post agm season report feb 2016

Corporate Governance

Trends

February 2016

GPS Governance

2015 AGM Season Report

Introduction

2 Post-AGM Season Governance Report: February 2016

In the July 2015 Corporate Governance

Trends report, GPS flagged that one

of the new governance developments

to monitor during the 2015 shareholder

voting season would be the response

to the ASX Corporate Governance

Council’s Recommendation 2.2 from

proxy advisors and institutional

shareholders. Recommendation 2.2

states that a listed entity should have

and disclose a BSM setting out the mix

of skills and diversity that the Board

currently has or is looking to achieve

in its membership.

A story in the Australian Financial

Review on 18 January 2016 headlined

“Diversity tops directors’ 2016 to-do list”

stated that when a group of directors

were asked about their top priorities for

2016, “diversity was a recurring theme.

Not just gender diversity, but diversity

in the broadest sense”. The market and

governance stakeholders will therefore

be scrutinising BSM reporting, amongst

other data, to gain insights into how

companies are managing the Board

diversity challenge.

Introduction of the recommended Board Skills Matrix (BSM) disclosure for ASX-listed companies

Continued dissent around select remuneration policies; 14 companies within the S&P/ASX 300 index are hit by a remuneration strike

Rise of climate change activism via shareholder resolutions at AGMs

Highlights of the 2015 Annual General Meeting

(AGM) season:

Open Season on the

Board Skills Matrix

Background

GPS Governance


In our preview of this new BSM

reporting recommendation,

GPS stated that it presents an

opportunity to:

Evaluate how the composition of the Board supports a Company’s disclosed strategy;

Identify perceived gaps in the collective representation of Board skills and experience; and

Facilitate the Board’s succession planning process through the identification of complimentary director candidates.

Directors should note that

corporate governance

stakeholders, particularly proxy

advisers who provide voting

recommendations to domestic

and international institutional

investors, have amended their

proxy voting policies in response

to the introduction of the BSM. The

two leading global proxy advisers,

Glass Lewis and Institutional

Shareholder Services (ISS),

updated their Australian policies in

advance of the 2015 AGM season

as follows:

“If a board has not addressed major issues of board composi-tion, including the composition and mix of skills and experience of the independent element of the board, [CGI]will consider recommending voting against the chair of the nomination committee, or equivalent. CGI Glass Lewis will evaluate the skills and experience across individual directors based upon publicly available information and will identify any apparent gaps.”

“Under certain circumstances, ISS may consider the Board Skills Matrix disclosure in its voting recommendations on the election of directors, as warranted.”

Historically, apart from director

bios Australian shareholders

and their advisers have had little

publicly available information

when independently assessing

the suitability of non-executive

director nominees for election.

Corporate governance

stakeholders believe that there

is an absence of disclosure or

recognition for the aggregate

composition of Board skills and

experience and whether it is

effectively structured to oversee

a Company’s communicated

strategy to support future

shareholder wealth creation.

GPS Governance


And it looks as thought there’s some way to go yet. Based on insights into how

governance stakeholders assess corporate governance disclosures, GPS has

conducted a preliminary review of BSM disclosures for 161 separate ASX200

constituents that have held AGM’s between 22nd September 2015 and 18th

December 2015. This included a qualitative assessment of BSM disclosures across

four separate categories.

Qualitative Assessment Parameters of 2015 AGM BSM Disclosures (S&P/ASX 200)

Rating Description

Good

Basic

Enhanced disclosure, quantified or director specific; and an accompanying narrative; and links to strategy or discloses identified Board skills gaps.

Generally includes a simple table disclosure with brief or no narrative; and skills represented are quantified (or assessment of strength is indicated qualitatively and categorically; e.g. - strong, very strong, adequate...).

Poor

Very brief wording, no matrix, not quantified, not director specific, no skills gaps identified. Generally includes a broad list of non-attributed skillsets the Board states that it requires to effectively oversee the business.

Not disclosed Complete absence of BSM disclosure and recognition of ASX Recommendation 2.2.

Source: GPS analysis

Just as the introduction of the “Two Strikes” rule in 2011 focused the minds of

companies to better articulate and explain the alignment between remuneration

structure and performance, so it is expected that the recommended BSM

disclosure will lead to improved reporting for the benefit of shareholders and the

Company. Over time, it can be expected that companies who are perceived as

poor BSM disclosers will come under the governance spotlight and could attract

a higher amount of dissenting votes when it comes to director election resolutions.

