A KEY ADVISORY GROUP to Australia’s superannuation funds recently warned company directors to link the salary packages of executives more closely to their performance
A KEY ADVISORY GROUP to Australia’s superannuation funds has urged company directors to link the salary packages of executives more closely to their performance.
The Australian Council of Superannuation Investors (ACSI) recently launched its revised corporate governance guidelines, intended to provide a guide for superannuation trustees to monitor listed Australian companies. The revised guidelines will be used by a number of superannuation funds in respect of proxy voting and engagement with listed Australian corporations.
“We expect listed companies to improve their performance and behaviour that goes beyond meeting legal obligations,” said ACSI executive officer Phillip Spathis.
“We have an obligation to improve and enhance the long-term performance of listed companies in order to protect members’ retirement savings. We believe that commitment to corporate governance practices is critical to long-term performance.”
Spathis said ACSI’s analysis of the top 200 ASX/S&P listed companies highlighted a number of areas where companies need to lift their game, particularly in the areas of termination pay, insider trading, executive remuneration and protection of minority shareholder rights.
The revised guidelines outline what ACSI will consider in assessing the reasonableness of performance measures, and include specific provisions regarding, valuation and expensing of options, dilution retesting of performance hurdles and protection of minority shareholders.
The guidelines encourage the utilisation of dual performance hurdles (which measure a corporation’s performance on an absolute and relative basis) to be satisfied before any share options or other long-term incentive instruments vest.
However, ACSI said it will accept one performance hurdle, provided it is a relative performance measure that is sufficiently challenging and requires the achievement of out-performance against relevant and disclosed external benchmarks.
The guidelines also recommend that a corporation should disclose its policy on notice periods and termination payments in Executive Service Agreements (ESAs).ACSI said a corporation should ensure that such agreements provide a reasonable basis to procure the early termination of an executive, in circumstances where poor and inadequate performance by the executive against previously agreed benchmarks has occurred.
The council also supported properly constructed ‘liquidated damages’clauses as a way of restricting payouts to executives who depart following a period of poor performance, along with legislative reform that would provide shareholders with a greater say in termination benefits payment.
“The existing caps applicable under the Corporations Act are too generous,”Spathis said.
“They only allow for shareholders’approval of termination payments that exceed seven-times annual remuneration. Termination benefits worth more than a 12 months’ base salary should require approval by shareholders.”
ACSI also said it supported bringing Australian disclosure provisions relating to such agreements in line with US provisions, that would compel listed companies to file a copy of these with the relevant regulatory authorities.
“Bringing Australian disclosure provisions in line with equivalent US requirements would ensure that the contractual provisions dealing with a potential termination payout are made public concurrent with the hiring of the executive,” Spathis said.
