The Australian Council of Superannuation Investors (ACSI) – the peak body for institutional investors focused on ESG issues – has recently released its revised Governance Guidelines.
Many industry superannuation funds, in particular, will take direction from ACSI on how to vote their shares, so ACSI’s importance as a stakeholder for directors of listed entities is growing. ACSI includes as its members fund managers like IFM investors, large industry funds like AustralianSuper, CBUS and HESTA and state-based not for profits such as First State, Vic Super and QSuper.
ACSI has a director engagement strategy and holds around 250 meetings with directors of ASX300 entities a year. The AICD also regularly engages with ACSI over its views on ESG issues and how they relate to directors.
ACSI’s revised Governance Guidelines set out the issues it will focus on in engagement work with companies and factors it will take into consideration when determining voting recommendations. The revisions to the guidelines include new sections on:
1. Accountability: In light of the Financial Services Royal Commission, an emphasis on directors making decisions based on long-term sustainability and demonstrating a culture of accountability, being prepared to acknowledge responsibility for actions and decisions and engage with shareholders.
2. Risk management: Ensuring that the board actively manages ESG risks with strategies for engagement with stakeholders, regular monitoring, updates and reviews of ESG risks and incorporates ESG risk management into assurance and remuneration practices.
3. Corporate culture: Clear expectation that the board is responsible for corporate culture, with regular assessment and disclosure of culture and metrics and a consideration of culture when selecting the CEO.
4. Social licence to operate: Requiring boards to disclose how they deal with stakeholders and maintain their social licence. This includes clear ESG disclosures which identify how they are managed and how the company evaluates whether its management is effective.
5. Gender diversity: A minimum of 30 per cent of a board being women with a time-frame to achieve gender balance (40:40:20) on the board.
6. Remuneration: A concern that short-term incentives (STIs) may be paid for performance at target and the need for evidence that variable remuneration is applied consistently (for example when it fluctuates) from year to year and clear explanation of remuneration practices in a narrative form. No vesting of STIs when performance is below the median of peers.
The guidelines also highlight other factors that ACSI will take into account when recommending votes to its members. These include:
- When approaching director re-election, ACSI will consider factors relating to performance and accountability of each director as well as overall board composition.
- Ensuring directors are not over committed with board work, in particular the Chair.
- Detailed criteria to assess independence of non-executive directors.
- Non-executive directors should be paid by fixed fee or shares, not by options.
- Climate change risks to be identified and managed in accordance with the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosure.
- Where companies are members of industry associations that advocate on climate change, an indication of whether the board agrees with that association’s advocacy and how it intends to respond to those differences.
- Compliance with the terms of the Modern Slavery Act.
- Transparency around health and safety data, including disclosure of workplace fatalities.
- Disclosure on other workforce metrics including culture, workplace diversity and discrimination, labour relations and whistleblowing and grievance mechanisms.
- Disclosure of tax policies with proper governance of tax risk including any aggressive approach to tax planning.
- Non-audit fees paid to a firm to generally be less than 50% of audit fees to the same firm.
- Rotation of audit firm every 10 to 12 years on an if not why-not basis.
- Equity capital raising to be conducted in a manner that allows shareholders an opportunity to maintain their interest or be compensated for dilution.
The ACSI guidelines illustrate rising governance expectations of listed companies, especially in the wake of the Financial Services Royal Commission. In particular, investor groups such as ACSI are expecting to see greater disclosure around company’s stakeholder impact and more individual director scrutiny and accountability.
Looking ahead to 2020, remuneration frameworks will continue to attract significant focus from investors, with companies needing to demonstrate a clear correlation between pay and performance, both financial and non-financial. With ASIC expected to release its report into board oversight of variable remuneration in early 2020, and APRA set to finalise a new prudential standard on remuneration around the same time, the governance of pay will remain in the headlines.
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