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].

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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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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

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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

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?

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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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Pressure from stakeholders brings about change

In an increasing number of companies, remuneration based on short-term results is giving way to a remuneration structure based on long-term performance. Companies should be able to indicate how the CEO’s remuneration contributes to long-term value creation, and be prepared to discuss their performance in this area.

It is an undeniable trend: in an increasing number of companies, remuneration based on short-term results is giving way to a remuneration structure based on long-term performance. The remuneration of executive directors is one of the most important governance issues for companies. Companies should be able to indicate how the CEO’s remuneration contributes to long-term value creation, and they should be prepared to discuss their performance in this area.

Supervisory and remuneration committees are expected to have assessed whether the remuneration is in perspective, both in relation to comparable roles, but also with respect to relationships within the company itself. In various countries, legislation that forces companies to explain how the remuneration of a top executive relates to the salaries of average employees within the organization is now under consideration.

Losing ground

The long-term focus in remuneration structures is also reflected in our data. For example, excessive severance payments, golden parachutes (a prior agreement on the level of severance pay) and substantial signing bonuses are becoming less and less common. In some countries, this kind of remuneration is now even prohibited. In addition, companies are increasingly using performance criteria that are in line with the long-term development of the company’s value. For example, generated cash flow as a criterion for the remuneration of executive pay is losing ground. Instead, the executive director’s performance is measured against metrics that say something about long-term value development, such as earnings per share.

Especially in financial sector

In the Netherlands, these developments can be seen mainly in the financial sector. In recent years, several listed financials have wholly or partly converted variable remuneration for executives and management into fixed remuneration. Moreover, this fixed remuneration more often consists of a combination of cash and shares of the company. With remuneration in shares, there is a direct connection between the remuneration of the executive director and the performance of the company. A similar development, but on a much larger scale, can be seen in the United States. Companies in a wide range of sectors are opting for a remuneration policy that combines cash and shares. These shares account for an average of 55 to 60 percent of the total remuneration package.

Stakeholder pressure

So the Netherlands has not got as far as the United States yet. But the trend has been set and it is irreversible. Greater attention to reasonable pay is in line with the focus in society and the business community on sustainable growth. Not all companies make the turnaround on their own initiative.

Not uncommonly, it takes pressure from stakeholders − such as major shareholders or employees − to start a discussion in the boardroom about a more sustainable remuneration policy. Large investors in particular − pension funds and insurers − are driving the change in remuneration. CGLytics data show that they are increasingly exercising their control to influence remuneration proposals. Not only are they expressing an explicit opinion on management board remuneration, but they also discuss the structure of the remuneration policy itself and the performance metrics used. Investors are calling for a sustainable and socially responsible remuneration policy by including ESG statistics (with environmental, social and governance variables). Shell sets short-term targets to reduce CO2 emissions and ties executive pay to these targets. Other groups have to keep up with such trends. If they do not do so proactively, they expose the company to financial and reputational risks.

Long-term focus

More than ever before, executive and supervisory directors need to strike a good balance between corporate strategy, remuneration of talent and the interests of shareholders. So the question is not whether Dutch companies should focus their remuneration policy more on long-term value creation, but when.

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

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Good corporate governance begins with good data

Effective corporate governance starts with having the right information. In an ever-changing corporate governance landscape of continually increasing, publicly available information, shareholder involvement, activism, ongoing media campaigns and continual changes to governance regulations, having the right information from the start can be the difference between success and ongoing shareholder revolt.

Effective corporate governance starts with having the right information. In an ever-changing corporate governance landscape of continually increasing, publicly available information, shareholder involvement, activism, ongoing media campaigns and continual changes to governance regulations, having the right information on a timely basis from the start can be the difference between success and ongoing shareholder revolt.

This article first appeard in Ethical Boardroom, the premier subscription based magazine and website that is trusted for its in-depth coverage and analysis of global governance issues. Click here to access the original article.

Boardroom diversity, fair executive compensation, compliance to regulatory requirements, how companies compare against their peers and competitors and how they are perceived by investors and proxy advisors, needs to be thoroughly understood by boards of companies to stay ahead.