GPS Governance


BSM Disclosure Rankings – 2015 AGM Season (S&P/ASX 200)

4

46

79

32

0

10

20

30

40

50

60

70

80

90

Good Basic Poor Not Disclosed

Num

ber o

f Com

pani

es

Source: GPS analysis

Key Takeaways

In context of this analysis, Boards should be aware that the identification of

inadequate skills or competencies in one specific area is not indicative of a

dysfunctional Board. Those Boards that are apprehensive about disclosing

skills gaps need to be cognisant that such disclosure can be effectively

counterbalanced with a robust narrative explaining why the mix of non-executive

director skills and experience supports the current requirements of the business.

Shareholders can also appreciate that the skills and experience of the Board is

required to evolve in recognition of changes to a Company’s operating

environment, investments and/or strategy, which results in the requirement to

add or strengthen specific skillset representations on the Board over time.

At this early stage in the evolution of the BSM disclosure, it is reasonable to expect

that many Australian Boards are looking to their peers to assess the level of detail

that is being disclosed around the aggregate mix of Board skills and experience.

As depicted in the chart above, 2.5% of companies that held an AGM during the

2015 voting season provided enhanced disclosure. These companies were namely:

BHP Billiton, Suncorp Group, South32 and Liquified Natural Gas. This stands in sharp

contrast to approximately two-thirds of ASX companies that held an AGM in the

second half of 2015 that did not disclose a BSM or provided relatively poor

disclosure.

GPS Governance


As 2015 marked the fourth full year that the ‘two strikes’ say on pay legislation

has been in effect for ASX companies, there was expected to be relatively minimal

controversy around executive remuneration heading into the 2015 AGM season.

The majority of S&P/ASX 300 companies (excluding new entrants or listings) have

had sufficient time to digest the expectations of governance stakeholders,

shareholders and their advisers on what is considered to be appropriate

remuneration policies, disclosures and pay outcomes for senior executives.

Based upon GPS analysis, the following observations are made in regards to voting

results on remuneration-related resolutions during the 2015 AGM season for S&P/

ASX 300 constituents:

Companies Continue to Strike Out

Of the 221 remuneration reports that were voted upon, 14 of these companies (6.3%) received a remuneration strike.

Of the 14 companies that received a strike, the highest level of dissent recorded ‘against’ a remuneration report was 62.4% of votes cast, whilst the median rate of dissent for S&P/ASX 300 companies that incurred a strike was 34.3%.

Of the 207 companies that did not incur a strike, the median level of dissent recorded ‘against’ a remuneration report was 2.5% of votes cast.

Of the 202 Executive Director long term incentive (equity) grant resolutions put forward for shareholder approval, all were passed on a majority vote.

The highest level of dissent ‘against’ an Executive Director LTI grant resolution was 48.7%, whilst the median vote ‘against’ for all 202 resolutions was 2.7% of votes cast.

Of the 36 resolutions put forward to shareholders requesting an increase to the Non-Executive Director fee cap, all were passed on a majority vote.

The highest level of dissent ‘against’ a requested increase to the Non-Executive Director fee cap was 29.6%, whilst the median vote ‘against’ for all 36 resolutions was 1.9% of votes cast.

GPS Governance


One aspect to executive remuneration that received substantial shareholder focus

during 2015 AGM season is the treatment of exclusions from cash earnings, such

as write downs and impairments, when determining short term incentive and long

term incentive payment/vesting outcomes to senior executives.

One proxy adviser has taken a strict approach towards such accounting

treatments:

They recommended that shareholders vote against the remuneration

report for one major Australian bank, citing a change in accounting

policy towards capitalised information technology (IT) software that

was subsequently written off and as a result, was perceived to have

triggered the payment of variable incentives to executives under the

remuneration policy’s primary earnings measure. In this instance, it

was argued that there was a misalignment between executive pay

outcomes and true financial performance. The bank countered by

stating that the change in accounting policy was necessitated by the

requirement to reduce the value of the software more quickly due to

rapid changes in technology. As such, the write off had not resulted

from poor management decisions. Ultimately, shareholders lodged a

16.5% vote ‘against’ the bank’s 2015 remuneration report, which was

up from 2.8% ‘against’ the previous year and matched the highest ‘no

vote’ for a major Australian bank on its remuneration report since the

2012 AGM season.

GPS Governance


They recommended ‘against’ the proposed re-election of an

executive director of an ASX100 Company that had been present

when the business completed an asset acquisition that subsequently

incurred substantial impairments and associated restructuring

expenses during the 2015 financial year period. The recommendation

was made to signal the accountability of the executive director for

past investments.

Consequently, ASX companies must continue to evolve their governance

engagement program with institutional shareholders and their advisers to stay

abreast of shareholder voting sensitivities (particularly remuneration-related

concerns), the rationale for continued amendments to proxy voting policies and

emerging thematics across the Australian corporate governance space. GPS

continues to assist Australian companies with developing their stakeholder

governance engagement program, in addition to the determination and

finalisation of governance structures and disclosures across Board membership,

remuneration practices and environmental and social risk exposures.

