Randstad make data-based decisions going into the AGM season

“At Randstad we are looking at the remuneration policy on a continual basis and it’s an important topic. Prior to the AGM we want to fully understand how all our stakeholders look at our remuneration policy. “

Randstad N.V. is a leading global HR services company. The company, which is headquartered in Diemen, Netherlands, provides work for more than 670,000 people
around the world each day.

With anything less than 80% of approval from shareholders on remuneration policies now deemed as negative by stakeholders (compared to 50% five years ago), and justification requirements increasing (inpart due to implementation of the Shareholders’ Right Directive II in Europe), companies’ remuneration policies are coming
under greater scrutiny.

Going into the next proxy season, Randstad wants to know which KPIs are being used by other companies to form their own opinion and they also want to compare executive remuneration against peers’ and understand how they will be perceived by proxy advisors like ISS and Glass Lewis.

Read the full story here and find out why Ranstad now goes into their AGMS with greater confidence and how they are able to make data-based decisions rather than assumptions.

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Thiam Tidjane exits Credit Suisse

On February 7, 2020, Credit Suisse Group AG announced that CEO Tidjane Thiam has resigned. The announcement came amid allegations that Credit Suisse spied on former board members, a scandal that led to the departure of Pierre-Olivier Bouée, its Chief Operating Officer in October 2019.

On February 7, 2020, Credit Suisse Group AG announced that CEO Tidjane Thiam has resigned, effective Feb. 14, 2020. The company appointed Thomas Gottstein, Head of Unit Credit Suisse (Schweiz) AG, as his successor and their current Head of Institutional Relations, Andre Helfelstein as Gottstein’s replacement.

The announcement came amid allegations that Credit Suisse spied on former board members, a scandal that led to the departure of Pierre-Olivier Bouée, its Chief Operating Officer in October 2019.

Background and timeline

In March 2015, Credit Suisse recruited Cote d’Ivoire native Tidjane Thiam from Prudential plc. He replaced Brady Dougan as the company’s Chief Executive. The market responded favorably to the news and the company’s share price increased significantly.

From the strategy Thiam had, it was evident that he wanted to refocus the bank on wealth management. In October 2015, Thiam promoted Iqbal Khan to the management board in charge of International Wealth Management. Khan had a steady rise in the company giving him the reputation as the “crown prince” to succeed Thiam in the near future.

The company nevertheless had a share price slide in November 2017 which led the CEO to take charge and begin a restructuring initiative. Following this initiative, the company’s share price rose again, approaching an almost two-year high.

 

The relationship decline

However, in January 2019, Thiam and Khan, who had become residential neighbors, got into an altercation at a party held in Thiam’s home. Though this was not public knowledge, the altercation led to Khan complaining to the company’s board which led to a fall out between the two men.

In February that same year, Khan was passed over in a restructuring/reorganization in the company that saw two of his colleagues promoted.  In a very interesting move, Khan resigned from Credit Suisse to join rival UBS in July 2019, with a start date in October 1, 2019. Two months later, Zurich prosecutors launched criminal investigation after Khan complained that he was being threatened by unidentified people.

Speculations were that Credit Suisse had decided to keep tabs on Khan after he agreed to join UBS, hoping to prevent him from poaching private bankers. Within days, Credit Suisse’s board began their own inquiry into the surveillance. Thiam and Urs Rohner, Chairman of the Board, vowed that the “truth will emerge.”

Outspoken U.S. investor David Herro, one of Credit Suisse’s biggest shareholders, says it would be “damaging” to expel any senior manager over the potential shadowing of Khan. Former Credit Suisse and UBS chief Oswald Gruebel took the opposite stance, stating that Thiam should be fired if the reports were confirmed.

By the end of the month the scandal claimed that another victim, a contractor for Credit Suisse, had committed suicide.

 

Credit Suisse ousts Chief Operating Officer and right-hand man of Thiam

In October 2019, right about the time the police were investigating the death of the contractor, Credit Suisse absolved Thiam and ousted Chief Operating Officer Pierre-Olivier Bouée, who had been his chief lieutenant at three companies for more than a decade. The bank in its statement said that Bouée had acted alone in ordering the surveillance of Khan and had informed neither Thiam nor the board of his intentions. Rohner apologized to Khan and his family and reaffirmed that Thiam had the board’s backing.

The bank that month announced mixed third-quarter earnings. The lender’s financial statements and presentations were overshadowed by questions about the scandal. In his first public comments on TV, CEO, Thiam reiterated that he didn’t order the undercover work and called it “inappropriate” and “disproportionate.” Interestingly, of his longtime colleague Bouée he added, “I’m not sure you can describe him as a friend… He is somebody I respect. I value him as a professional.”

 

Second spying accusation emerges in December 2019

In December 2019, another spying attempt was revealed. This time, the company’s former Chief Human Resources Officer Peter Goerke, was the target. Again, former COO Bouée was blamed for the incident. The financial institution swiftly declared that he was fired for cause. Bouée was painted by Credit Suisse as a rogue operative who kept all executives and directors in the dark about his actions.

Chairman Rohner however began to take a different stance saying that this new case has changed the situation, as a pattern had started to emerge.

Around the same time, Credit Suisse was trying to fend off a third accusation that had arisen. This time, it was related to a U.S. employee who had left the corporation years earlier. In a case dating from 2017, Colleen Graham, a former senior compliance executive in the U.S., alleged in a court filing that the bank had her followed.

Credit Suisse said it had investigated Graham’s claims “and found them to be entirely baseless,” and said the U.S. Department of Labor also dismissed her claims. However, it came to light that the company’s lawyer, it turns out, still met with Graham as recently as the first week in February 2020 to discuss her claims.

 

Regulators step in

In January 2020, Swiss regulators begun looking into the matter. The regulators hired an independent auditor. The investigations revealed that in 2018, Thiam asked Khan to collect “dirty material” on Claudio De Sanctis, a top private banker who left for Deutsche Bank that same year. Thiam took to social media site Instagram to reject the findings calling it “entirely false and defamatory”.

On February 10, 2020, it emerged that Switzerland’s markets regulator will continue its investigation into corporate governance issues despite the resignation of Thiam. A spokesman for the Swiss Financial Market Supervisory Authority, or FINMA, said the regulator is continuing its probe into the bank to “clarify matters related to supervision,” according to the report.

 

Power struggle between Tidjane Thiam and Urs Rohner emerges

Though Credit Suisse’s chairman and CEO always projected a united front, signs of a possible rift and cracks were first seen around 2015.

During that year, there was a huge trading loss which prompted Thiam to publicly complain that he was caught unaware by his traders. Interestingly, the chairman Rohner took the position that Thiam should have seen it coming. The rift deepened after the spying scandal which saw the exit of then COO, which the bank struggled to contain.