With heightened scrutiny of governance practices in the post-financial crisis era, it is now more important than ever for companies’ boards and their executives to be fully prepared, with the same data and information as investors and proxy advisors, before beginning engagement to avoid reputational and governance risk.

CGLytics, the leading provider for global corporate governance data analytics, provides real time data and a suite of powerful benchmarking tools to help companies and their boards with data- driven insights for sustainable practices and effective oversight. These tools support boards in making smarter, more timely and better-informed decisions.

The great debate of executive compensation

Investors over the past 12 months have continued to pay attention to, and even asked more questions about, the pay practices of companies and rewards offered to their CEOs and directors. Add to this the requirements set out in the revised European Shareholder Rights Directive (SRD II) to increase transparency of the company’s pay practices, including CEO to average employee pay ratios, CEO pay relative to company’s performance and extended say on pay rights of shareholders, companies should be sitting up and paying close attention.

During the last proxy season, executive pay was heavily and effectively challenged. Shareholders repeatedly voted down advisory remuneration reports and questioned short-term remuneration plans, urging companies to bring pay into line with performance. Many remuneration-related resolutions were voted down on the grounds of misalignment.

The UK, in particular, was at the forefront of shareholders concerns over excessive pay. To address these concerns, the Financial Reporting Council (FRC) issued a Revised Corporate Governance Code in July 2018, which encouraged directors to exercise independent judgement and discretion when authorising remuneration outcomes, by taking into account company and individual performance along with other circumstances.

Executive compensation data available in the CGLytics application

CGLytics carried out a proxy review with data from its extensive, global governance database of FTSE 100 companies and their pay practices. The study revealed that in 2018, 33 companies in the index sought a binding shareholder approval for their remuneration policies. Generally, investors questioned the earning potentials in short-term incentive plans, for example Rentokil Initial plc’s decision to increase the annual bonus from 100 per cent to 150 per cent cost the board a dissent of around 25 per cent on their remuneration policy. In addition, shareholder revolts were seen regarding remuneration reports where there was not enough clarity about contractual entitlements, as seen in the case of Royal Mail’s retiring CEO Moya Greene and new CEO Rico Back.

In other markets, shareholders became increasingly involved in company strategy, as seen in the Dutch AEX study carried out by CGLytics. Of the past years’ proposals to amend executive and supervisory directors’ remuneration, the majority encountered criticism and some were withdrawn prior to the AGM, or resulted in a large number of votes against.

“WITH HEIGHTENED SCRUTINY OF GOVERNANCE PRACTICES IN THE POST-FINANCIAL CRISIS ERA, IT IS NOW MORE IMPORTANT THAN EVER FOR COMPANIES’ BOARDS AND THEIR EXECUTIVES TO BE FULLY PREPARED”- Aniel Mahabier, CEO of CGLytics

To increase transparency and truly understand how stakeholders, including proxy advisors, are viewing executive compensation and predicting how they are going to vote, companies and their boards need access to, not only information, but also data and tools that allow them to instantly compare their company to their industry peers’.

CGLytics’ extensive database hosts more than 10 years of global compensation data and is driving good corporate governance practices by increasing CEO pay transparency and helping companies to be more prepared than ever before.

Using the same solution as leading proxy advisors and institutional investors, companies can replicate the peer groups of proxy advisors and investors with CGLytics’ customisable peer group modeler and easily perform a pay-for-performance alignment review. This empowers boards to know exactly what investors are looking at and scrutinising prior to engagement, be proactive with their reporting and make sure there are no hidden surprises come AGM time.

Diversity in the boardroom: where are all the women?

With companies, their boards, investors and governmental stakeholders all agreeing that goals that promote long-term value creation are imperative to corporate governance health, the issue of diversity comes into play. Why? Because having a diverse board is linked to long-term value creation.

A diverse board of directors with different ages, genders, nationalities, cultures, skills, experiences, tenure and backgrounds certainly creates new and interesting dialogue around best practices for long-term value creation and brings fresh ideas to the table.

With the speed of change happening today, driven by technology innovations, a variety of ideas, perspectives and knowledge is mandatory to keep up and make the best decisions by taking into account worldly happenings. And government and regulatory bodies are taking note. In particular, during the past year, the US has seen strict regulation changes in some states to even out the gender imbalance in corporate boardrooms.

