2014 Proxy Season Preview: Australia and New Zealand
Although the focus in Australia will remain on remuneration, there will be particular emphasis in 2014 on mandatory shareholding requirements, the disclosure of strategy and material business risks and their link to remuneration, diversity reporting, and directors with overboarding concerns.
Moreover, select key changes were implemented to the ISS proxy voting policy document in advance of the 2014 season for Australian annual shareholder meetings.
ISS previously attached a 20-year threshold on director tenure, whereby any director who had served as many years on one board was classified by ISS to be non-independent. This approach was arguably quite relaxed and overdue for a refresh.
The ASX Corporate Governance Council reviewed its stance on director tenure in the lead up to the release of the Third Edition. The new guidelines recognize the value in having a diverse board in respect of board tenure.
ISS revised its policy for Australia whereby: “A non-executive director who has served 12 or more years may be classified as non-independent.”
Clients should recognize that ISS will not recommend against the (re)election of any director solely on the basis of being classified as non-independent. As it relates to such resolutions, consideration is made for the composition of the board and the board’s reporting sub-committees, in addition to any wider corporate governance concerns.
In regards to the adjournment of shareholder meetings, ISS now incorporates the following into the Australian policy document: “ISS will consider proposals to provide the board with the authority to adjourn an annual or special meeting as a change to the company constitution on a case by case basis, considering the board’s rationale for proposing the amendment, as well as past practices in acting in the best interests of shareholders.”
“ISS will consider evidence of the misuse of the authority to adjourn an annual or special meeting as a factor in recommending against the re-election of the chairperson, and if the chairperson is not up for re-election, any non-executive directors up for re-election that were present at the relevant meeting.”
Recent examples of meeting adjournments include Westfield Retail Trust and David Jones. ISS recognizes that there are legitimate purposes to adjourn a meeting, for example during competitive takeover bids, and therefore such resolutions will be evaluated on a case-by-case basis.
Focus Areas for 2014 Australian Proxy Season
As in previous years, the primary focus for ISS when it comes to evaluating Australian companies for the upcoming 2014 proxy season will be remuneration. The following areas of focus in regards to company pay practices will therefore be maintained:
- The balance of fixed and variable remuneration, with emphasis toward at risk incentive structures. Albeit with acceptable variations, the general rule of thumb for the Australian market is to have senior executive packages set out as follows: one-third fixed pay, one-third annual bonus, and one-third long-term incentives.
- The quantum of pay packages, juxtaposed against sector or market capitalisation peer group comparables as appropriate.
- Year-on-year changes to senior executive base pay and non-executive director fees, whereby above-inflation increases will be spotlighted.
- The provision of ex-gratia non-performance based payments to incoming or existing executives, which will continue to be scrutinized.
- Appropriate disclosure around annual bonus payments to senior executives, with the following expectations:
o Detailed descriptions of the performance metrics applied, with some discussion around the rationale for why the specific performance conditions are relevant, including any links to the current company strategy;
o The respective contributions of the individual performance requirements being proportionately weighted for shareholders to analyze;
o The quantification of absolute performance targets, and, to the degree that such information is regarded to be commercial-in-confidence, a commitment on behalf of the company to retrospectively disclose such hurdles once they are no longer considered to be commercially sensitive;
o Sufficient explanation around the degree to which individual performance metrics have or have not been satisfied, broken out for the CEO/MD as well as the reported key management personnel; and
o Proper disclosure and rationale underpinning any discretion exercised by the board over bonus payments outside the stated framework of the short-term incentive scheme.
- The rigor of LTI incentive scheme hurdles, whereby consideration will be made for market expectations for company growth over the proposed performance period as reflected in sell-side consensus forecast estimates.
- Any presence of performance based pay to non-executive directors, which continues to be inappropriate based upon Australian governance standards.
New Zealand: Continued Equity Market Resilience
The NZX50 has exhibited continued index value growth into the 2014 calendar year, posting a 7.5 percent increase during the first half of the 2014 fiscal year (2013: +16.5 percent; 2012: +23.7 percent). The continued strength in New Zealand equity market investment is best characterized by:
- New investors entering the market, driven primarily by steps taken by the New Zealand government around its mixed ownership programme, offering New Zealanders minority shareholdings in previously state-owned companies;
- Upward trending business confidence in the presence of a record low interest rates. As interest rates are tipped to rise from the second half of 2014 and beyond, New Zealand consumers appear more focused on increasing employment prospects and a robust underlying economy, exhibited by a strengthening New Zealand dollar;
- A material increase in initial public offerings (IPO) activity, whereby 2013 exhibited the highest level of capital raised through IPOs in 20 years (with over NZ$4 billion invested in IPOs, including NZ$3 billion resulting from New Zealand government asset sales); and
- Increasing deal activity, whereby total deals in New Zealand during 2013 increased by 23 percent over 2012 to a total of 147 deals. This is primarily driven by domestic market investment (approximately half of all New Zealand deals in 2013), Australian-based investment into New Zealand (up 20 percent in 2013 and representing 35 percent of total inbound transactions), and growing interest from Chinese investors in the New Zealand agricultural sector.
As the 2014 New Zealand proxy season approaches, ISS highlights the following focus areas:
- Timely Lodgement of the Notice of Meeting. As witnessed during the 2013 New Zealand proxy season, many companies continue to lodge their Notice of Meeting at the minimum deadline, 14 days from the annual general meeting date. Companies that choose to do this in 2014 will find that their ability to engage with proxy advisers around contentious shareholder concerns will be limited.
- Classification of Directors. There will be increased scrutiny toward a company’s classification of its directors as it relates to independence, particularly in respect of the disclosure (nature and quantum) of related-party transactions involving company directors. Some NZX constituents fail to provide in their proxy meeting documents the company’s view of independence when it comes to director elections on the ballot. In such instances, ISS will simply proceed with its own classification and provide its recommendations to clients accordingly.
- Non-Executive Director (NED) Fee Cap Increases. Preference will be held toward smaller and regular increases to the NED fee cap, whereby sufficiently compelling rationale for material increases will be required. Regard will be carried toward the size and complexity of the company, fees provided at similar sized companies (when evaluating the core constituents of the NZX50), the jurisdiction for which the company must compete for talent, and any acute requirement to appoint any additional director(s) to the board for the purposes of succession planning or for additional skills to be represented at the board level.
- Excessive Non-Audit Fees. Continued emphasis will be placed on the level of non-audit fees (versus audit fees) reported by New Zealand companies as it relates to shareholders’ authorization to fix the auditor’s remuneration. Those entities for which a trend of excessive non-audit fees is identified will be spotlighted and could potentially face an adverse recommendation.
Different from last proxy season and based upon client feedback, ISS will carry more flexibility toward recommendations around the election of non-independent non-executive directors on non-majority independent boards, with regard for company performance, shareholder wealth outcomes, and the continuity of leadership and integral knowledge, on a case-by-case basis.–Michael Chandler and Chanaka Gunasekera, Australian Research
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