AGMs: Tactics for a Plague Year

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible. What are the best options for running AGMs during a plague year?

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible.

Postponing them may also not be a good option. Advisors, analysts, shareholders, investors, employees and all other stakeholders are all eager to understand their companies’ way forward in such troubled times, and the AGM offers the best way to address this. Postponing the AGM, even for good reasons, sends a bad signal to the markets at the very time when addressing investor and broader social concerns is critical.

For example, many companies are considering reducing dividends due to the challenging economic conditions, yet CEO pay reductions are not on the AGM agendas. CEO pay continues to rise, regardless of performance. The top 35 highest-paid CEOs on the S&P 500 received a combined Total Realized Compensation (TRC) of almost $3 billion in 2019, yet pay-for-performance alignment is badly skewed at nearly half of the companies on the index as our statistics show.

If postponing is not an option, companies do have two other options at their disposal: Running a ‘hybrid’ AGM, which would combine physical presence with virtual communications, or making the entire AGM virtual. Most companies don’t have such options included in their Articles of Association, but the first step at the hybrid or virtual AGM would mean voting on such changes. The London Stock Exchange is currently pushing for emergency legislation to change the companies act to allow all companies to stage virtual shareholder meetings. 

The hybrid option means that either board members are physically present at the AGM, while shareholders communicate with them via virtual links, or that shareholders send representatives to physically attend the meeting while board members communicate via video or audio communications. Voting ahead of meetings is also an option, working with proxy advisors.

Swedish telecoms and networking firm L.M. Ericsson has chosen the former hybrid option for its 2020 AGM on 31 March. The President and CEO Börje Ekholm will not attend in person, but will participate via links (it is not clear whether other board members will attend in person). A live webcast of the meeting will be available to shareholders.

To keep the numbers of attendees down, Euroclear Sweden will offer shareholders who are individuals the option to vote via proxy, and other opportunities to work with proxies are made available to shareholders. “No food or refreshments will be served,” the official invitation warns.

Ericsson’s official invitation offers links to Nomination Committee proposals as well as to some shareholder motions.

But, in this hybrid approach to the AGM, is it clear that board members will be able to fulfil their fiduciary responsibilities in communicating with shareholders? Will it be possible to hold a dynamic discussion of the company’s affairs? Will shareholders be able to work with proxy advisors on such short notice – how will policies be communicated? Will a shareholder wishing to pose a complex question to the CEO get sufficient airtime?

The alternative hybrid approach to running AGMs would mean that board members are physically present, while shareholders communicate with them entirely via audio, video and messaging. And there is the further alternative, in which all communication takes place virtually.

Each of these alternatives poses many of the same questions that we’ve raised above. One of the virtues of the physically-attended AGM is that a shareholder can follow up on questions, or insist on attention to specific subjects. Can shareholders be sure this will happen online?

The even larger question being asked at some companies will be whether all shareholders have had access to sufficient information to vote before the AGM. For example, under current conditions, it may not be possible for the audit of financial statements to be concluded. Some companies are opting to work with financial reporting that is incompletely audited. This poses a serious corporate governance challenge that the board would have to address at the AGM.

The diffusion of extensive financial and non-financial information to shareholders and their representatives ahead of the meeting is also critical for these virtual or semi-virtual AGMs to succeed. Given that shareholders must accept somewhat limited access to the board, they must be certain that all of the information relevant to decision-making on matters such as executive compensation, director election, Stock Purchase Plan has been provided in advance.

Boards that take all the necessary steps to ensure that shareholders have the information they need ahead of the AGMs will be fulfilling their fiduciary responsibilities to shareholders. At the same time, Shareholders will need to step up and leverage technology and information to support their engagement. The AGM will provide the basis for the company to move forward even in a Plague Year.

Latest Industry News, Views & Information

A diverse supervisory board: This is how to unlock a wealth of talent

Aniel Mahabier, CEO of governance data specialist CGLytics, welcomes the fact that selection committees are using corporate governance analytics to assess the diversity of their own supervisory board. Technology is bridging the gap between the available talent and the knowledge and experience that committees already have in-house.

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

A diverse supervisory board: This is how to unlock a wealth of talent

Aniel Mahabier, CEO of governance data specialist CGLytics, welcomes the fact that selection committees are using corporate governance analytics to assess the diversity of their own supervisory board. Technology is bridging the gap between the available talent and the knowledge and experience that committees already have in-house.

“Selection committees are looking for the right candidates outside their traditional networks”, says Aniel Mahabier, founder and CEO of governance data specialist CGLytics. Such an alternative approach, for example through the use of data analysis, has major advantages: people with unique experience and unique talent are put on the radar.

