ESG Focus: Executive Remuneration In The Spotlight (Part 2)

ESG Focus | Aug 06 2019

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

This part continues from Part One, published on 1 August 2019.

Australian focus: Hello remuneration strikes

-Remuneration strikes on the rise
-Regulators ordered to step up
-Trend to incorporate ESG metrics

By Sarah Mills

Corporate freedom in Australia is among the greatest in the world but that could change.

The traditional passivity of Australian shareholders is shifting. 

In 2018, the number of ASX100 companies to receive a strike against their remuneration tripled on 2017, and there were many close shaves.

In 2018, large strikes were received against National Australia Bank, Mineral Resources ((MIN)), Westpac ((WBC)), Telstra ((TLS)), and AMP ((AMP)).

A second strike vote this year would force a vote on board spills.

According to AON Hewitt Australia, the companies that received strikes tended to be those that took a wait-and-see approach rather than pre-emptive.

According to a report from JP Morgan: “Across the ASX200, support for remuneration reports is in decline.

“Over the most recent AGM season, a record 17 companies received strikes with at least 75% of shareholders voting against the remuneration reports compared with seven companies receiving strikes over the previous corresponding period.

“The trend has continued through the second half of 2019 with CSR receiving a first strike against the remuneration report at the 2019 AGM. “

?Royal Commission heralds change

The Haynes Royal Commission into the finance industry last year has identified executive remuneration as a key area of reform.

It has provided a blueprint for remuneration that will most likely extend beyond the walls of the financial sector.

The Final Report’s recommendations did not specify a ratio of fixed to variable pay, nor proposed caps but focused instead on increasing the transparency of the remuneration process and the role of remuneration in driving culture and governance.

In line with international trends, it recommended limiting the use of financial metrics in the design of long-term incentives - across the whole organisation not just executives – to help avoid repeats of some of the major banking scandals of the past decade.

Hayne’s recommended Australian Prudential Regulation Authority (APRA) set the limits on the financial metrics in the long-term variable component of bank remuneration schemes for senior executives, and APRA is in the process of transforming remuneration structures in the finance industry.

Three problems with pay

Following up on the recommendations, APRA published a review identifying three problems with pay:

  • “Employees at lower levels of organisations received downward adjustments to pay that were not always matched by corresponding adjustments at an executive level to recognise line accountability.
  • “Performance measures for pay incentives were too focused on shareholder metrics such as Total Shareholder Return (TSR) – and that this had the potential to drive behaviour that does not support long-term organisation success and sustainability. 
  • “Shortcomings in oversight by remuneration committees requiring stronger governance of executive pay.”

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