It’s that time of the year again when shareholders front up to the annual general meetings of the country’s largest listed companies to hold boards of directors and leadership teams to account. With executive pay and gender diversity high on the agenda, Karin Halliday, AMP Capital’s Senior Manager of Corporate Governance, highlights some of the big themes individual shareholders, asset managers and asset owners alike need to be across.
Provocations around executive pay have been a feature of proxy season since the introduction of the so called “two strike” rule, to what extent do you expect remuneration will feature again this year?
For as long as I have been involved in proxy voting, remuneration has been a feature. Maybe the tall poppy syndrome combined with the concept of a fair go have influenced what Australian’s think about high levels of executive pay. Sometimes the sheer size of pay has been the issue, other times it’s been concern over structure and most recently over exactly what bonuses are being paid for. For the coming proxy season I think we’ll see a lot of focus on simplifying pay structures. They’d become so complicated they weren’t doing a good job of doing what they set out to achieve.
You mentioned closer scrutiny of what bonuses are actually being paid for. Last year some companies were criticised for linking bonuses to less tangible nonfinancial targets. What is your view of the so-called ‘soft’ performance targets?
I’m on the record (report here
) supporting non-financial targets, or as I prefer to call them ‘pre-financial targets’. There are times when targets around people and culture are exactly what executives should be focussing on. After all the quality of a company’s leaders and employees, its culture, its ability to innovate and its ability to manage risks have a huge impact on company value. I know that CEOs are already paid to manage people and culture as part of their day job but when bonuses are linked to such factors it focuses the mind and signals what’s important.
Is corporate Australia getting better at measuring these hard to measure areas such as culture, innovation and the like?
These things are definitely hard to measure. But I do think we are getting better at finding ways around that. By that I mean companies and investors have found they can form a solid view by considering such things as employee engagement surveys, absenteeism statistics, safety records and the speed at which management responds in times of crises.
Why should company culture matter to shareholders? To what extent is culture reflected in share prices in your view? Any examples you can think of?
Company value is driven by a range of factors. While hard assets are important, it’s even more important to consider how companies develop, manage and protect those assets. One only needs to compare the value of hard assets on a company’s balance sheet with the price shareholders are prepared to pay for a company to realise there is more to a company than meets the eye.
Companies need to focus on creating a culture that attracts the best employees and creates an environment that enables employees to contribute their best. Rewarding executives for pursuing short-term profits at the expense of long-term stability can be dangerous. It can be hard to point out aspects good culture, it is clear when things go wrong. Every day we see the newspapers full of examples of short-cuts, conflicts of interest, misuse of investors’ money.
Are shareholders and asset owners generally too soft on directors in your opinion?
It’s hard to generalise about whether shareholders are too soft on directors. If you look at voting stats, most directors are re-elected comfortably. But what you don’t see from those numbers are the private discussions going on within companies and with investors. Poorly performing directors, tend to leave quietly rather than being voted out.
AMP Capital funds have gradually reduced the number of resolutions they’ve not supported over the years since about 2009, is that because the companies AMP Capital invests in are getting better?
That’s part of it. But we’ve also reduced the number of Australian companies AMP Capital holds. Unsurprisingly, we’ve held on to the ‘good’ companies. i.e. those we consider to have the best prospects and the best governance.
Do you engage with companies on behalf of passive funds or is company engagement the domain of active funds only?
We definitely engage on behalf of both. It’s probably more important for passive funds because if something’s not right you can’t just sell, you have to stay at index weight. So to improve things you have little choice but to engage.
A lot of smaller companies we hold in our index funds really appreciate our engagement as they don’t get a lot of feedback from their owners and often they do like to know what we’re thinking and particularly why we may have voted against something.
How has the rise of passive funds in Australia changed the corporate governance landscape?
It’s hard to say, but I suppose the low fees paid to investment managers for passive funds will ultimately mean investment managers won’t have the resources to continue to engage to the same extent. This may be why asset owners, such are larger industry funds, are appointing in-house teams to engage with companies on behalf of their members. It will be interesting to watch how this trend develops in future.
Movements by the likes of Australia Council of Superannuation Investors means asset owners are increasingly being asked to vote against company directors if boards have too few women members, what’s your view on ensuring board diversity and is there a minimum percentage you think boards should strive for?
I think it is so important for company boards to have a good mix of directors. As the business environment moves more quickly and gets more complex than ever before I believe [Insight paper here
] boards must have cognitive diversity and collective intelligence. This means they can’t all be men, or more importantly, as the saying goes… they can’t all be pale, male and stale.
Having said that, I’m not keen on any hard and fast rules that insist you vote against directors simply because there are too few women on a board. Gender diversity is extremely complex, the more you look into it the more you understand that.
AMP Capital would consider voting against a male director; not because there are no women on the board, but because the company has failed to acknowledge the benefits of diversity, has made no visible attempt to recruit a woman, and is seeking support for the election of a male director who appears to add no particular value or skill.