California was the first state to legally require female representation on boards with the California Senate Bill 826 being passed. The law requires the appointment of at least one female to a company’s board of directors by 2019 and between one and three by 2021, depending on the size of the company. A fine of $100,000 can be expected for not complying. This was shortly followed by New Jersey , which mimicked California’s approach of at least one female director by 2019.

Earlier this year, using CGLytics’ software solution that provides extensive boardroom composition data and analytics, a review was carried out to evaluate the progress made in the US market and likelihood of achieving greater diversity in the coming years. By taking a deep dive into the board composition of S&P 500 companies, it was revealed that even though there is a push from investors for more diverse boards in order to maximise returns, change is not happening as fast as desired.

In CGLytic’s S&P 500 Diversity report it shows that from 2017 to 2018 total female representation on boards grew marginally, reaching 24 per cent, up just one per cent from 2017. In response to engagement with the investor community, as well as the new regulatory requirements, the number of women on boards rose from two in 2017 to three in 2018, showing only a slight increase in efforts being made. However, despite the slow growth in overall female representation, six of the seven companies that lacked at least one female director in 2017 corrected this in 2018.

The report also revealed that bringing younger directors into the boardroom does not only add value in terms of unique perspectives and improved innovation, but also impacts company performance. The findings show that there  is a clear and positive correlation between the number of younger board members and the total shareholder return (TSR).

As many investors continue to encourage and push for boardroom diversity for long-term value creation, it is now crucial for companies to, firstly, see how their boardroom composition, including skills, expertise, age and gender diversity is seen by the outside world. And, secondly, see how their company stacks up against their peers and competitors (see graph below).

Source: CGLytics Data and Analytics

Companies using the CGLytics software-as-a-service platform now have access to boardroom intelligence and can see exactly what their investors and proxy advisors see. Using this intelligence, which includes a skills and expertise matrix of more than 5,500 listed companies across the globe, boards are better preparing for AGMs, implementing effective succession plans and, at the same time, reducing their risk to reputational damage and activist investors.

In addition, having access to 125,000-plus global executive biographies in the CGLytics solution, including more than 20,000 female profiles (both existing as well as upcoming directors), with detailed information of skills, experience, compensation, interlocks and connections, nomination committees can lever new ways of scanning the market for talent, understanding corporate networks and work smarter with their search and HR firms when it comes to succession planning and recruitment. It really is helping companies to look beyond the standard practices and information available by leveraging technology to drive and implement good corporate governance practices and sustain a competitive advantage.

Why data, tools and smart technology are mandatory in the challenging times ahead

As we continue to see regulatory requirements to increase transparency of governance practices, such as CEO pay (through implementation of SRD II) and improve diversity (through legislation not only in the US but worldwide), a trend is emerging of investors becoming increasingly knowledgeable and sophisticated.

Not only are leading proxy advisors and institutional investors choosing to use data and analytics delivered to them from CGLytics, but some are building their own systems to stay informed and take advantage of investment opportunities. Companies need to have access to the same information as proxy advisors and investors, with the same sophisticated tools, in order to assess risks, better prepare for shareholder engagement and avoid potential activism. With knowledge being power, and transparency becoming a mandatory requirement, in the near future companies will have no choice but to use systems, such as those offered –by CGLytics, to keep up with investors and improve their reporting practices.

Board insights available in the CGLytics application

The need to keep up with intel on governance risk exposure was evident during the 2018 proxy season. The season saw record levels of shareholder activism, with some high-level campaigns – notably those of Elliott Management and Icahn Partners – hitting the headlines. Changes to board composition and M&A were the primary aims of these campaigns. A recent study performed by Lazard, shows that activists won 161 board seats in 2018, up 56 per cent from 2017 and continue to name accomplished candidates, with 27 per cent of activist appointees having public company CEO/CFO experience. The message is clear: boards must regularly review their governance vulnerabilities to minimise their exposure to activists, and to review vulnerabilities they must have access to the analytics and tools in platforms such as CGLytics’.

And themes that were established in the 2018 season are likely to continue. Shareholder activism will increase with institutional investors playing a more active role and driving change. It also seems likely that US activists will launch campaigns focussed on European companies. Forcing European companies to have access to global data for instant comparison of not just their country peers, but their industry peers and competitors globally.

