The Australian Council of Superannuation Investors (ACSI) has released a policy paper outlining four proposals to update Australia’s corporate governance framework and improve corporate accountability. ACSI states that if implemented in full, the proposed changes 'would encourage boards to ensure that they are adequately informed about business issues, properly equipped to oversee management, and prepared to take appropriate remedial action when things go wrong'.
Proposed reforms
- Introduce a binding vote on remuneration policy every three years to supplement the existing two strikes rule.
- Disclose CEO pay ratios to shareholders, along with an explanation of how the ratio supports the company's values, strategy and culture. More particularly, ACSI is calling for the introduction of a requirement for companies to disclose the ratio of their CEO pay to that of their Australian workers' median 25th and 75th percentile pay. Companies should also be required to explain any changes over time, along with how those ratios are consistent with the company's values, strategy and culture. ACSI comments that in combination, the two measures (the binding vote on remuneration policy every three years, and the disclosure of CEO pay ratios) will ensure investors have greater influence to prevent pay outcomes that are inconsistent with their expectations.
- Introduce annual director elections (for directors of listed companies on a 'comply or explain' basis). Asking companies to put directors forward for re-election annually in Australia will ensure: a) 'boards are the frontline in demonstrating accountability for their companies'; b) 'responsive and timely' feedback on director performance by investors; and c) careful consideration by boards and shareholders of each individual director's contribution to the board and their effectiveness.
- Give shareholders the right to propose non-binding resolutions to company meetings (without the need to seek an amendment to a company's constitution), subject to 'appropriate support' ie the existing 5% or 100 member rule). The proposed reform would benefit boards by giving them the benefit of investor views on a range of matters (on an advisory basis) without 'disrupting the board's role in governing the company'.
[Note: ACSI has previously recommended shareholder resolution reform of this kind in the context of diving progress on ESG issues. See: Governance News 03/11/2017]
'Targeted' and 'proportionate' response to the issues identified over the course of the Hayne Commission
Commenting on the proposals in the media, ACSI CEO Louise Davidson reportedly observed that the measures have already been introduced in other developed markets such as the UK and the US and that consequently, Australia has some 'catching up to do' to bring its corporate governance framework into line with best practice. Ms Davisson also said that she considers the proposals to be a 'proportionate and targeted response' to the issues highlighted by the recent Financial Services Royal Commission.
ACSI has called on parliamentarians and regulators to implement the proposals
ACSI states that the 'proposals for annual director elections, votes and disclosure on pay, and greater shareholder power are important steps in this direction. Similar measures have had a positive effect in other markets, making companies more accountable to their end investors. We encourage Australian regulators and policymakers to adopt these constructive proposals.'
More to come?
ACSI has said that the proposed reforms are part of a broader policy agenda which it intends to ahead of its annual conference on 8 May.
An endorsement of Labor's pay transparency policy?
In a statement, Shadow Assistant Treasurer Andrew Leigh welcomed ACSI's call for CEO pay ratio disclosure noting that the CEO pay proposal is in line with Federal Labor's stated policy position. Mr Leigh said that in October 2018, the Federal Labor Party announced that (if elected) it plans to require all listed firms with more than 250 employees to report the ratio of their CEO pay to the pay of the median employee. In addition, firms would be encouraged to provide an explanation of their remuneration strategy. The measure would apply from the 2021 financial year to allow the Australian Securities and Investments Commission (ASIC) time to issue appropriate guidance and sufficient time for firms to comply with the new requirements.