There were three companies that had a shareholder resolution on ballot at

their 2015 AGM that was put forward by the Australian Centre for Corporate

Responsibility (ACCR). These resolutions requested an amendment to the

Company constitution in regards to the reporting and management of climate

change risk exposures. The content of these resolutions are detailed as follows:

Shareholder Activism – Climate Change

Company Shareholder Support

Content of the Shareholder Resolution

AGL Energy Special Resolution to Amend the Constitution

That, at the end of Clause 31 ‘Notice’ the following new sub-clause 31.5 is inserted:

5.2% of votes cast on this resolution were cast in favour

Powers/Disclosures Requested

Disclosure of business model diversification; emissions reporting and benchmarking.

ANZ Special Resolution to Amend the Constitution

To amend the constitution to insert at the end of Clause 5 ‘Powers of the Board’ the following new sub-clause 5.4: “The Company in general meeting may by ordinary resolution express an opinion or request information about the way in which a power of the Company partially or exclusively vested in the directors has been or should be exercised. However, such a resolution must relate to an issue of material relevance to the Company or the Company’s business and cannot either advocate action which would violate any law or relate to any personal claim or grievance. Such a resolution is advisory only and does not bind the directors or the Company.”


The power for 100 shareholders or shareholders owning >5% of issued capital to file non-binding resolutions; disclo-sure of business exposure to carbon emitting invest-ments; setting and disclosing targets for reducing the bank’s climate change ex-posures.

GPS Governance


“That, (a) the Board must prepare a business model that demonstrates sufficient diversification of the power generation and supply activities of the Company to ensure continued profitability under pathways that limit the world to 2C warming; and (b) include in future annual reporting to shareholders, at reason-able cost and omitting any proprietary information, information about ongoing power generation and supply chain emissions management benchmarked against that model.”

Ordinary Resolution

“That in order to address our interest in the longer term success of the Company, given the recognised risks and opportunities associated with climate change, we as shareholders of the Company: (a) requesting that the Board of Directors report to shareholders by end-August 2016, at reasonable cost and omitting proprietary information, their assessment of our exposure to climate change risk and carbon intensive business in our lending, investing and financing activities (utilising whatever metrics the Board finds most appropriate) and (b) express our view that it is in the best interests of our Company that, by end-August 2016 our Board set public targets and a timetable for reductions in the extent of that exposure.”


GPS Governance


Origin Energy

Special Resolution to Amend the Constitution

“That, at the end of Clause 8.3 ‘Notice of general meetings’ the following new sub-clause 8.3(e) is inserted: “Each year from 2016, at reasonable cost and omitting any proprietary information, routine annual reporting will include further information about ongoing power generation and supply chain emissions management, generation portfolio resilience to the


Carbon emissions reporting; setting of carbon targets linked to senior executive variable remuneration opportunities, disclosure of corporate climate change policy.

GPS Governance


International Energy Agency’s (IEA’s) scenarios; relevant strategic key performance indicators (KPI’s) and executive incentives; and our public policy positions relating to climate change.”

Source: Company Announcements. Note: Special Resolutions require >75% of votes cast on the resolution to be in favour for it to pass. Ordinary Resolutions require >50% of votes cast on the resolution to be in favour.

None of the resolutions detailed above were endorsed by the respective

Company Board.

GPS carries the view that constitutional amendments are not the most appropriate

method for shareholders to voice their concern around a Company’s long term

climate change exposures. Although it is well within shareholders’ rights to express

their dissatisfaction with the operation of a listed Company, it is considered

inappropriate for Australian shareholders to be afforded the capability to direct

the conduct of the Board, which is supported by Australian case law.

This precedent was set in the case of National Roads & Motorists’ Association v

Parker (1986), whereby the Court ruled that it is not a function of the shareholders

of a Company in a general meeting to express an opinion by resolution as to how

a power vested in the Board should be exercised by the Board. Further, this

judgment was relied upon in the Federal Court case of ACCR v Commonwealth

Bank of Australia (CBA)(2015), whereby the ACCR launched a legal challenge

against CBA in the wake of its decision not to put the following resolution to

shareholders at its 2014 AGM:

Special Resolution to amend the constitution: At the end of Clause 9

‘General Meetings’ insert the following new sub-clause: “That, each year

at about the time of the release of the Annual Report, at reasonable

cost and omitting any proprietary information, the Directors report to

shareholders their assessment of the quantum of greenhouse gas

emissions we are responsible for financing calculated, for example, in

accordance with Greenhouse Gas (GHG) Protocol guidance.”

GPS Governance


The Court found that CBA was not

obliged to put the aforementioned

resolution to shareholders. The ACCR

has launched an appeal on this

decision that will be heard on 12

February 2016, with a decision

expected in April/May 2016.

