of the resolutions detailed above were endorsed by the respective
Company Board.
GPS carries the view that constitutional amendments are not the most appropriate
method for shareholders to voice their concern around a Company’s long term
climate change exposures. Although it is well within shareholders’ rights to express
their dissatisfaction with the operation of a listed Company, it is considered
inappropriate for Australian shareholders to be afforded the capability to direct
the conduct of the Board, which is supported by Australian case law.
This precedent was set in the case of National Roads & Motorists’ Association v
Parker (1986), whereby the Court ruled that it is not a function of the shareholders
of a Company in a general meeting to express an opinion by resolution as to how
a power vested in the Board should be exercised by the Board. Further, this
judgment was relied upon in the Federal Court case of ACCR v Commonwealth
Bank of Australia (CBA)(2015), whereby the ACCR launched a legal challenge
against CBA in the wake of its decision not to put the following resolution to
shareholders at its 2014 AGM:
Special Resolution to amend the constitution: At the end of Clause 9
‘General Meetings’ insert the following new sub-clause: “That, each year
at about the time of the release of the Annual Report, at reasonable
cost and omitting any proprietary information, the Directors report to
shareholders their assessment of the quantum of greenhouse gas
emissions we are responsible for financing calculated, for example, in
accordance with Greenhouse Gas (GHG) Protocol guidance.”
GPS Governance
12 Post-AGM Season Governance Report: February 2016
The Court found that CBA was not
obliged to put the aforementioned
resolution to shareholders. The ACCR
has launched an appeal on this
decision that will be heard on 12
February 2016, with a decision
expected in April/May 2016.
In context of the proposed
amendment to ANZ’s constitution
regarding the ‘powers of the board’,
the potential for shareholders to put
forward alternative views around
how the power to manage the
business should be exercised is
regarded to be potentially
disruptive and may impede the
ability of the directors to oversee
and manage the business in the
interests of all shareholders.
Additionally, there is substantial
concern around the shared
accountability that would ensue
for decisions that are made at the
request of shareholders and which
result in poor business administration
or governance.
Directors, as fiduciary agents, are
required to not only exercise their
powers in accordance with the
Australian Corporations Act, but also
bona fide for the Company as a
whole. Furthermore, Australian
shareholders have substantial
capability to engage with Company
directors, and if not satisfied, can
refuse to re-elect directors or
vote to remove them from office.
Moreover, some dissatisfied
shareholders may choose to lodge
a protest vote on the annual
resolution to approve a Company’s
remuneration report, that is subject
to the “Two Strikes” legislation and
can eventuate in a spill meeting and
the complete refresh of Board
membership.
Although the method by which
these shareholders have advocated
for the disclosure and management
of carbon emissions is not
procedurally ideal, at a minimum
these voting resolutions have
focused the directors of these
respective companies on
enhancing their climate change
initiatives: Origin Energy and AGL
have announced that they are
committing to the ‘We Mean
Business’ climate change related
initiatives; AGL has made a long
term commitment to ‘no coal by
2050’; whilst ANZ has provided
additional disclosure in its 2015
reporting documents on the bank’s
carbon emissions from project
finance lending to the power
generation sector, which will assist
investors with tracking ANZ’s progress
in reducing the carbon emissions
intensity of its portfolio.
GPS Governance
13 Post-AGM Season Governance Report: February 2016
We observe that sustainability
minded associations and
investors are more willing to agitate
for improved ESG disclosure and
practices. Furthermore, we expect
increased scrutiny around ESG risk
exposures for Australian companies,
resulting in escalating pressure being
placed upon ASX Boards to
effectively illustrate how these
risks are being managed.
What does this mean for you?
Governance conscious stakeholders
carefully scrutinise and interpret your
corporate governance disclosures.
They are looking for companies to
cohesively ‘tell a story’ rather than
‘tick the box’. Generally speaking,
the greatest risk a company can
assume in corporate governance
is regarding it solely as a response
to regulatory requirements or
recommendations, and not
perceiving such practice as forming
an integral part of a company’s duty
to protect the interests of its owners,
the shareholders. This ‘tick the box’
approach can lead companies into
paying lip service to governance
stakeholders and overlooking the
practical implications of proper
governance frameworks.
The implications of poor corporate
governance disclosures or practice,
or even the perception of a gap,
may result in cash flow or liquidity
risk, business interruption, or
reputational damage (to name a
few), all of which carry negative
implications over shareholder wealth
outcomes. A Company should
therefore:
Adopt robust board practices that will withstand scrutiny
Promote functional and effective internal reporting and control structures
Provide thorough and transparent disclosure on a continual basis
How GPS Can Assist Boards
GPS is the only Australia-based,
independent corporate governance
advisory group that has in-house
staff who have worked at the world’s
leading proxy adviser firms. On this
basis, GPS is uniquely positioned to
provide insights into the perspectives
of governance-conscious
institutional investors and their
advisers, including how proxy voting
recommendations are formed and
followed.
Having worked with boards of Australia’s largest listed companies, and with the
support of continued engagement with many of Australia’s largest institutional
investors, GPS remains at the forefront of stakeholder perspectives in relation to
current and developing areas of corporate governance best practice.
Our governance offering is customised to the needs of each company and includes a variety of specialist services, such as:
Boards Skills Matrix
Executive and Director
Remuneration
Full Corporate Governance
ReviewTakeovers
and Mergers Activism
Board Skills, Remuneration,
Disclosures and
Reporting
$
Gaps analysis on
remuneration disclosures
and practices, full end-to-end
authoring of the
remuneration report
Governance review of pre-
publication documents,
detailed feedback and
reporting of potential disclosure
gaps, development
of proxy adviser
materials and assistance
with engagement
with governance stakeholders
Strategic corporate
governance consultation
to help a company
respond to a shareholder
meeting requisition,
or to provide support to a requisitioning shareholder’s
campaign
Development and imple-
mentation of a board skills
disclosure that is appropri-
ately linked to a company’s
strategic direction, discretely manages
potential skills gaps, supports
the board renewal
process and is effective in withstanding
public scrutiny
GPS Governance
14 Post-AGM Season Governance Report: February 2016
Copyright notice:
Complete or partial use subject to
copyright and prior permission from
Global Proxy Solicitation Pty Limited.
For more information, or to discuss
your Corporate Governance needs,
please contact:
Michael Chandler
P: 02 8022 7946