Why do we engage on corporate governance issues?
Corporate governance is a material issue for all companies and poor practices expose shareholders to significant risk in the value of their investments.
There are too many examples in corporate Australia of poor behaviour, including a failure to manage ESG risks, which have elevated public concern. Too often, investors and the wider community have borne the consequences. The Banking and Financial Services Royal Commission highlighted the need for better governance practices.
ACSI has been a standard-bearer of this message for some time, highlighting the importance of corporate governance and appropriate management of ESG issues– to reputation, profitability, sustainability and social licence to operate.
At ACSI, the key areas of corporate governance focus include board composition and accountability, executive remuneration and capital raising practices.
How do we engage on corporate governance?
ACSI directly engages with ASX listed companies that, through our voting research, deficiencies in governance performance have been identified.
ACSI’s Governance Guidelines set out a clear statement of our members’ expectations about the governance practices of the companies in which they invest.
Positively influencing the way business is conducted by providing guidance to companies on how to cultivate policies and practices that enshrine good governance is one way our members maximise investment outcomes for their beneficiaries.
How are companies responding?
In 2019, 80 percent of companies that we engaged on corporate governance made improvement to their practices.
These included commitments on board renewal by companies with poor track records, while in other cases we saw commitment for more industry-relevant skills.
Companies that we engaged on matters of remuneration issues increased their pay-for-performance alignment, set more challenging hurdles and improved their standards of transparency.
Each year we publish a report into CEO pay in ASX200 companies. Our report consistently identifies concerning trends in remuneration practices, including the emerging ‘culture of entitlement’ surrounding annual bonuses and short term incentives in many of Australia’s largest companies.
The report found that more than half of ASX100 CEOs received at least 70 per cent of their maximum bonus entitlements in FY18 suggesting that what is supposed to be ‘at-risk’ pay may not be very risky at all.
There are, however, some positive signs that some boards are understanding our message. We have seen a trend among leading companies to lower base pay for incoming CEOs, reducing their cash pay by deferring a portion of awards into equity that is delivered over time, and implementing malus or clawback provisions to deal with situations where poor performance and behaviours emerge after rewards have been delivered.
However more work needs to be done. We will continue to review the remuneration practices of ASX300 companies and engage with them to understand the rationale underpinning their remuneration practices. We will also continue to assess remuneration arrangements on a case-by- case and make recommendations to our members.