Openly, the chairman was on the defensive. Confidentially, he was lining up backing from other investors, including Qatar’s sovereign wealth fund and the world’s largest asset manager, BlackRock, Inc. Rohner was also counting on the board’s support in his defensive posturing. It was also reported that he was lining up a team of possible successors to Thiam.

However, reports have suggested that the ousting of Thiam was not unanimously supported by all.

Specifically, David Herro (Harris Associates’ deputy chairman), Silchester International Investors (which owns around 8.42% of Credit Suisse) and Eminence Capital warned the board of directors that if there was a choice to be made, Rohner should be the one to go. The power struggle at the time appear to be tilting in favor of the CEO. But as mentioned before, the Chair was rallying support from other shareholders.

 

New CEO steps into a likely difficult situation

From the look of the situation, incoming CEO, Gosstein is most likely stepping into quite a difficult situation currently at the bank. On Friday February 7, 2020, the company’s share price dropped by around 5% when the changes were announced suggesting that investors were not happy with the directional change.

Reports suggest that he will need to both heal internal wounds at the bank following the high-profile power struggle and figure out how to reverse its more than 50% share price decline over the past five years.

Again, there is another school of thought that believes that the investors which were loyal to Thiam are not likely to disappear into the background. David Herro, Harris Associates, is quoted to have told Bloomberg TV on February 7, 2020 that while he believes Gottstein is “talented,” the bank still has “a chairman who is less capable and talented and a board who seems to just mimic, just follows blindly whatever

Utilizing CGLytics’ risk rating tool, we find that Credit Suisse’s Board effectiveness is scored 73 points, earning the financial company a rank on the 42nd percentile in the Switzerland’s largest cap index(SMI) which may not be considered a good ranking.

Understanding the board’s skills and expertise

Using CGLytics’ board expertise and skills matrix online application, we are able to gain insights into Credit Suisse current expertise and possibly what the new matrix will look like when the changes are effected.

Utilizing the process as outlined above, we find that the while board chairman Urs Rohner has Executive, Leadership, Non-Executive, Industry, International and Governance expertise, he lacks Financial and Technology expertise which is quite critical to his role and for a scandal of this nature.

Per CGLytics’ methodology, outgoing CEO Thiam also lacks Technology expertise which means for all the other remaining expertise in our classification are owing to his executive roles at Aviva and Prudential as well as his Non-Executive experience from his role at Fox Corporation, which also ended in May 2019.

Incoming CEO Thomas Gottstein, from CGLytics’ expertise classification, does not yet have any Non-Executive, Governance, International and Technology expertise.

Current Board Expertise and Skills of Credit Suisse

creditsuiessboardexpertise
Source: CGLytics Data and Analytics

Data from CGLytics suggests that expertise of the current board of Credit Suisse are concentrated in Leadership, International, Industry/Sector and Executive. A significant number of their directors also seems to have Non-Executive expertise. Interestingly, Governance and Technology does not seem to be the area of greatest emphasis.

Board expertise and skills of Credit Suisse after February 14

While performing a scenario analysis, we see that from February 14, 2020, when the anticipated change takes effect, the board’s strongest skills stills remain concentrated in Leadership, International, Industry/Sector and Executive expertise.

creditsuiessboardexpertise2

From CGLytics’ data, it reveals that since Thiam took over in 2015, the company’s revenue and share price fell steadily from 2015 to 2017. However, both indicators improved in 2018 and is expected to rise again when the closing books of 2019 are announced.

Specifically, from 2014 to 2018, revenue has dropped by 21% and share price has more than halved in the same period.  Revenue is however expected to rise by 3% and the 2019 closing share price also depicts a rise of 21% within the same period.

Credit Suisse revenue vs share price development

shareprice
Source: CGLytics Data and Analytics

Final pay day for Thiam

According to Swiss media reports, following his departure from Credit Suisse, Thiam may walk off with an amount of CHF 20M to CHF 30M. Based on the CEO’s granted pay of CHF 12.65M in 2018, as well as the deferred payments currently totaling about CHF 11.8M, CGLytics’ data indicates that Thiam stands to walk away from his position as CEO with approximately CHF 24M.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

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About the Author

Edna Twumwaa Frimpong: Lead EU Research Analyst

Edna holds a degree in LLM Finance and Law Programme from the Duisenberg School of Finance. In addition she completed her Bachelor’s Degree in Administration in Accra, Ghana. She gained work experience during her internships as a research analyst at Sustainalytics and as a finance and business development intern at Carnomise SAS.

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Edna Frimpong: Lead EU Research Analyst

Edna holds a degree in LLM Finance and Law Programme from the Duisenberg School of Finance. In addition she completed her Bachelor’s Degree in Administration in Accra, Ghana. She gained work experience during her internships as a research analyst at Sustainalytics and as a finance and business development intern at Carnomise SAS.

Westpac: the issues, regulators and lessons to be learnt

It has been revealed that several banks have been involved in fraudulent and criminal conduct, one of them being Westpac Banking Corporation.

Since the Royal Commission was established to inquire and report on misconduct in the banking, superannuation and financial services industry in Australia (on December 2017 )[1], it has been revealed that several banks have been involved in fraudulent and criminal conduct, one of them being Westpac Banking Corporation.

One of the more egregious acts of misconduct, according to the Royal Commission, was Westpac filling out loan forms and documents on behalf of its clients. Westpac was quick to acknowledge that it was normal practice for staff to help clients fill out documents on their behalf. However, after further investigation, there was evidence to suggest that the bank falsely witnessed documents and marked documents without client approval and acknowledgement[2].

 

The case of Ms. Flanagan

A specific case for this issue was that of an elderly pensioner, Ms. Carolyn Flanagan. Ms. Flanagan became a guarantor for a business loan taken out by her daughter. Westpac, despite having knowledge of Ms. Flanagan’s numerous medical conditions such as being legally blind, deafness, depression and a previous battle with cancer, allowed her to become a guarantor of AUD 165,000 business loan while claiming her home as collateral. Unfortunately, her daughter’s business failed two years after the loan was taken out in 2010. Westpac sought to evict the pensioner to recoup funds, but allowed Ms. Flanagan to live in her home until her passing. However, if she decided to sell the property, even for the purpose of funding her aged care and medical bills, she would have been liable to pay AUD 170,000 from the sale, plus three per cent per annum accruing.

Westpac’s general manager has admitted that the bank had incorrectly filled out Ms. Flanagan’s daughter’s loan. The marked document suggested that Ms. Flanagan sought independent legal and financial advice regarding the business loan, when in fact, she had not. Westpac admits its staff had wrongly assumed that Ms. Flanagan would be seeing a lawyer after the meeting. The bank lacked due diligence in checking for the elderly’s sources of income, placing the loan at greater risk. Furthermore, a Westpac employee admitted to signing the loan documents as a witness even before Ms. Flanagan signed the document.

