News and Views

  • Date:01 Dec 2007
  • Type:CompanyDirectorMagazine

More communication needed to overcome ‘rem’ issues

Executive remuneration packages – and rising shareholder votes against them – have dominated recent media coverage of the current AGM season.

Telstra grabbed the biggest headline when holders of 66 per cent of its shares voted against its remuneration report – the largest protest vote for a top 100 company seen sicne the non-binding vote came into effect in 2005.

But pay packages at several other companies, including the likes of AGL Energy and Babcock & Brown Infrastructure, were also voted down by shareholders.

While these votes are non-binding, the backlash in recent weeks has no doubt sent a shiver up the spines of some boards and their remuneration committees, especially given the need to retain executives while the global war for talent rages on and given the complexity and time involved in drawing up effective remuneration packages.

For its part, AICD believes that executive remuneration should remain a matter which is decided on by a company’s board, but it also stresses the need for open communication and engagement with shareholders.

AICD believes that boards – with the assistance of their remuneration committess and where appropriate, external consultants – should use professional proccsses to review and set appropriate remuneration structures for their companies’ individual circumstances.

It notes that while boards and shareholders can agree to the broad principles of remuneration strategy, negotiations regarding remuneration contracts should remain unique and confidential to individual executives.

“Ultimately, directors and shareholders want the same things – the best executive team, improved corporate performance and some alignment of financial incentives for owners and managers,” says AICD CEO, Ralph Evans. [For more on AICD’s views on this issue, see p6.]

To improve communications, Australasian Investor Relations Association CEO, Ian Matheson, advises companies to be well prepared ahead of their AGMs. “The company’s chairman, investor relations manager and possibly the head of the remuneration committee should do a road show ahead of the AGM,” he says.

“There’s also a need for companies to acknowledge, if they do get a strong vote against the remuneration package, that shareholders do have serious concerns and that they should take on board these concerns.”

Matheson adds that companies and their remuneration committees should consider these issues before they take on a new CEO or renew a contract, knowing that shareholders may have something to say about it, even if it’s after the fact.

Australian Council of Super Investors (ACSI) executive officer Phillip Spathis also believes that communications are the key. “We benefit from the process and so do companies,” he says. “There are many examples of companies using the disclosure regime to tell the story of how they want to retain and sttract good people. So it’s basically a good news story.”

In the mini-reporting season, however, about 15-20 per cent of companies attracted a high ‘no’ vote – defined as anything above 20 per cent – against their remuneration reports. “We are probably tracking at the same level during the current AGM season,” says Spathis. “More shareholders, especially institutions, are thinking about this issue and I see this period as an opportunity. The vote is non-binding, but a message is being sent to boards about how they can do better at managing these issues.”

He says: “Rather than burying their heads in the sand, companies should find out why they reveived a ‘no’ vote. As a block, we don’t go out to vote a remuneration report down… We are not saying that you shouldn’t pay people well, but you do need an appropriate mix of fixed pay and at risk pay, especially given the high turnover of CEOs today.”

Top 200 are ill-equipped for climate change

Australia’s top 200 listed companies are unprepared to mitigate risks posed by climate change – a factor that is affecting their financial value and performance, according to new research.

A study by investment research and ratings firm, RepuTex, reveals that only 20 per cent of Australia’s top 200 companies are positioned to manage climate change risk. It also finds that the materials and financial sectors are leading the pack and have best anticipated carbon risks while the utilities and energy sectors are the worst prepared. In addition, the research uncovers a direct correlation between a company’s level of preparedness and its financial performance on the stock market. Indeed, companies with a positive RepuTex Carbon Valuation ranking have been outperforming both low valued stocks and local ASX benchmarks.

RepuTex’s head of research, Hugh Grossman, notes that although business leaders acknowledge the rules of the game are changing as the world moves to a low-carbon economy, many companies are yet to fully understand the financial impact of carbon risks and the opportunity for their competitive position and bottom line.

“Climate change is no longer purely an environmental risk issue, but a significant opportunity for the corporate and investment communities,” he says. “Australian companies must understand their carbon risk and quantify bottomline impacts in order to remain competitive as new drivers — such as carbon intensity, energy efficiency and credit generation capacity — begin to have an impact on company value.

“For investors, understanding a company’s capacity to deal with these risks and maximise opportunities is the most important means of identifying company value and growth,” he says.

Overall, top 200 companies have a low average level of preparedness of 0.08 on a scale from -1 (low) to +1 (high). A positive rating indicates that a company has the risk management strategies in place to respond to carbon risks, and is positioned to deliver value to shareholders.

“The overall negative valuation shows that Australian companies are unprepared to mitigate carbon liabilities or capitalise on potential revenues,” says Grossman.

Fischer to chair Flying Doctors

Former deputy prime minister Tim Fischer has been appointed national chairman of the Royal Flying Doctor Service (RFDS), replacing outgoing chairman Dr Stuart Spring.

The former National Party leader was unanimously elected to the position last month by the RFDS Australian Council National Board. Existing national board member, Air Vice-Marshal Norman Gray, was unanimously elected deputy chairman.

“It is a delightful privilege to take on this role just in time for the 80th anniversary year of the RFDS,” Fischer said in a statement.

New appointments to AICD’s board

Lyn Cox FAICD, President Tasmanian Division

Cox is a fellow of the Institute of Chartered Accountants in Australia and has a Bachelor of Economics. He was a partner in accounting firm, Deloitte Touche Tohmatsu until October 2007 and until 2006, was the managing partner for Tasmania. He has worked in accounting firms since 1970 and been a partner since 1976 mainly in the areas of assurance and advisory, corporate finance, risk assessment and governance. Formerly state chairman and national councillor of the Institute of Chartered Accountants, he was also national treasurer and national director of the National Heart Foundation.

Alan Hewitt FAICD, President South Australian and Northern Territory Division

Hewitt is chairman of CPS Credit Union (SA). He is also chairman of Eastwoods Group and a director of CPS Waymouth. He was a consultant and managing director of HH Advisory, following ten years as state manager of the Australian Property Group of the Department of Administrative Services. He is a fellow of the Australian Property Institute and a senior associate of the Financial Services Institute of Australasia.

Richard Lee FAICD, President New South Wales Division

Lee is chairman of ASX listed group Salmat, deputy chairman of Ridley Corporation and a director of CSR and Newcrest Mining. He is also a director of the insurance division of Wesfarmers and an independent member of the trading risk management committee of Graincorp. In addition to these roles, Lee is a director of several private companies and provides consulting services to various corporations. Lee is a former CEO of the NM Rothschild Australia Group. He is also a governor of the Institute of Neuromuscular Research.

Elizabeth Bryan FAICD, National Director

Bryan was previously president of the New South Wales Division. As a national director she will be the board representative on the Corporate Governance Committee.

AICD would like to thank the following directors who have completed their term:
Helen Nugent AO FAICD, National Director
Ashley Harris FAICD, President Tasmanian Division
Keith Smith OAM FAICD, President South Australia and Northern Territory Division