In many organizations – listed and unlisted – supervision is far from diverse. A supervisory board with only people of the same generation, background and education cannot properly monitor the continuity of the company in the changing society. Such a homogeneous council cannot sufficiently monitor the interests of the various stakeholders.

An important task therefore lies with the selection committees that are responsible for a balanced composition of the supervisory board. We see that selection committees use our corporate governance analytics to assess and benchmark the diversity of their own supervisory board. For example, to be able to answer questions from international shareholders and when planning succession. For example, they test the current composition against the various international corporate governance codes and sustainability regulations. This contributes to effective management and good risk management.  

Click here to continue reading the full article.

Latest Industry News, Views & Information

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

Regulation and Investor Expectations: A corporate governance insight paper

Key corporate governance areas are examined to determine the extent of impact on UK and Irish companies, and the wider potential risks going into the 2020 AGM season.

Regulation and Investor Expectations: A white paper ahead of the 2020 AGM season

What should UK and Irish companies expect in the 2020 AGM season?

Over the past five years the focus on corporate governance has become particularly pronounced. With the 2018 iteration of the UK Corporate Governance Code and the capabilities of institutional investors increasing, 2019 saw significant change in a number of key areas.

An analysis of these key areas is examined by FTI Consulting and CGLytics to determine the extent of impact on UK and Irish companies, and the wider potential risks going into the 2020 AGM season.

Areas examined in the white paper include:

  • – Pension schemes
  • – Chair tenure
  • – Women in leadership positions
  • – Workforce engagement
  • – Remuneration policies
  • – Restricted shares
  • – ESG & Proxy Voting
  • – Overboarding

 

Download the report to learn more

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Latest Industry News, Views & Information

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What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

CGLytics S&P 500 Executive Compensation Review

Executive Compensation Review: Which S&P 500 companies showed the greatest Pay for Performance misalignment and conservative practice in 2019?

S&P 500 Executive Compensation Review

Which S&P 500 companies showed the greatest Pay for Performance misalignment and conservative practice in 2019?

CGLytics has released its inaugural S&P 500 Executive Compensation Review. For companies and investors to be fully prepared with insights for the upcoming proxy season, it is imperative to know what concerned shareholders in 2019 and trends to look out for in 2020.

Download the CGLytics S&P 500 Executive Compensation Review and learn:

  • • What are the hottest topics surrounding executive compensation?
  • • Which companies saw the greatest pushback on their Say on Pay proposals?
  • • How does CEO granted and realized pay compare across industries?
  • • What to expect in the upcoming 2020 Proxy Season?
  • • Plus, a deep dive of companies in the materials sector and how they have aligned their pay for performance practices.

Download the report to learn more.

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Latest Industry News, Views & Information

  • All
  • Blog

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

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].

 

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.

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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.

Latest Industry News, Views & Information

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

Reflection on 2019 Executive Pay: Belgium and Luxembourg

In the recent report published by PwC, using CGLytics data and analytics, the critical trends from the 2019 proxy season for Belgium and Luxembourg listed companies surrounding executive compensation were revealed.

In the recent report published by PwC, using CGLytics data and analytics, the critical trends from the 2019 proxy season for Belgium and Luxembourg listed companies surrounding executive compensation were revealed.

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

Latest Industry News, Views & Information

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

Corporate governance and executive pay. Reflection on the 2019 proxy season. A joint report with PwC

This report by PwC Belgium and CGLytics takes a closer look at votes on remuneration items and reviews the critical trends of the 2019 voting results in Belgium and Luxembourg. Download the report to better prepare for the 2020 proxy season.

Corporate Governance and Executive Pay. A joint report with PwC

The 2019 proxy season has come to a close. This report by PwC Belgium and CGLytics takes a closer look at votes on remuneration items and reviews the critical trends of the 2019 voting results in Belgium and Luxembourg.

Download the report to better prepare for the 2020 proxy season and learn about:

  • • The 2020 Belgian Corporate Governance Code and how it has changed since 2009
  • • The effects of the implementation of the revised Shareholder Rights Directive (SRD II) into national law
  • • Feedback and results of the 2019 general meetings
  • • Remuneration – A Shareholders Revolt?
  • • The evolution of base salary, short term incentives and long term incentives
  • • Key governance themes for boards, such as Pay-for-Performance and board diversity

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Latest Industry News, Views & Information

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What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

Concern over Wesfarmers’ executive pay?

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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What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

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Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

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Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

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.

Latest Industry News, Views & Information

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?