 

Westpac CEO apologizes and releases statement

After the scandal was released, Westpac Group’s CEO Brian Hartzer released a public apology and a guarantee that the bank will learn from its mistakes[3]. The introduction of low rate credit cards, lower transaction fees, amendment of remuneration structures and other initiatives are some of the measures taken by Westpac to remedy its misconduct[4].

 

Shareholders show distrust via remuneration report

Unfortunately, these initiatives were not enough to win back the trust and satisfaction of Westpac shareholders. During the 2018 Annual General Meeting (AGM), 64.16 per cent of shareholders voted against the adoption of the remuneration report[5]. This resulted in a first strike for the company. According to the Corporations Act 2001, a company will be given a first strike when 25 per cent or more vote “no” on the remuneration report. The company must be able to review and reform its remuneration structures before the next AGM[6]. The following AGM determines whether a company gets a second strike. This is when 25 per cent or more shareholders vote against its remuneration report for the second time. During the next AGM, shareholders will establish whether directors need to stand for re-election. If 50 per cent or more shareholders vote to pass a “spill” resolution, a “spill” meeting will be held within 90 days[7].

Despite the 25 per cent cut of short-term cash awards to executives, shareholders still showed concern of executives receiving large amounts of bonuses following the scandals revealed by the Royal Commission. Westpac Chairman Mr. Lindsay Maxsted pointed out that such misconduct was not limited only to Westpac, and he continued to defend via the decrease in short-term awards for executives. He further urged shareholders not to focus on the issues released by the Commission as this does not reflect the overall culture of the company[8]. Westpac has allotted AUD 281 million for customer compensation and litigation costs[9][10]. After the no-confidence vote on the company’s remuneration report, Mr. Maxsted said that the bank will be reviewing the remuneration structure and taking shareholder feedback very seriously[11].

Want to know how COVID-19 is Impacting Executive Compensation?

Download our latest whitepaper to learn how you can address a range of governance, design and administration challenges that involve executive and non-employee director compensation programs.

Westpac’s Pay for Performance alignment compared to country and industry peers

CGLytics’ Pay for Performance analysis (using its Pay for Performance modeling application) shown below, has compared Westpac’s CEO total realized pay with the industry peer group’s three-year Total Shareholder Return (TSR). The CEO’s pay is in the 45th percentile compared to the three-year TSR being ranked in the 20th percentile which shows that the CEO’s pay is aligned to the TSR performance following the 25 per cent decrease in short-term cash awards.

Westpac’s CEO Pay for Performance

Source: CGLytics Data and Analytics

Westpac’s assessment of culture, governance and accountability

After the 2018 AGM, the Australian Regulation Prudential Authority (APRA) requested that Westpac undergo an assessment of its culture, governance and accountability (CGA)[12]. The bank’s CGA self-assessment report stated that the company needs improvement of understanding non-financial risks. Westpac admitted that the bank’s management of non-financial risks was “generally less mature” than its management of financial risks[13]. The bank’s recommendations are focused around five streams, namely: governance, risk and compliance, customers, remuneration and accountability and culture. The CGA report was released in the hopes of avoiding a second strike during the 2019 AGM.

Towards the end of November 2019, Austrac, an Australian Government regulator for financial crimes, discussed legal actions against Westpac following an estimated AUD 23 million legal breaches worth over AUD 11 billion[14]. Among these breaches, the most detrimental is the one regarding transactions involved in child exploitation in the Philippines.

Austrac claims that Westpac failed to meet anti-money laundering and counter terror finance (AML-CTL) laws by allowing some 3,000 transactions, all valued less than AUD 500,000, made by twelve Westpac customers. Austrac stated that Westpac should have flagged these transactions, as they were consistent with child exploitation practices[15]. Such practices include: customers remitting small amounts of money to the Philippines and Southeast Asia despite having no familial or business connections in those countries, customers remitting money to a suspected “child exploitation arranger” in the Philippines, and customers with known prior child exploitation charges remitting money to the Philippines.

Westpac was accused of not conducting due diligence despite having knowledge of the aforementioned practices. Only 18 months after the transactions had occurred did Westpac take any action.

Westpac responds to scandal with changes to their board

After the release of this new scandal, shareholders of Westpac have been aggressive in wanting to terminate CEO Brian Hartzer[16]. However, the Board of Directors have expressed that there is no evidence that Mr. Hartzer was aware of these criminal transactions. As a result, Westpac again promised to cut down bonuses of its senior executives and promised to create a financial crime committee[17]. Despite these efforts, pressure and criticism from shareholders pushed CEO Mr. Brian Hartzer, Non-Executive Director and Chair of the Board Risk Committee Mr. Ewen Crouch, and Chairman Mr. Lindsay Maxsted to step down from the board and company[18].

After the awaited 2019 AGM on December 12, 2019, results were released that 35.90 per cent of shareholders voted against the adoption of the remuneration report, earning them a strike two. However, 91.26 per cent of shareholders voted no on the conditional spill resolution[19]. All directors except Mr. Ewen Crouch, who had withdrawn his re-election, passed the re-election and election on their positions[20]. Mr. Maxsted stated that the Board will be decreasing 20 per cent in executive pay, and deduct short-term awards to zero.

 

Westpac’s board skills matrix and expertise

Looking into Westpac’s board expertise and skills, one may want to deduce if the Board had the right skills set to manage the affairs of the Board. According to CGLytics’ Board Expertise application, Westpac has a significant number of directors that have experience in advisory which is timely and relevant during this turbulent time. Westpac has claimed that the Board is competent in finance, including financial risks. However, the Board lacks expertise in risk management, specifically in non-financial risk to account for risks such as reputational damage, for the next AGMs. Another expertise that is crucial in this time is legal, where compliance and governance is much needed to enforce regulatory frameworks provided by Austrac, APRA and other regulators [21].

Westpac's board expertise and skills

westpac_board
Source: CGLytics Data and Analytics

Westpac has responded by appointing a new Chairman, Mr. John McFarlane, who has over 40 years of experience in banking and is expected by shareholders to quickly settle current issues as well as appoint a new Chief Executive Officer[22]. Another step that Westpac has taken following the scandals is to appoint Accountability Review Advisory Panel members. The following members of the panel are: Mr. Colin Carter, Dr. Kerry Schott and Dr. Zygmunt Switkwoski[23]. The panel’s objective is to give recommendations on risk governance and accountability in response to Austrac.

Are you prepared for the 2020 proxy season? The CGLytics platform provides users with a wealth of governance insights. From executive remuneration, board composition and risk indicators, CGLytics empowers Companies, Boards, Investors and Third-parties to be one step ahead.