To prepare effectively for shareholder engagement and anticipate response, companies and their boards must also be looking at past voting habits and patterns, and resolutions from other AGMs during the season. By looking at the trends of past shareholder voting and keeping abreast of happenings during the current proxy season, boards can spot patterns and predict the outcomes of shareholder voting resolutions.

CGLytics’ platform hosts an extensive database of N-PX filings with voting proposals and resolutions from 2004 onwards, covering 4,000-plus investors with more than eight million data points. With this information on hand, plus the benefit of receiving up-to-date alerts of shareholder voting outcomes, boards remain on top of voting trends and can easily identify investors for a proactive engagement.

The next era in corporate governance intelligence

The pressure on companies and their boards to increase transparency of executive compensation and pay practices, improve age and gender diversity, and constantly assess their board quality and effectiveness will not go away.

As investors and their proxy advisors gain greater insights and intelligence by use of data and smart solutions, companies will need to do the same. Boards need to ensure they are on top of their exposure to governance risks in order to avoid activism at all costs and any possibility of reputational risk – and they need to do this efficiently.

Would you like to learn more about how, you too, can have instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? As well as access the same executive compensation data used by Glass Lewis in their Proxy Papers? Click here to learn more.

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SRD II and the implications on executive pay and corporate governance

Aniel Mahabier considers the ramifications of the extensive disclosure obligations required as part of the second iteration of the Shareholder Rights Directive and argues that knowledge is key to ensuring accountability.

SRD II and the implications on executive pay and corporate governance

SRD II feature article by Governance.co.uk

Aniel Mahabier considers the ramifications of the extensive disclosure obligations required as part of the second iteration of the Shareholder Rights Directive and argues that knowledge is key to ensuring accountability.

Download the article that considers :

– The drivers behind the new regime

– The aim of putting transparency first

– The problem of executive pay

– How boards can proactively address issues before they become problematic

 

Aniel Mahabier

Aniel Mahabier,
CEO and founder of CGLytics

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SRD II and the ramifications for disclosure obligations

With the proxy season fast approaching SRD II is top of mind. Learn about the implications SRD II will have on disclosure of executive pay and corporate goverannce.

With the next proxy season fast approaching the Shareholder Rights Directive (SRD) is top of mind. Extensive disclosure obligations are part of the second iteration and reliable information is key to ensuring requirements are met.

 

This article is part of the featured news report by governance.co.uk on SRD II. Click here to download the full article.

With the EU directive requiring transposition into domestic law in all Member States by September 2020, companies have a limited window to comply with the new requirements and ensure they have aligned their company’s structure in a way that encourages shareholder engagement long term.

The directive’s main aims involve long-term thinking and practices, transparency and increased engagement. However don’t think that this doesn’t also have implications for institutional investors, asset managers and proxy advisors. 

The new regime involves institutional investors and asset managers having to disclose their engagement  policies, and intermediaries to make sure they facilitate the transmition of information to shareholders in a transparent manner. This includes publicly disclosing what they charge for these services.

In short, the SRD II is aimed at reducing short-termism and excessive risk taking by EU companies, plus increasing transparency all-round.

The problem of pay

With executive pay being heavily scrutinized over the past few years, it comes as no surprise that SRD II calls for change to pay disclosures. Creating a better link between pay and performance of company directors, and bringing an end to short-term targets as a measure of success. With this aim brings requirements of providing greater detail and information to support pay policies, including what metrics are being used to measure executive performance. Decisions will have to be rationalized and justified in detail, and without data and facts showing exactly why these decisions were made, companies put themselves at risk of non-compliance.

For companies and investors to meet the requirements of SRD II and as they become effective in the 2020 proxy season (and for intermediaries to be fully compliant) there is no doubt that they need access to accurate and reliable data. CGLytics is already helping many companies, investors and intermediaries get up to speed with meeting obligations, including providing Glass Lewis with data for their Proxy Papers, and you can be fully prepared too.

If you would like to know more about the impact SRD II will have on your company or firm, click here to download the full article

Or reach out to us at CGLytics and receive a free explanation and assessment on how it’s likely to affect you. Click here

Aniel Mahabier SRD II quote

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