Non-financial performance measures for executives play an important role in encouraging companies to build the capability required to deliver strong financial results and sustainable returns for shareholders, according to AMP Capital.
AMP Capital’s latest Corporate Governance Report looks at the complex issue of executive pay and how the tendency to categorise non-financial measures as ‘soft’ has had the effect of devaluing their importance.
AMP Capital Senior Corporate Governance Manager Karin Halliday said management should be incentivised and rewarded for what they have done and also how well they have set the company up for future performance. This means using financial and non-financial measures.
Ms Halliday said: “Total reliance on financial performance measures can be harmful if they discourage executives from focusing on the strategic goals linked to building and enhancing the capability required for long-term value creation. Over the long term, non-financials will impact financial outcomes. The timing is just less clear. For example, profit growth attained at the expense of customer satisfaction is not sustainable nor is profit growth achieved by underpaying workers or neglecting legal responsibilities.
“Given the impact factors such as employee engagement or workplace diversity or culture can have on company value, there will be times when it makes sense to link executive bonuses to such measures. At the end of the day, executives focus on what gets rewarded. If one’s pay, wealth and reputation depend on how successfully certain things are done, it is natural that this is where attention will be directed.”
Ms Halliday noted that shareholder support for such hurdles can only be guaranteed when there is a clear link to long-term value creation and companies can be trusted to judge performance fairly.
Ms Halliday added: “To assist shareholders, companies should articulate the nature and purpose of the hurdles as clearly as possible, indicate how the quality of performance will be judged and identify what is considered to be over and above the day-to-day requirements of the role. It’s also important that performance measures are objective and not easily ‘game-able’. Shareholders want evidence that ‘at-risk pay’ is, indeed, ‘at risk’.”
Within the report, AMP Capital also identified the prominent ESG trends investors should watch. They include:
- Sugar and obesity: a risk to earnings.
- Disruption: technology with the potential to upend mature industries.
- Climate change: momentum on renewables will continue.
- Corporate governance: CEO pay and persistence of bonuses.
- Social licence to operate.
- Supply chain: scrutiny broadens beyond the garment sector.
- Food and agriculture: human resistance to antibiotics.
Ms Halliday said: “As long-term investors, understanding the way the world is changing is crucial. At any point in time, a complex web of trends is shaping industries, creating headwinds and fuelling tailwinds. For instance, sugar is emerging as one of the most prominent investments risks for the global food and beverage industry while technological change is heavily impacting manufacturing, finance and retail. AMP Capital is also now investigating other supply chains outside of the garment sector, particularly electronics and food and agriculture. Each of these trends have the potential to materially affect investment returns over the long term.”
In addition, the AMP Capital Corporate Governance Report examines AMP Capital’s new ethical framework, highlights the recent AMP Capital paper on the roadblocks impacting gender diversity on Australia’s corporate boards, and summarises AMP Capital’s proxy voting and engagement activity.
For calendar year 2016, AMP Capital submitted votes on 1156 resolutions at 221 company meetings. Of these resolutions, 93 per cent were supported. AMP Capital either voted against or specifically abstained from voting on 7 per cent of resolutions.
While the 2016 proxy season saw a high number of strikes against remuneration reports, AMP Capital’s more supportive vote outcomes reflect both the quality of companies we hold and constructive conversations with companies.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.