CGLytics executive pay data is trusted worldwide by leading independent proxy advisor Glass Lewis for research analysis used in their proxy papers. Access the same data in the CGLytics application.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

Want to know how COVID-19 is Impacting Executive Compensation?

Download our latest whitepaper to learn how you can address a range of governance, design and administration challenges that involve executive and non-employee director compensation programs.

References

[1] https://www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-you-need-to-know-so-far

[2] https://www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-you-need-to-know-so-far

[3] https://www.westpac.com.au/about-westpac/media/media-releases/2018/28-september/

[4] https://www.westpac.com.au/about-westpac/media/media-releases/2018/28-january/

[5] https://thewest.com.au/business/banking/westpac-chiefs-brace-for-fiery-perth-agm-following-banking-royal-commission-revelations-ng-b881048164z

[6] https://aicd.companydirectors.com.au/resources/all-sectors/director-remuneration

[7] https://www.smh.com.au/business/companies/what-is-the-two-strikes-rule-20121008-278us.html

[8] https://www.afr.com/companies/financial-services/westpac-gets-a-first-strike-at-agm-20181212-h190vn

[9] https://www.westpac.com.au/news/making-news/2018/12/strike-sends-a-strong-message/

[10] https://www.theguardian.com/australia-news/2018/dec/12/disgruntled-westpac-shareholders-vote-down-executive-pay-over-bonuses

[11] https://www.sharecafe.com.au/2018/12/13/58152/

[12] https://www.smh.com.au/business/banking-and-finance/westpac-risks-second-strike-on-executive-pay-20190624-p520ns.html

[13]https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/media/Westpac_Self-Assessment_Report_.pdf

[14] https://www.theguardian.com/australia-news/2019/nov/21/what-is-westpac-accused-of-and-how-is-this-related-to-child-exploitation-explainer

[15] https://www.theguardian.com/australia-news/2019/nov/21/legal-breaches-allowed-westpac-customers-to-pay-for-child-sex-undetected-austrac-alleges

[16] https://www.news.com.au/finance/business/banking/calls-for-blood-over-westpac-money-laundering-and-child-exploitation-scandal/news-story/8f85b5a35cf033b08ab40d74c369f72b

[17] https://www.theguardian.com/australia-news/2019/nov/28/more-directors-may-leave-westpac-as-investigation-seeks-board-accountability

[18] https://www.abc.net.au/news/2019-12-12/westpac-chairman-agm-protest-vote/11792010

[19]https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/WBC_AGM_2019_Results.pdf

[20] https://www.abc.net.au/news/2019-12-12/westpac-chairman-agm-protest-vote/11792010

[21]https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/media/Westpac_Self-Assessment_Report_.pdf

[22] https://www.westpac.com.au/news/making-news/2020/01/sufficiently-battle-hardened-westpac-names-new-chair/

[23] https://www.westpac.com.au/about-westpac/media/media-releases/2019/20-december/

About the Author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

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Analysis of votes on remuneration items shows an increasing focus on making sure companies have sustainable value creation and a growing expectation of increased disclosure of financial and non-financial information. Shareholders have become more active over the past few years and the average CEO total realised compensation seems to show a decreasing trend and is adapting slowly to the evolution of the total shareholder return.

Belgian companies see more revolt on remuneration items

Belgium listed companies were seen to be more active compared to shareholders of Luxembourg listed companies. The data of the Selected Index of 49 companies indicates that Belgian listed companies were more affected by shareholder revolt on remuneration items than Luxembourg companies.

Shareholder Rights Directive 

Luxembourg successfully implementing SRD II, however Belgium failed to transpose the revised Shareholders Rights Directive to national law by the 10 June 2019 cutoff. Draft law implementing SRD II is being discussed in the Belgian Chamber of Representatives

The new Belgian Corporate Governance Code

The report sheds light on the new Belgian 2020 Corporate Governance Code (‘CGC’) compared to the 2009 CGC, which includes positive steps such as: 

  • • A cap being placed on short-term variable remuneration awarded to executive management; and 
  • • The principle that non-executive board members should receive part of their remuneration in the form of shares in the company.
  • • Particular attention to be paid to diversity, talent development and succession planning

 

Compensation design: Ratio of fixed versus variable remuneration

The report reveals that there is an increasing focus on long-term sustainable value creation.

The proportion of short-term incentives (STI) decreased from 2013 and continued to stagnate over the past few years. Next year’s analysis will tell whether the recent regulatory developments (the introduction of a cap on STI in the 2020 Belgian Corporate Governance Code) will impact the proportion of pay components.

 

To learn more about:

  • • The implementation of the revised Shareholder Rights Directive (SRD II) into Belgian and Luxembourg law,
  • • Evolution of votes on remuneration items,
  • • Shareholder revolt seen in 2019,
  • • Detailed insights into the CEO compensation mix (Base Salary, STIs, LTIs), and
  • • CEO Pay for Performance alignment of the Selected Index

 

Download the report here

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Wesfarmers, which owns some of Australia’s most recognizable brands, sees concerns from shareholders and proxy advisors regarding its CEO and executive pay during the last proxy season

Wesfarmers, one of the biggest conglomerates in Australia, saw concern from its shareholders with a negative response during the recent 2019 Annual General Meeting (AGM) that was held last November 14, 2019.

Although all resolutions were passed, there was a large number of shareholders that voted against the adoption of the remuneration report, resulting in a 21.45 percent disapproval. One of the biggest causes of the pessimistic response from shareholders was due to proxy advisor ISS advising investors to go against the remuneration report because of an “excessive” compensation plan.

Although Wesfarmers’ demerger from Coles supermarket resulted in a 360 percent increase in after-tax profit to AUD 5.5 billion, the company will neither give incentive nor penalize its executives [1].

Shareholders were concerned over the pay for both Chief Executive Officer (CEO) Robert Scott and Independent Chairman Michael Chaney [2]. Mr. Scott has received over AUD 4 million in total realized pay and Mr. Chaney has received AUD 780,000 in total compensation, which ISS claims is higher than its industry peers.

CGLytics Pay for Performance Analysis

According to our CGLytics analysis, Wesfarmers has a higher CEO total realized pay over three years than its three-year increase in total shareholder return (TSR), when compared against its country and industry peers.

This misalignment of the CEO pay compared to company performance may have been the cause of the company almost undergoing a first-strike. A first-strike occurs when 25 percent of shareholders vote against the adoption of the remuneration report and the company would need to either amend or justify its remuneration policies before the next AGM [3].

Wesfarmers Limited's CEO Pay for Performance

wesfarmers CEO pay
Source: CGLytics Data and Analytics

Not only was there concern over the CEO pay for Wesfarmers, but the ambiguous changes in awards policies [4]. This was also seen as an issue for other proxy firms such as Glass Lewis and the Australian Shareholders’ Association (ASA).

