With the AGM season fast approaching, Angela Perry explains key changes to factor into remuneration planning.
For listed company directors, the annual general meeting (AGM) season is fast approaching – when company decisions are put to the vote and remuneration structures are scrutinised by shareholders.
With many changes flagged, company directors need to understand how to avoid a potential double strike against executive remuneration. It is also a good time to reflect on what is ahead for the coming year.
Proxy advisers and solicitation specialists have a significant influence on large institutional investors voting although there has been a gradual shift away from sole reliance on these reports with large institutional investors taking a much greater interest in the companies they invest in.
Of particular interest is a growing awareness of sustainable and ethical investment choices with many superannuation funds considering how they can accommodate this in the mainstream choices for their members.
Over 50 per cent of the assets under management on the Australian Stock Exchange (ASX) are managed by people who have now signed on to the United Nations Principles for Responsible Investment (UNPRI).
Conversations with proxy advisers and institutional investors can be infrequent – sometimes only twice a year, unless a company has a first strike against it.
Best practice engagement is now moving towards continuous communication with proxy advisers and institutional investors, especially if a company is considering something outside of the norm (for executive equity, the norm is currently performance rights or a performance share plan with a three or more year vesting period and total shareholder return (TSR) and earnings-per-share (EPS) performance measures).
Even with the standard plans, there are some important design elements to be aware of: dividend payment before vesting is not acceptable, disclosure of clawback considerations is important and weighting of remuneration in favour of any one element will be scrutinised. Most importantly, relevant and simple information about why the plan has been chosen needs to be continuously explained.
As an example, if a company has changed its equity plan in any way since the last AGM, it is important to meet and disclose this early with proxy advisers and large institutional investors and explain the rationale behind the changes and not to wait until the normal visit.
Leading up to the AGM, proxy advisers are busy developing reports which analyse listed companies – ultimately providing recommendations on how they believe shareholders should vote.
Knowing this, directors should consider planning early to ensure they have the chance to influence and educate the adviser. Proxy advisers are compiling hundreds of reports in a short time frame so engagement outside of the crucial months leading up to AGM season is imperative.
There is also a growing use of proxy solicitation, because directors are prepared to spend money to get peace of mind, knowing that they are entering the AGM with a “for vote” for their remuneration report. The two strikes legislation has meant that the AGM season has even more visibility and pressure for directors.
Looking forward, directors should also be aware of upcoming reforms that are likely to affect executive and employee equity plans.
Reforms to employee ownership rules
The rules for employees and directors around employee share ownership are undergoing change from various stakeholders ranging from the Australian Securities and Investments Commission (ASIC), ASX, Australian Taxation Office (ATO) and the government. While many of these changes are unlikely to affect the 2014 AGM season, it is important to be aware of them.
ASX Listing Rule 3.19B
The proposed ASX Listing Rule 3.19B (requiring continuous disclosure of share purchases under an employee or executive equity plans) was eventually scrapped. It was replaced by a new Listing Rule 4.10.22. It will require a listed entity to include in its annual report, as a one-off annual disclosure covering the whole of the reporting period, the substance of the information that would have been required to be disclosed continuously under the proposed Listing Rule 3.19B.
Although the amendments are set to commence on 1 July 2014, they will only be mandatory in respect of financial years ending on or after 30 June 2015.
ASIC Class Order 03/184
ASIC Class Order (CO) 03/184 – Prospectus Exemptions for Employee and Executive Equity is being amended and released around late July or August 2014. The CO which was previously issued in 2003 is being amended to expand the class of financial products offered (performance rights are included), people who can participate (contractors and casuals are included) and ultimately reduce the administrative burden placed on companies for employee share incentives (continuous listing is likely to be reduced from 12 months to three months so newly listed or demerged companies will find it easier to offer equity).
With employee shares typically offered between August and December, the staggered approach that is being proposed by ASIC will provide companies with the chance to get across the issues and change documents before their next offers.
ATO TR 2014/D1
The ATO also announced Tax Ruling 2014/D1 on the deductibility of contributions made to an employee share trust. The interpretation of the ruling was unclear with some believing it would deny deductions relating to Division 83A plans – the legislation which governs traditional employee share schemes.
While the updated ruling has not been released at the time of writing, guidance was provided verbally at the recent Employee Ownership of Australia Conference in May by the ATO that Division 83A plans will be carved out of the final draft.
The Department of Industry is also looking at changes to employee ownership for start-ups as part of its general review in July.
While the outcome is unknown at this stage, it is a positive step for the industry after the federal Budget did not provide any amendments to current employee ownership regimes.
The changes being discussed are generally welcomed by the industry because of the positive effects they will have for private and listed companies.
From a governance perspective, it is important for directors be aware of these changes and understand how they affect their plans.
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