ASIC surveys corporate governance practices of ASX 200 companies

ASIC Commissioner John Price confirms review of board practices for large listed companies, and summarises key AGM season trends.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry cast a long shadow over the 2018 annual general meeting season. This was particularly so for companies and directors directly involved in the Royal Commission, but the focus was also more generally felt across ASX 200-listed companies holding AGMs from October to December 2018. Here, we summarise the trends and issues emerging from the last AGM season.

Remuneration

Executive remuneration was topical, with strikes on remuneration reports for ASX 200 companies during the season increasing significantly. Twelve companies received first strikes this season, compared with five first strikes and one second strike the previous year. The magnitude of individual “against” votes on remuneration reports also soared, reaching a record high 88 per cent “against” vote in one case. Shareholders expressed concerns regarding amounts of pay, including consequences on pay for poor performance, the complexity of remuneration structures and a lack of transparency around the operation of incentive plans.

For financial services companies, negative shareholder sentiment on executive pay, as well as accountability, appeared to impact voting on remuneration reports. The average “for” vote on remuneration reports for ASX 200 companies in the banking sector during the 2018 season fell to 66 per cent (from 96 per cent in 2017). None of the companies with a first strike in 2017 (that were still in the ASX 200) received a second this season. This may show that board response addressed shareholder concerns.

Shareholder engagement

The AGM season saw an increasing proportion of material “against” votes on resolutions for benefits to key management personnel. One in five of these attracted an “against” vote of 10 per cent or more. Resolutions for the election or re-election of directors also remained an area where “against” votes continued to creep upwards. The average “against” vote on director elections increased to more than four per cent in the 2018 AGM season (3.2 per cent in 2017). One in 10 director election resolutions attracted an “against” vote of 10 per cent or more during the season.

Shareholder concerns may have been driven by director workloads, with investor groups or proxy advisors targeting some directors who were perceived to have taken on too many board positions.

ESG issues

Shareholder-requisitioned resolutions relating to environmental, social and governance (ESG) issues continued to draw attention this season. Although the number of companies facing these resolutions decreased from last year, the level of support for them increased. Average proxy for votes increased to 19 per cent compared with six per cent in 2017; and two resolutions relating to climate change attracted proxy for votes of more than 40 per cent, which may indicate a broader shareholder focus on ESG issues, particularly climate change. We recommend when climate risk is material to a company’s business, consideration should be given to disclosing its governance and risk management practices around climate risk.

Related party transactions

In 2018, when examining all ASIC-lodged notices of meetings by listed public companies, ASIC noticed a 20 per cent year-on-year decrease in the number of meetings that included a resolution proposing to grant benefits to a related party. This may be due to smaller listed companies placing greater reliance on the “arm’s length” exception in section 210 of the Corporations Act 2001 (Cth).

ASIC encourages companies to ensure the arm’s length exception is applied correctly so members are given an opportunity to vote on a proposed related-party transaction if it is not truly arm’s length.

ASIC Corporate Governance Taskforce

Over the next six months, ASIC is reviewing the corporate governance practices of large listed entities. The review includes:

• Board decision-making in relation to variable executive remuneration, including its granting and vesting.
• The role of the board and officers in the oversight of (and in the case of officers, the management of) non-financial risk.

The aim of ASIC’s review is to raise governance standards in listed entities and ensure compliance with the Corporations Act 2001 (Cth). It is intended to highlight effective, market-leading practices while identifying those requiring improvements.