What is the KEEPP bonus scheme?

The 2016 and 2017 Key Executive Equity Performance Plan (KEEPP) bonus had been cancelled following the demerger of Coles supermarket, but a bonus will be rewarded with the same principles as KEEPP, however with different performance conditions.

The 2017 KEEPP Allocation for the CEO and the Chief Financial Officer (CFO) had the following performance metrics: 50 percent weighting on Wesfarmers relative to the TSR of the ASX 100 Index, 20 percent weighting on absolute Return on Equity (ROE) and 30 percent weighting on strategic measures.

Because of the demerger in 2018, the company has removed the performance condition on absolute ROE as it may have an impact on the targets of executives. The 2018 KEEPP allocation for the CEO and CFO is as follows: 60 percent weighting on the Wesfarmers’ relative TSR against the S&P/ASX100 Index, 20 percent weighting on Wesfarmers’ portfolio management and investment outcomes and 20 percent weighting on strategic measures. However, the company was not able to be fully transparent and clear in its disclosure of strategic measures and investment outcomes, only stating the improvement of data analytics and better progress in gender balance.

Wesfarmers underpays due to complications in payroll

After the release of the 2019 AGM results, another scandal arose when it came to light that Wesfarmers had underpaid up to 6,000 current and former employees of its industrial division, resulting in AUD 15 million or more in underpayments [5]. The company stated that its cause was due to a defect in a payroll system. The company plans to expedite the sending of payments into the banks of underpaid current and former employees before the end of 2019, but is hindered by the complication of its payroll system [6][7].

Linking director pay to competency and expertise

Companies not only link executive pay to performance, but more often than not, companies also link director pay to competency and expertise [8]. With the current events that Wesfarmers has experienced, it is suggested that the company would benefit from a board that can guide it towards its strategic direction, mitigate risk and oversee company performance.

According to our analysis (performend using the CGLytics application), Wesfarmers’ board has strengths in the areas of ‘advisory’ and ‘finance’. Wesfarmers recent acquisition of the Catch Group in 2019 (an e-commerce company that runs Catch.com.au, Mumgo, Grocery Run and Brands Exclusive), should see greater skills and expertise added in the area of ‘technology’, which is currently very low. ‘Governance’ experience, to spot and mitigate risks, is also worth looking at to ensure issues are resolved smoothly in the future.

Wesfarmers board's expertise and skills

Wesfarmers skills and expertise
Source: CGLytics Data and Analytics

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The DOs and DON’Ts when rethinking incentive plans

Why have 75% of first-time say-on-pay votes failed in 2019? A large number of negative votes can be attributed to incentives. Companies need to rethink their incentive plans and make sure metrics truly benchmark performance.

Seventy-five percent of first-time say-on-pay (SoP) votes failed in 2019, and a large number of these negative votes focused on incentives.

There is an increasing need for companies to fully rethink their incentive plans, as the CGlytics whitepaper “How to take the testing of equity-based compensation plans into your own hands” points out.

“It is imperative that companies design their equity pay plans to ensure they receive shareholder approval first time, every time. In order to meet investor expectations, companies need to understand how they, and the proxy advisors they rely on, evaluate equity plans and make voting decisions.”

Marc Ullman, a partner with Meridian Compensation Partners explains what to do and what not to do in rethinking incentive plans.

First of all, companies need to fully rethink their compensation plans, and not to just tweak them. Making just a few cosmetic changes will not suffice to ensure that incentives are effective. At least every two years, a real restructuring is needed.

Often shareholder pushback will incite a rethink, but even with shareholder support, benchmarking for effectiveness is critical as priorities change and the business climate evolves. The plan must reflect the new realities the business faces.

Or the incentive plan may simply become too complicated to be useful, as continually including more metrics and other add-ons makes application confusing. This often happens as businesses try to simply tweak the plan instead of really rethinking it.

 

Here are the do’s and don’ts to achieve as near optimal alignment between pay and performance as possible:

– If you need a full-scale rethink, don’t settle for a mere tweak. Make sure that what you do matters, don’t nibble around the edges. Make sure the metrics truly benchmark performance.

– But don’t overdo it. Pick out the key metrics and focus on that; don’t try to transform the whole structure unless you really feel that you have to.

– As the rethinking process is underway, take note of the solid rationale that stems from the business model. This will be something to communicate at the end of the process, and one that can be used for grounding the basis of your thinking.

– Make sure you include all the right people: Finance, HR, Corporate leadership, corporate leadership and the business unit. Everyone should buy in to the metrics and the targets that are being set.

– Make sure your plan pays something in year one. After a big rollout you need to make sure that design provides results. Otherwise it could hurt your credibility.

– Take advantage of feedback from shareholder outreach. More and more companies are actively talking to shareholders, and their points of view should at least be considered as the design is taking shape. Consider investor relations and investor perspective and proxy advisors like ISS and Glass Lewis.

– Communicate internally and externally. You have multiple audiences internally.

 

Predict Shareholder Approval with Glass Lewis’ Equity Compensation Model

 

The Glass Lewis Equity Compensation Model (ECM) allows you to instantly test and review your incentives plan using the same key criteria and scoring system as leading proxy advisor Glass Lewis. The ECM supports testing of 4,300+ publicly-traded U.S. firms including the Russell 3000 and exclusively available via CGLytics.

With the ECM you can confidently engage, knowing the strengths and weaknesses of your current and future equity plans. Ensure you get the votes to legally grant equity compensation to your executives, board members and staff.

Click here to learn more about the ECM application or request a no-obligation demonstration.

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Sims Metal Management: Tracking Pay for Performance Over Time

A key element in an assessment of remuneration outcomes is the payout track record and payout variability over several years. Sophisticated remuneration structures should result in pay outcomes which vary in line with performance.

CGI Glass Lewis assesses both executive remuneration structure and outcomes, which is highly valuable when considering our support for remuneration reports of ASX-listed entities.

Concepts of appropriate structure and appropriate outcomes are related, given that strong remuneration structures should result in appropriate remuneration outcomes. However, we have found that a) the complexity of remuneration structures, b) challenges in measuring performance, and c) a large degree of discretion built in to remuneration structures (whether visible or not) often stretch this relationship.  To compensate, CGI Glass Lewis will often consider remuneration structure and remuneration outcomes independently so as to have each component act as a cross-check of the other.

A key element in an assessment of remuneration outcomes is the payout track record and payout variability over several years. Sophisticated remuneration structures should result in pay outcomes which vary in line with performance. Furthermore, the relationship between pay and performance should persist over longer periods as a result of common short-term incentives and long-term incentive remuneration structures.

