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ESG Focus: Banks Survive AGM Season, Barely

ESG Focus | Dec 23 2019

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Banks Survive AGM Season, Barely

The boards of Australia's major banks survived their AGMs but a wider issue of proxy voting rights is playing out in the ESG sphere.

-No board spills as directors fall on their swords
-Boards play it safe with remuneration proposals
-Westpac still vulnerable, others out of the woods for 2020.
-Opposition builds to proxy holders

By Sarah Mills

All eyes were peeled to the recent bank annual general meeting season, which was expected to be the showdown of all showdowns between institutional investors and bank boards.

The outcome was largely as expected with senior board members and management choosing to fall on their swords and issue acceptable remuneration reports rather than face a second strike; while retail investors vented their fury.

Westpac ((WBC)) was the only bank to receive a second strike on its remuneration report but still managed to avoid a board spill, with institutions staying their hand in favour of stability.

While 47.5% of shares voted were against the remuneration report, triggering a second strike after a 50.6% "no" vote last year, only 11.1% of shares supported a spill.

Boards play it safe with remuneration reports

National Australia Bank ((NAB)) managed to avoid a second strike by making considerable concessions, scrapping short term bonuses for executives, freezing executive base pay and cutting directors' fees by -20%. Directors' fees would have been perceived as a critical concession. The bank received 97% support in favour of the proposal. ANZ Banking Group ((ANZ)) was also spared.

That means Westpac's board is the only one of the banks to be vulnerable to a potential spill at the 2020 AGM. Much is likely to depend on the extent of financial damage as the fallout from the AUSTRAC scandal becomes clear.

While the wisdom of ensuring some degree of board stability is sound, and the National Australia Bank concessions made it difficult to vote down, the recent banking debacle raises the question: What will it take to trigger a board spill?

Will it be all about the remuneration reports? What about more billion-dollar losses? If remuneration strikes are dropped, it means the power of shareholders to spill the board in the event of further mismanagement over the next 12 months is zero.

Will banks and investors settle into an uneasy truce that revolves solely around remuneration reports? Or will it just take another round of fraud and incompetence for institutional shareholders to believe more drastic action is justified?

Proxy holders let banks off the hook

Institutional shareholders were willing to relinquish their power over next year's remuneration reports for all of the banks save Westpac, which at first glance appears an odd move given it is unlikely a strike against any of the remuneration reports would have triggered a board spill this year. If Westpac only garnered an 11% spill vote, it is unlikely the other banks would have done worse.

After all, Westpac's astonishing and flummoxing 23 million breaches of the money laundering provisions, which enabled child trafficking rings no less, left observers agog, and ejected NAB and ANZ from the spotlight.

But it may also reflect on the bigger ESG picture. Many corporations appear to be digging in for a battle against institutions and many are calling for regulation of proxy advisers in an attempt to gag and reduce their influence.

Corporations call for greater regulation of proxy holders

Rupert Murdoch has had public stoushes with proxy advisers and what he described as "Left" proxy holders, who have called for an end to News Corp's dual class capital structure.

Harvey Norman founder Gerry Harvey has called for regulation of proxy holders after an ill-fated bid to remove the board.

And, in August, the Republican-led US Securities Exchange (SEC) is reported to have voted along party lines to clarify that proxy advisers are subject to anti-fraud rules concerning materially false or misleading statements. Some see this as a fair ruling, others perceive it as a deliberate attempt to limit proxy holders' power.

Institutions themselves have raised concerns about proxy holders' conflicts of interest, and some have boycotted those firms they perceive to have crossed the line.

ISS and SEC lock legal horns

Institutional Shareholder Services (ISS) has since sued the SEC, claiming its right to free speech has been infringed. At the least, it will increase the company's legal costs and is likely to affect shareholder votes at company annual meetings.

The NAB remuneration report held considerable concessions and it is possible that its rejection could have exposed institutions to accusation of abuse-of-power by their detractors. Retail shareholders on the other hand, may have argued the cuts were insufficient.

The SEC actions are just the first shots across the bow of what is promising to be the first major environmental, social and governance investing (ESG) battles of our time. It is part of a new war being fought at a much higher level than the share market and annual general meetings, and much is being waged behind closed doors.

There is a push, way above the paygrade of proxy advisers, to temper corporate power and institute an order that may bring some degree of stability to a world driven to new extremes of wealth distribution and changes to the world's geology and climate. But it's a high stakes game with many powerful competing interests.

UN Sustainable Developments Goals will set the pace

One has to assume that the United Nations agenda for sustainable development is being driven by some of these power brokers and will continue to drive corporate activity for some time.

For this reason, we can expect the Sustainable Development Goals (SDG) to continue to bear pressure on the world's corporations, including Australian banks, as these will increasingly become non-negotiables.

So I thought I'd finish this article by examining Westpac's transgressions from an SDG lense. The breaches of goals and targets are as follows:

  1. SDG 5: Achieve gender equality and empower all women and girls
  2. SDG Goal 5: End all forms of discrimination against all women and girls everywhere.
  3. Eliminate all forms of violence against all women and girls in the public and private spheres, including trafficking and sexual and other types of sexual exploitation.
  4. Ensure women's full and effective participation and equal opportunities for leadership at all levels of decision making in political economic and public life.
  5. SDG 16: Peace, justice and strong institutions.
  6. SDG 16.1 Significantly reduce all forms of violence and related death rates everywhere 
  7. SDG 16.2 Target: End abuse exploitation, trafficking and all forms of violence against and torture of children
  8. SDG 16.3. Promote the rule of law at the national and international levels and ensure equal access to justice for all 
  9. SDG Target 16.4: By 2030 substantially reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime.
  10.  SDG Target 16.5: Substantially reduce corruption and bribery in all their forms.
  11.  SDG Target 16.6: Develop effective, accountable and transparent institutions at all levels.

Clearly ensuring women's full and effective participation within the bank and other governance issues are shared equally by most of the world's corporations and are not directly related to the AUSTRAC scandal, but Westpac and Australia's other corporations are still in breach of this SDG on this count.

Some would argue that a greater participation of women in management may have averted the Westpac scandal. Coincidentally, it was a woman, Amanda Wood, who reported the AUSTRAC failings and was later demoted, triggering her departure. The Australian Prudential Regulation Authority is investigating.

Meanwhile, the Australian Council of Superannuation Investors has already called for further board renewal at Westpac, so it is likely that, given this year's remuneration trigger, the markets can expect some action at the 2020 annual general meeting. ANZ, NAB and CBA basically have two years' grace before the boards need break a sweat.

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