ESG Trends to Watch: Corporate accountability and shareholder activism
The year 2023 has proven to be a tumultuous period for corporate Australia, marked by a series of corporate scandals and significant shareholder dissent at AGMs. Notably, a record number of ASX300 companies recorded strikes against their remuneration reports, marking the highest tally since the introduction of the two-strike rule in 2011.
Analysing these vote results is crucial for investors, corporate leaders, and governance bodies alike, offering key insights into the future of responsible investment and corporate accountability in Australia.
Performance accountability
Shareholders are becoming more vocal in expressing their displeasure over subpar company performance, evident in their voting against remuneration reports and challenging directors at re-elections. This frustration accompanies a challenging economic climate with an end to record low interest rates and a series of scandals that have rattled the Australian corporate landscape.
In this context, the substantial number of protest votes may be cyclical and event-driven, rather than reflective of an underlying trend. The combination of tough economic conditions and a growing distrust in corporate institutions may have temporarily reshaped shareholder sentiment.
However, a case could also be made that this year’s results are indicative of a long-term shift in voting patterns. Voting based on share price performance has rapidly emerged as a primary driver of shareholder dissent, and although it may see fluctuations, there’s a likelihood that investors will persist in expressing their dissatisfaction when warranted.
Looking ahead to 2024, a critical area of focus will be observing how companies address the issues leading to remuneration strikes and other significant protest votes. This response will be telling of the future direction in corporate governance and shareholder engagement.
Executive remuneration: long-term value alignment
The lack of shareholder alignment has always been a recurring theme in discussions about inadequate remuneration structures.
A potential remedy to this challenge lies in placing a stronger emphasis on equity-based, long-term remuneration. Unfortunately, this aspect of the pay package has not been highly prized by most executives to date. The perceived control over vesting outcomes and risk-adjusted values of long-term incentives both tend to be low. This is partly a result of the use of relative measures against generic or otherwise imperfect comparator groups with tough cliff vesting thresholds. The allure of focusing on more controllable and attainable short-term goals has been more appealing, as it helps to bolster annual bonuses which are expected to vest more consistently.
There is a need for innovation in executive pay structures to shift the executive mindset towards prioritising sustainable, long-term value creation, aligning more closely with shareholder interests rather than merely delivering against short-term scorecard objectives.
The regulatory landscape has seen some movement in this direction, particularly with the introduction of APRA’s CPS 511. It has catalysed changes, notably the introduction of a restricted share units component by four major banks. This de-risked long-term incentive award has come at the expense of short-term incentive opportunity, a move that has generally been well-received by the investment community.
The real impact of these changes will become more apparent in the years to come as we observe how the new structures are being executed. It will also be interesting to monitor whether this approach gains traction beyond the financial sector, with other industries potentially adopting similar structures.
Shareholder Activism: a rising force in corporate Australia
This year’s proxy season saw a surge in shareholder activism with prominent fund managers launching several campaigns targeting ASX300 companies. This wave of activism encapsulates the earlier discussed trends, focusing on companies with underperformance issues and perceived deficiencies in remuneration structures.
The impact has been significant, triggering protest votes, leading to board and C-suite resignations, and pushing companies to commit to revising their remuneration structures in response to stakeholder concerns.
The focus of these campaigns, along with their growing influence on ASX300 voting outcomes, indicates that performance accountability and executive remuneration will continue to be key areas of interest in the year ahead.
Predicting upcoming campaigns can be a challenging task. Some fund managers like Sandon Capital and Tanarra Capital offer some visibility by discussing their active campaigns on their websites. However, the launch or escalation of these campaigns often happens closer to the meeting date. This dynamic adds an element of unpredictability to the landscape of shareholder activism in Australia.
Alicja (Alice) Bielawska, Director of Research at CGI Glass Lewis
Alice oversees the Sydney-based research and engagement team that covers Australian and New Zealand markets. Prior to joining CGI Glass Lewis in 2017, Alice worked as an analyst specialising in the commercialisation process, including intellectual property and start-up valuations. Alice holds a Master of Accounting and Finance from Wroclaw University of Economics and Business in Poland and is a CFA Charterholder.
Disclaimer: The views and opinions expressed in this article are solely those of the author(s) and do not necessarily reflect the view or position of the Responsible Investment Association Australasia (RIAA). This article is intended as general information and should not be considered investment advice. It is recommended to seek appropriate professional advice before making any investment decisions.