CGLytics data has allowed us to consider the relationship between executive pay and company performance over a five-year period and has been a key element in our remuneration reports.

CGLytics in use

Sims Metal Management (“SGM”) buys and processes scrap metal from businesses, other recyclers and the general public with over 250 processing facilities in the United States, United Kingdom and Australasia.

CGLytics captures the total realizable pay of ASX300 CEO’s, including for SGM, where total realizable pay is the value of awards vested to the CEO in any given year. CGLytics tools have allowed the charting of realizable pay for the CEO of SGM against realizable pay for CEO’s of peer entities. CGLytics also captures the EBITDA performance for SGM and peers.

The CGLytics analysis, which is included in our Proxy Paper for the SGM 2019 AGM is presented below:

SGM Peer Groups

Looking at the charts, SGM has outperformed its peers on an EBITDA basis between 2015 and 2018 and the CEO’s realizable pay rose to match that.  In FY2019, EBITDA has dipped, which is matched by a significant drop in the CEO’s take home pay—notwithstanding the payout is still above those of peer groups.

We are please to see this relationship between performance and pay and can easily see the variability in pay outcomes over time, which corresponds to company performance as measured by EBITDA.

As SGM has no obvious direct peers listed on the ASX, a diversified approach to peer groups is used.  The first peer group, Country, is a group of 10 peer entities which are similar to SGM in terms of market capitalisation, revenues and employee numbers.  Similarly, the second peer group, Industry, is a group of 10 peer entities with similar size as in the Country peer group, but with the addition of a further industry filter.

A common problem for ASX-listed entities is the sourcing of appropriate peers. The use of the two sets of companies addresses the shortcomings of using a single peer group and allows us to see if trends and patterns persist when moving from one peer group to another.

Conclusion

CGI Glass Lewis assessed SGM’s 2019 remuneration structure as Fair following application of our Good/Fair/Poor assessment options.  This has historically been our assessment of SGM’s remuneration structure.

After reviewing of remuneration outcomes, including CGLytics charts which enable us to see historic payout variation and an ongoing relationship between pay and performance, we were comfortable in supporting the remuneration report proposal at the 2019 AGM.  In this case, using an assessment of remuneration outcomes has supported a Fair grading of remuneration structure and has given us confidence in SGM’s remuneration report.

Ultimately, the 2019 AGM held on November 14, 2019, SGM’s remuneration report proposal received support from 92.80% of votes cast.

 

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

For the 2020 proxy season, CGLytics data will provide the basis of Glass Lewis’ Say on Pay recommendations.

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Remuneration policy: Directors reward attracts more and more attention

A well-founded remuneration policy is no longer optional. The new European Shareholder Rights Directive demands transparency around remuneration of directors.

At many of the annual shareholders meetings, the remuneration of the directors will soon be prominently on the agenda. It is one of the most important governance issues for companies. In 2019, companies already received a taste of the increasing interest in this topic of shareholders and employees. We expect that this attention will only increase. It is not only shareholders who look critically at the remuneration of the directors and everything that is related to it. The legislator is also alert. De new European Shareholder Rights Directive (SRD II) demands the transparency of the company around the remuneration of directors and senior managers. The reward must also be in line with the long-term value creation.

Active involvement

An increasing number of directors, supervisors renumeration committees and investors are using corporate governance analytics to review remuneration policy. That helps determine an adequate reward structure. And overseeing it. The wide-ranging discussion on Shell-CEO’s remuneration, Ben van Beurden, illustrates that. It more than doubled to € 20.1 million in 2018. Important detail: the data shows that his wages are 143 times higher than the average wage of the British staff of Shell. At Shell’s most recent meeting, shareholders had the chance to vote on the pay package, 10 percent of the shareholders voted against.

Equal to employees

We also see how stakeholders can appreciate a long-term remuneration policy. For example, insurer ASR came into the news positively when it wanted to permanently put an end to bonuses and pay in shares for the board. After the agreement with the shareholders, it is also stipulated that there are no variable remuneration schemes for the members of the Board of Directors, thus the remuneration policy is equal to that of the other employees in the company.

Effect new law

It is clear that companies need to be aware of the effects of their remuneration policy. We see a positive effect if companies do talk about the remuneration policy with shareholders and other stakeholders before the general meeting of shareholders, underpinning this with data. We see signals that this reduces the number of oppositions to the proposed policy.

A well-founded remuneration policy is no longer optional. Dutch companies must draw up their remuneration reporting for the 2019 financial year in line with the new requirements of SRD II. This includes a comprehensive overview of the remuneration and benefits of each individual director covered by the advisory vote of shareholders. In addition, Dutch listed companies need to explain how their salary strategy connects with the long-term goals. The new law also gives shareholders more participation and influence. Since the introduction of the law, companies need 75 percent of shareholders’ votes to adapt their salary strategy. This was previously 50 percent. All the more reason for companies – also non-listed ones – to put their remuneration policy into perspective.

For more information about how CGLytics’ executive compensation data and tools informs companies of how they compare to their peers reumuneration practices click here.

About the Author

Aniel Mahabier: CEO and founder of CGLytics

Mahabier interviews and writes for Management Scope about the remuneration of directors and corporate governance analytics. This blog was published in Management Scope.

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Blue Sky Downfall – What went wrong?

While no company wants to find itself in a state of voluntary administration, it is a stark reality faced by the Australian-based fund manager Blue Sky Alternative Investments Limited. The company is currently undergoing administration, following years of challenging circumstances starting as early as 2017.

When facing bankruptcy or insolvency, companies have the option of going into voluntary administration. This is when an independent and qualified person (a voluntary administrator) takes over a company’s assets and business operations in an attempt to salvage the company [1].

While no company wants to find itself in a state of voluntary administration, it is a stark reality faced by the Australian-based fund manager Blue Sky Alternative Investments Limited. The company is currently undergoing administration, following years of challenging circumstances starting as early as 2017. The future of a company that was once named one of Brisbane’s top companies is now uncertain [2] after US-based short-seller Glaucus reported that the company had overstated its valuation and disregarded some of its key business obligations [3].

Despite Blue Sky’s former Chief Executive Officer Robert Shand’s claims that the company had grown by 50 per cent across key performance metrics, Glaucus expressed skepticism regarding the credibility of Blue Sky’s valuations [4]. The research company’s analysis showed that Blue Sky’s real fee earning asset under management was valued at maximum AUD 1.5 billion, which was 63 per cent short of the AUD 3.9 billion that Blue Sky had reported [5]. The inflated representation of figures may have helped with boosting share prices and more access to capital. Blue Sky was also criticized for allegedly overcharging its clients with inflated management fees.

