AMP board showdown symbolic of bigger problem
Experts say shareholders already have enough power
By Alexander Liddington-Cox
Corporate governance experts have poured cold water on a push to give shareholders powers on top of the two-strikes rule as AMP faces a potential boardroom spill tomorrow.
Labor has shown a willingness to adopt one of the more populist measures on offer, which go well beyond what the Hayne royal commission recommended for the prudential regulator, as debate continues to rage over the two-strikes rule that has brought AMP to heel.
“We need to be aware of the costs and benefits,” Swinburne University corporate governance expert Helen Bird said on the proposals to expand shareholder control over companies.
“We actually have much more conservative (director's) fees here and one of the reasons that’s the case is because of the strike policy."
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Debate about the two-strikes rule and additional shareholder powers to curb executive remuneration has seen a resurgence as financial services giants AMP, ANZ, NAB and Westpac all received strikes last year.
The royal commission’s recommendations on executive remuneration mostly centred on the Australian Prudential Regulation Authority (APRA) limiting the use of financial metrics for bonuses and pushing the banks towards incentives that focus on limiting misconduct and compliance failures.
But the peak super investor body has put four additional proposals on the table in its Towards Better Corporate Accountability report for all listed companies, arguing that the royal commission “outlined the need for change”.
The Australian Council of Superannuation Investors’ measures include annual election of directors, a binding vote on remuneration, loosening restrictions on shareholder resolutions and compulsory executive pay ratio disclosure.
The Australian Shareholders’ Association issued a similar position on non-binding shareholder resolutions on Friday and has been calculating the ratio of CEO pay to average earnings since 2017. The ASA intends to vote against AMP’s remuneration report on Thursday, which could prove critical, citing new chief executive Francesco De Ferrari's A$12 million sign-on package as a key reason.
ASA chief executive Judith Fox said the body would need to see how a binding vote on remuneration would interact with the two-strikes rule, which it does not want changed, while it sees “advantages and disadvantages” on the subject of annual elections.
Too much control?
The main theme from the debate about whether the two-strikes rule should be added to or watered down is whether more granular control for shareholders leads to greater accountability or short-termism.
Australian Institute of Company Directors chief executive Angus Armour points out that annual director elections, for example, could likely lead to higher board turnover, which is not necessarily good for corporate governance.
“Orderly board succession planning and renewal is critical to performance and allows the board to match company strategy and needs with new director appointments,” said Armour.
Bird agrees, arguing that boards typically benefit from having a mixture of experienced directors members and new blood and noting that it takes six-to-nine months to onboard a new director.
“If we reduce everything to a 12-month cycle are we in fact playing into the hands of short-termism, which we already have problems with now,” said Bird.
Associate Professor of Finance at UNSW Business School Mark Humphery-Jenner described the proposal as “justifiable,” although his descriptions of the other three policies varied from “problematic” to “bad”.
“This can make it quicker and easier to remove underperforming directors,” said Humphery-Jenner of annual elections. “Quality directors will be able to point to a track record of performance.”
CEO-average punter ratio has support
Compulsory executive pay ratio disclosure, which ACSI has borrowed from the UK and the US, is the only initiative with any political backing.
The Labor Opposition said it would require all ASX-listed companies with more than 250 employees to disclose how much their chief executives earn against the average employee. A government spokesperson said only that they were “closely watching” the two-strikes rule debate.
The proposal “serves no useful purpose,” according to Humphery-Jenner. “CEO pay should reflect how much value they create. That is the CEO’s job. Shareholders hire the CEO to maximise value and sometimes talented people require high salaries. It is entirely irrelevant how it compares to other employees.”
Bird noted the UK and US have experienced much higher levels of executive pay than Australia, especially in the financial services sector.
“We already have a conservative corporate governance environment, brought about by our regulatory framework, which is already not necessarily producing dynamic governance,” said Bird. “So we have to factor in whether that’s an issue in this whole debate.”
Two-strikes debate continues
Bird said the research on the two-strikes rule indicates that it has a downward impact on executive remuneration. "I think the system as it currently operates is a very good one," said Bird.
Nevertheless, the AICD's Armour said “concern remains that the two-strikes rule can be misused at times to raise concerns about broader governance issues”.
Humphery-Jenner noted two-strikes can be abused for a few reasons, but the main one for banks is that shareholders are “simply angry”.
“This is a live concern for companies that are important in the national psyche, risk political ire, and have many small shareholders,” said Humphery-Jenner. “Executives would rightly be concerned that they are being used as a proxy war for a larger political debate,” he said, while adding institutional investors are unlikely to be persuaded by politics.
According to a Computershare report, 2018 was an “unprecedented” year for remuneration strikes, headlined by the big financial services companies.
Twenty-four companies in the ASX300 received a strike from shareholders, which is 50% higher than the yearly average from 2014-2017. However, not one spill motion has been carried over the same period.
APRA in the middle
APRA, which is charged with regulating the banks and is reviewing executive remuneration on the back of the royal commission, is awkwardly placed in the whole debate.
APRA Chairman Wayne Byres said during the royal commission that the two-strikes rule is “a way that shareholders can express dissatisfaction" and acknowledged it as important.
Australian Banking Daily asked APRA what its stance was on the ACSI’s proposed policies. A spokesperson said only that ASIC is responsible for administering the two-strikes rules and it has no comment on alternative proposals.
APRA’s former head of governance, Fahmi Hosain, said the two strikes rule is giving shareholders too much power to express issues far removed from remuneration.
“We have to get rid of the two-strike rule because it’s enabling shareholders to have a huge sway in terms of remuneration structuring going forward,” he said.