In context of the proposed

amendment to ANZ’s constitution

regarding the ‘powers of the board’,

the potential for shareholders to put

forward alternative views around

how the power to manage the

business should be exercised is

regarded to be potentially

disruptive and may impede the

ability of the directors to oversee

and manage the business in the

interests of all shareholders.

Additionally, there is substantial

concern around the shared

accountability that would ensue

for decisions that are made at the

request of shareholders and which

result in poor business administration

or governance.

Directors, as fiduciary agents, are

required to not only exercise their

powers in accordance with the

Australian Corporations Act, but also

bona fide for the Company as a

whole. Furthermore, Australian

shareholders have substantial

capability to engage with Company

directors, and if not satisfied, can

refuse to re-elect directors or

vote to remove them from office.

Moreover, some dissatisfied

shareholders may choose to lodge

a protest vote on the annual

resolution to approve a Company’s

remuneration report, that is subject

to the “Two Strikes” legislation and

can eventuate in a spill meeting and

the complete refresh of Board

membership.

Although the method by which

these shareholders have advocated

for the disclosure and management

of carbon emissions is not

procedurally ideal, at a minimum

these voting resolutions have

focused the directors of these

respective companies on

enhancing their climate change

initiatives: Origin Energy and AGL

have announced that they are

committing to the ‘We Mean

Business’ climate change related

initiatives; AGL has made a long

term commitment to ‘no coal by

2050’; whilst ANZ has provided

additional disclosure in its 2015

reporting documents on the bank’s

carbon emissions from project

finance lending to the power

generation sector, which will assist

investors with tracking ANZ’s progress

in reducing the carbon emissions

intensity of its portfolio.

GPS Governance


We observe that sustainability

minded associations and

investors are more willing to agitate

for improved ESG disclosure and

practices. Furthermore, we expect

increased scrutiny around ESG risk

exposures for Australian companies,

resulting in escalating pressure being

placed upon ASX Boards to

effectively illustrate how these

risks are being managed.

What does this mean for you?

Governance conscious stakeholders

carefully scrutinise and interpret your

corporate governance disclosures.

They are looking for companies to

cohesively ‘tell a story’ rather than

‘tick the box’. Generally speaking,

the greatest risk a company can

assume in corporate governance

is regarding it solely as a response

to regulatory requirements or

recommendations, and not

perceiving such practice as forming

an integral part of a company’s duty

to protect the interests of its owners,

the shareholders. This ‘tick the box’

approach can lead companies into

paying lip service to governance

stakeholders and overlooking the

practical implications of proper

governance frameworks.

The implications of poor corporate

governance disclosures or practice,

or even the perception of a gap,

may result in cash flow or liquidity

risk, business interruption, or

reputational damage (to name a

few), all of which carry negative

implications over shareholder wealth

outcomes. A Company should

therefore:

Adopt robust board practices that will withstand scrutiny

Promote functional and effective internal reporting and control structures

Provide thorough and transparent disclosure on a continual basis

How GPS Can Assist Boards

GPS is the only Australia-based,

independent corporate governance

advisory group that has in-house

staff who have worked at the world’s

leading proxy adviser firms. On this

basis, GPS is uniquely positioned to

provide insights into the perspectives

of governance-conscious

institutional investors and their

advisers, including how proxy voting

recommendations are formed and

followed.

Having worked with boards of Australia’s largest listed companies, and with the

support of continued engagement with many of Australia’s largest institutional

investors, GPS remains at the forefront of stakeholder perspectives in relation to

current and developing areas of corporate governance best practice.

Our governance offering is customised to the needs of each company and includes a variety of specialist services, such as:

Boards Skills Matrix

Executive and Director

Remuneration

Full Corporate Governance

ReviewTakeovers

and Mergers Activism

Board Skills, Remuneration,

Disclosures and

Reporting

$

Gaps analysis on

remuneration disclosures

and practices, full end-to-end

authoring of the

remuneration report

Governance review of pre-

publication documents,

detailed feedback and

reporting of potential disclosure

gaps, development

of proxy adviser

materials and assistance

with engagement

with governance stakeholders

Strategic corporate

governance consultation

to help a company

respond to a shareholder

meeting requisition,

or to provide support to a requisitioning shareholder’s

campaign

Development and imple-

mentation of a board skills

disclosure that is appropri-

ately linked to a company’s

strategic direction, discretely manages

potential skills gaps, supports

the board renewal

process and is effective in withstanding

public scrutiny

GPS Governance


Copyright notice:

Complete or partial use subject to

copyright and prior permission from

Global Proxy Solicitation Pty Limited.

For more information, or to discuss

your Corporate Governance needs,

please contact:

Michael Chandler

P: 02 8022 7946

E: [email protected]

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