Shortly after the release of the Glaucus report, Blue Sky suspended its trading to review the claims of the short-seller hedge fund [6]. Just one week later, the company’s share prices dropped by 41 per cent by April 5, 2018 [7]. Despite its free falling share prices, Blue Sky’s response in the face of such accusations was to call on the Australian Investments and Securities Commission (ASIC) to investigate and question the integrity of Glaucus rather than to refute the latter’s claims with evidence, fostering even more pessimistic investor sentiments.

Even in the midst of battling to keep themselves afloat and avoiding more trade suspensions, Blue Sky nonetheless remained optimistic. This was until September 2018, when it confirmed that a US-based investment firm, Oaktree Capital, would be providing the Australian company with a seven-year-loan facility of AUD 50 million to facilitate the recovery of the company [8].  However, not long after the loan agreement, Blue Sky announced it will fail to meet its obligations to Oaktree [9], breaching its financial covenant as it reported an after tax net loss of AUD 25.7 million for the first half of 2019. Blue Sky Alternative Access Fund, Blue Sky Alternative Investment’s fund management subsidiary, also decided to withdraw from its parent company until ongoing legal actions were concluded [10].

After many failed deals and breaches of financial obligations, Blue Sky was suspended from the ASX 300 on May 2019. The company has also announced that the advisory and investment firm, KordaMentha, has been selected as its receiver and manager, and is currently still in administration [11].

What went wrong?

Not only did Blue Sky fail to display transparency during the short-seller report, but it also failed to comply with the 3rd edition of the ASX’s Corporate Governance Principles and Recommendations, where a listed entity must maintain a majority of independent directors in their board [12]. In early 2017, John Kain, who served as the Chairman of Blue Sky, was the only independent member of the board, the other six being Executive Directors. This pushed Blue Sky to appoint two more independent directors in February 2017 but still failed to compose a board with an independent majority board of directors [13]. The Australian Institute of Company Directors states that Non-Executive Directors provide independence and objectivity to the board. An objective and outside perspective supports the idea of acting in the best interest of the company and monitoring the Chief Executive Officer and senior executives without partiality [14]. Independent directors also act as expert advisors in areas where the company aims to grow and develop [15].

Board diversity Blue Sky

As of February 2017, the board of Blue Sky was composed of: John Kain (Independent Chairman), Michael Gordon (Independent Non-Executive Director), Philip Hennessy (Independent Non-Executive Director), Alexander McNab (Executive Director), Kim Morison (Executive Director), Timothy Wilson (Executive Director) and Mark Sowerby (Founder and Executive Director). Based on the CGLytics analysis, only 43 per cent of the board in 2017 were independent non-executive directors, even after the appointment of two additional independent directors. In addition, the analysis also shows that there are no female members, resulting in a less diverse board [16].

Board expertise Blue Sky

The board expertise tool of CGLytics that provides insight of the board skills matrix shows that the company lacked an expertise in risk. Although Blue Sky’s Board is strong in the finance expertise due to its company sector, independent directors experienced in risk management could facilitate in monitoring and assuring the reliability of the financial information provided by the company. However, both independent members and risk expertise were lacking.

There was also a high turnover of board members and senior executives during the whole debacle. The first to depart the company in 2016 was founder Mark Sowerby. This raised concerns due to his sale of approximately AUD 27 million worth of company shares and may have started the downfall and speculation of Blue Sky’s future [17]. In April 2018, Robert Shand, the supposed optimistic managing director of Blue Sky has also stepped down from the board [18]. Moreover, the company had to appoint three different Chief Financial Officers in a span of seven months [19]. Mr. Joel Cann was appointed as Chief Executive Officer as he had extensive experience in rebuilding Aspen, where he was also appointed as CEO in 2016 [20]. After just two months, Blue Sky announces that it no longer required a CEO, forcing Joel Cann to depart the board [21]. The high rate of departures could have led to an inefficiency in productivity [22]. A recent analysis performed by CGLytics on executive departures from S&P 500 companies reveals that having more than one executive resignation in a year may cause the company’s Total Shareholder Return to decline [23].

exec departures

A significant number of departures may potentially lead to a lack of confidence for the future and can slow down the growth of shareholder investments.

Conclusion

Although no one would have expected the drastic plunge of Blue Sky, it could have been minimized or mitigated with good governance practices and decisions throughout the volatile season of the company. Appointing competent and independent directors that have the right skills to oversee executive management can effectively and ultimately add value to the company and avoid risks of uncertainty in businesses.

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

[1] https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-employees/voluntary-administration-a-guide-for-employees/

[2] https://www.businessnewsaus.com.au/articles/2017-brisbane-top-companies-21-30.html

[3] https://www.bonitasresearch.com/company/blue-sky-alternative-investments-ltd-asx-bla/

[4] https://www.asx.com.au/asxpdf/20161006/pdf/43brx5pyfghn67.pdf

[5] https://www.bonitasresearch.com/company/blue-sky-alternative-investments-ltd-asx-bla/

[6] https://www.businessnewsaus.com.au/articles/short-seller-hits-blue-sky–sends-shares-tumbling.html

[7] https://www.businessnewsaus.com.au/articles/blue-sky-shares-take-another-big-hit-on-glaucus-stoush.html

[8] https://www.businessnewsaus.com.au/articles/oaktree-saves-blue-sky-with–50m-investment.html

[9] https://www.businessnewsaus.com.au/articles/blue-sky-fails-to-meet-oaktree-loan-conditions.html

[10] https://www.businessnewsaus.com.au/articles/blue-sky-s-alternative-access-fund-cuts-supply-to-mothership.html

[11] https://www.businessnewsaus.com.au/articles/blue-sky-calls-in-receivers.html

[12] https://www.businessnewsaus.com.au/articles/critics-call-for-more-independent-directors-on-blue-sky-board.html

[13] https://www.asx.com.au/asxpdf/20170220/pdf/43g3njpm12fzft.pdf

[14] https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-1-11-mem-director-tools-bc-non-executive-directors_a4_web.ashx

[15] https://medium.com/@theBoardlist/five-reasons-you-need-an-independent-director-on-your-board-dc300f668a41

[16] https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf

[17] https://www.businessnewsaus.com.au/articles/blue-sky-in-freefall–calling-for-asic-intervention.html

[18] https://www.businessnewsaus.com.au/articles/blue-sky-md-and-executives-resign-in-the-wake-of-glaucus-saga.html

[19] https://www.businessnewsaus.com.au/articles/blue-sky-appoints-third-cfo-in-seven-months.html

[20] https://www.businessnewsaus.com.au/articles/joel-cann-takes-the-reins-at-blue-sky.html

[21] https://www.businessnewsaus.com.au/articles/blue-sky-ceo-no-longer-required.html

[22] https://boardmember.com/sudden-ceo-departures-can-upend-an-unprepared-board/

[23] https://cglytics.com/the-effect-of-executive-departures-on-company-performance/

About the author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

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Harvey Norman AGM; Strike 2 in the making?

