Stephen Mayne on executive pay

Shareholder activist Stephen Mayne has put his views on the Productivity Commission's proposed changes to executive pay up on the ABC's The Drum website, and I reckon it's worth a read. He talks a bit about proposals that have received little media attention, such as banning executives from voting on resolutions over their own remuneration reports or that super funds must now disclose how they vote on remuneration reports.

I liked two snippets from the article enough that I thought they were worth repeating:

"...since when has the basic democratic principle of majority rule been a bad thing? If 50% of the voting shares support an external candidate, they should be on the board."

And:

"...that is the heart of the problem. If boards feel their tenure is under no threat from shareholders they will continue to behave recklessly through value-destroying ego-driven takeovers and excessive executive pay deals."

Executive pay reforms

The Productivity Commission has released its report on executive pay, which strengthens the power of shareholders to run their company and increases the accountability, transparency and independence of directors. Details of changes include:

1. The “no vacancy” rule is to be eliminated. This currently allows boards of directors, rather than shareholders, to arbitrarily set the size of the board. In past candidates could receive a “for” vote of 50% but fail to be elected because there were only a limited number of vacancies. In such cases only those with the highest “for” vote (generally board endorsed candidates) are elected. This is a good reform as selecting directors should be left to shareholders, not the directors themselves.
2. Remuneration reports must include a Plain English Summary, the Remuneration Committee cannot have any executives of ASX 300 companies on it and use of remuneration consultants is to be “overhauled”. Remuneration reports are becoming very complicated and the Australian Shareholder’s Association has opposed remuneration reports just for being too complex. If executives cannot understand the incentive structure then it reduces its ability to act as an incentive. Strengthening independence on the remuneration committee is also a good move. On remuneration consultants, I’ll wait until more details are released.
3. The proposed “two strikes” rule, where a 25% “against” vote on the remuneration report for 2 consecutive years will require all directors to face re-election, has been weakened. A majority of shareholders will now be required to pass a resolution before moving to a spill. This was a result of lobbying by the Business Council of Australia, who rightly pointed out that as it stood this rule gave control to a minority of shareholders. I think this is irrelevant, as a majority would have to vote against any director to vote them out, and is more a way for the BCA to save face.

A number of changes were not made:

1. A salary cap was rejected as impractical. This is correct, with this change being pushed by unions and their politics of envy rather than shareholders. Increasing accountability and shareholder power is a better approach, as this allows pay to be linked to performance. And recent AGMs have demonstrated that shareholders are very willing to oppose outrageous pay when the executives are not performing.
2. No quotas for women directors will be set. A number of European countries have a similar policy in place. While true that directors are an old boys club, the problem is the old, not the boys. As with the salary cap, this is not a practical solution as it doesn’t tackle the underlying problem. Reforms such as removing the no vacancy rule are a better way of getting qualified candidates (including women) on boards.
3. The chairman is still automatically given undirected proxies if shareholders do not nominate a proxy. Chairmen should be allowed to hold proxies, but currently shareholders who sign their voting form and send it back give their proxies to the chairman by default, even though they don’t indicate it, effectively giving power to the board and taking it from shareholders. As with the no vacancy rule, this should be eliminated, or at the very least chairmen should vote undirected proxies in line with how shareholders on the floor vote.

Overall these are good changes. Anything that gives more power to shareholders, the people who own the company, can only be good for their interests.