CEO Report

  • Date:01 Dec 2007
  • Type:CompanyDirectorMagazine

What to make of a negative non-binding vote?

What are we to make of the large negative advisory votes on remuneration at several major company Annual General Meetings (AGMs) in the last quarter of 2007? They were the key focus of press headlines on governance matters late in the year.

Readers will recall that in 2004, the Government introduced the requirement for a formal but non-binding vote on a remuneration report at every public company AGM. This was part of the CLERP 9 amendments to the Corporations Act. AICD opposed it at the time. It copied a British law, which to us made more sense in the UK environment where there are many more executive directors than is normal on Australian boards. We also thought the detailed disclosure in the remuneration report was likely to lead to further escalation of executive pay, which does seem to be being borne out.

The world of investors who cast the vote, whether in person or by proxy, is more complex than many people realise. Small or ‘retail’ shareholders often attend and vote at AGMs in person, but their votes are usually vastly outnumbered by those of institutional shareholders, most of whom vote by proxy.

Institutions such as big superannuation funds, responsible for managing members’ funds worth tens of billions of dollars, allocate money to many different professional fund managers, who in turn invest in hundreds of companies. When it comes to deciding how to vote on motions at AGMs, the fund managers usually outsource the thinking to specialist ‘proxy advisory’ firms, who have sprung up to fulfil this need.

Institutions give varied mandates to the fund managers. Some, particularly US-based global funds, instruct fund managers to always follow the advice of their preferred global proxy adviser. Others say the codes of their member bodies such as the Australian Council of Superannuation Investors or the Investment and Financial Services Assosication should be followed. Still others may ask for any recommendation that is contrary to what directors recommend to be referred to the institution for consideration. There are many other variations.

Company CEOs and chairmen brief the major fund managers on their share register regularly on how they are travelling and listen to the feedback they receive.

However, they do not always know what the proxy advisers are saying. It is pretty well impossible for them to know if the institutions behind the fund managers have views they wish to have reflected in votes at AGMs.

A large negative advisory vote on a remuneration report should be taken as a loud warning that the investment community is not content with some aspect of what that company is doing. However, it is an imprecise warning, as different people may cast negative votes for different reasons.

AICD believes any company that receives a large negative advisory vote should be sure to find out what the investors do not like and to take steps to ensure that it is not repeated. Institutional shareholders have a far more powerful weapon that they could use if unsatisfactory conduct continues, in the form of motions (or threats of motions) to unseat some or all of the directors.

Shareholders do not seem to be signalling that a high negative non-binding vote should lead to the resignation of directors. There have been instances recently where directors have been re-elected resoundingly at the very meeting where a large negative non-binding vote was recorded.

We emphatically do not support the view of some commentators that the next step should be adoption of a binding vote on remuneration. Directors are properly responsible for negotiating CEO remuneration and setting policy regarding other executives and staff. They are close to the company situation and know the people and their circumstances. Appointing the CEO is one of their key responsibilities, and his or her remuneration is intimately connected. Moreover, you cannot expect executives to wait months for an AGM to have their terms approved. Nor can the AGM override a contract that had already been signed.

The non-binding vote is here to stay. Companies need to learn to engage effectively with their key shareholders – as most have – and to act well in advance to avoid the kinds of things that will provoke a large negative vote. Equally, it is incumbent on proxy advisers to be reasonable and transparent about the principles they seek to apply.

Ralph Evans FAICD
CEO, Australian Institute of Company Directors