Harvey Norman’s Annual General Meeting is to be held this Wednesday November 27, 2019. With leading independent proxy advisor CGI Glass Lewis advising to vote against the reappointment of the company’s chief executive, Katie Page, and the remuneration report, the gloves are off.

Shareholders have braced themselves for the upcoming Harvey Norman Annual General Meeting (AGM) to be held on November 27, 2019. The meeting will not be taken lightly following the shocking results of the 2018 AGM. Here we take a look at the controversial corporate governance practices that has investors and proxy advisors concerned.

Votes against remuneration report in 2018

What happened in 2018? Majority of the shareholders voted against the adoption of the remuneration report, resulting in 50.63 per cent of shareholders disapproving the resolution earning the company a first strike. Not only did a large percentage of shareholders vote against the remuneration report, but an average of 27.76 per cent opposed the re-election of the following directors: Non-Executive Director Mr. Michael John Harvey, Non-Executive Director Mr. Christopher Herbert Brown, and Executive Director and Chief Operating Officer (COO) Mr. John Slack-Smith. An average of 17.5 per cent of shareholders also voted against the grant of performance rights under the Harvey Norman 2016 Long-term Incentive Plan to the following Executive Directors: Executive Chairman Mr. Gerald Harvey, Chief Executive Officer Ms. Kay Lesley Page, Executive Director and COO Mr. John Slack-Smith, Executive Director David Ackery, and Executive Director and Chief Financial Officer and Company Secretary Chris Mentis.

Questions over what will happen at 2019’s AGM

Harvey Norman is now in hot waters, especially if majority of the shareholders continue to vote against the adoption of the remuneration report in the 2019 AGM, leading to a spill resolution. The Corporations Act 2001 has been amended to include a “two-strike” rule [1]. A company will be given a first strike if 25 per cent or more vote against the remuneration report. Until the next AGM, the company is required to review and respond to the shareholders’ growing concerns regarding executive pay. The next AGM will determine whether a company gets a second strike [2]. This occurs when 25 per cent or more shareholders still vote against it. During the same AGM, shareholders will establish whether directors need to stand for re-election. If 50 per cent or more shareholders vote for to pass a “spill” resolution, a “spill” meeting will be held within 90 days. Proxy advisors Ownership Matters and CGI Glass Lewis have advised investors to vote against the remuneration report and face a spill resolution to effectively improve its corporate governance [3].

ASX’s Corporate Governance Principles comes into question

Minority shareholders are dissatisfied with the number of independent directors present in the board. The board is currently composed of: Executive Chairman Gerald Harvey, Chief Executive Officer Katie Page, Executive Director and Chief Financial Officer/ Company Secretary Chris Mentis, Executive Director and Chief Operating Officer John Slack-Smith, Executive Director David Ackery, Non-Executive Director Christopher Brown, Non-Executive Director Michael Harvey, Independent Non-Executive Director Maurice Craven, Independent Non-Executive Director Kenneth Gunderson-Briggs and Senior Independent Non-Executive Director Graham Paton.

There are 10 board members and only three of which are independent. The company disregards the 4th edition of ASX’s Corporate Governance Principles and Recommendation that states majority of board members must be independent [5].

Data from CGLytics suggests that only 30% of the Harvey Norman board members are independent. Independent directors are vital members of the board because they provide more transparency to shareholders and fill the gap of skills required by the company [6]. The lack of independent directors poses a huge problem for minority shareholders especially when the board of directors have a total of 56.9 per cent stake in the company, making them the majority shareholders. This gives a disadvantage to minority shareholders that want to voice concerns regarding re-election of directors and the adoption of the remuneration report.

HN Board

Proxy advisory firm Ownership Matters even goes so far to propose the voting against the re-election of non-Independent Directors to force the company to make board changes [7]. In the Harvey Norman 2019 Annual Report, the company responded to the reason behind appointing fewer independent directors, stating that each executive director (including non-executive directors that are not independent) still provide quality independent judgment to the issues that arise.

Tenure reveals a stale board

The board also appears to be stale. The average tenure of the board directors is 20 years. For some time now, corporate governance stakeholders; governance experts and shareholders alike have paid substantial attention to the issue of board refreshment or entrenched boards. Usually, when a board is stale, there is the concern that they may lack new perspectives, become complacent which may affect the long-term performance of the company as well as provision of effective oversight and management.

One more independent director added to the board

In March 2019, the company added John Craven who was an independent director to the board. This was the first time in 14 years that the board had appointed an independent director to its fold since Graham Paton joined the board in 2005.

Data from CGlytics shows that although there are 10 board members, most of their skills are concentrated on three areas: finance, advisory and technology. This shows that the composition of the skills matrix is not balanced between the members and is not aligned with the skills that the company requires. Having a skill such as risk is a vital key competency a board needs, especially in turbulent times that may make or break the company.

Harvey Norman's board expertise

What are the proxy advisors’ view?

Because of the criticism and frustration of stakeholders, proxy advisors such as ISS Governance and Ownership Matters  encourage investors to vote for the appointment of self-elected Mr. Stephen Mayne as a director. Mr. Stephen Mayne is a journalist and a shareholder activist that constantly offers himself up for election on boards. Executive Chairman Gerald Harvey has urged Australian regulators to question the credibility of the proxy advisors that advise shareholders to appoint someone who has no experience in the retail industry [8].

Different proxy advisory firms Ownership Matters and CGI Glass Lewis are also recommending against the re-election of Chief Executive Officer Katie Page [9].  The company is being questioned by the Australian Securities and Investment Commission regarding the high increase in pay for Ms. Page despite the decrease in the Total Shareholder Return (TSR) of the company [10].

Where does Harvey Norman’s CEO Pay for Performance rank?

The CGLytics Relative Positioning Pay for Performance tool compares Harvey Norman’s CEO pay with that of the industry peer group’s three year TSR. The performance evaluation shows that it is misaligned. The company’s total realized pay is in the 45th percentile while the three-year TSR ranks in the 15th percentile and shows that the CEO is compensated more than the increase in TSR.

HN P4P analysis

Changes in remuneration was included in its 2019 Annual Report, changing the short-term incentive financial metric from return on net assets to earnings per share adjusted for the after tax effect of property increments decrements. The short-term incentives will be measured 50 per cent on earnings per share adjusted for the after tax effect of property and 50 per cent as non-financial conditions. Short-term incentives will still be given in cash except when the executive directors have shares lower than the benchmark level. The STI pool will also be increased to the maximum level at 120%.

As to whether, these changes have the potential to avert a potential revolt at the upcoming AGM, it remains to be seen.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

About the Author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

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