Remuneration Governance Update 3 April 2014

Transcription

1 Remuneration Governance Update 3 April 2014

2 Agenda Introduction Business unusual for NEDs Time commitment The profile of a NED Chairpersons fees NED fees Shareholder engagement strategies Why are Institutional Shareholders voting No on Remuneration 2

3 Introduction recently released the seventh edition of our NED practices and fees trends report Report considers issues facing NEDs as well as trends in fees paid Data focuses on 358 (373) JSElisted companies and is based on publicly available information as at 30 November 2013 Total fees paid split between chairpersons and NEDs Analysis by reference to market capitalisation of companies as well as four main industries financial services, basic resources, industrial and services 3

4 Business unusual for non-executive directors In prior years we focussed on the increasing regulatory and risk landscape leading to greater personal liability for NEDs Current year we deal with the issue of organisations evolving into purpose-driven organisations Are our local NEDs equipped for this? Are they fit for purpose? The number of NEDs has declined to 2,204 (2,294) Quality rather than quantity is now the issue 4

5 Shift has happened Who are the stakeholders? What is purpose-driven? Examples (Apple, IBM, Google, Safaricom, FNB ) 5

6 TIMMS framework 6

7 Are our directors ready to tackle their new roles & responsibilities? Knowledge, skill resources, diversity and the ability to apply these skills effectively is paramount to deal with modernday boards and their challenges Time commitment? Adequate skill? 7

8 Time commitment Membership of multiple boards Number of directorships Number of NEDs Number of directorships (excluding subsidiary companies) Number of NEDS Number of boards Number of directors Number of companies 8

9 Adequate skills? s 2013 Annual Corporate Directors Survey findings: Diminished performance because of aging Lack of expertise Lack of preparation of meetings SA Survey findings: Industry expertise 29% Finance expertise 17% Racial diversity 17% Technology / digital media expertise 13% 9

10 Profile of a non-executive director 10

11 Profile of a non-executive director (1) Gender diversity Gender profile: Non-executive directors The % of female NEDs ranges from 15% in the case of AltX to 20% in the case of industrials and financial services 100% 90% 80% 70% 60% 50% 40% Improvement on prior year 30% 20% 10% 0% AltX Basic resources Financial Industrial Services Female % 14% 18% 15% 17% Female % 16% 20% 20% 19% Male % 86% 82% 85% 83% Male % 84% 80% 80% 81% 11

12 Profile of a non-executive director (2) Age Average age has increased for chairpersons 56 (median 53), while the average age for nonexecutive directors has remained the same at 50 (median 50) Racial transformation Representation for the first time declined from 42.5 to 41.6% Biggest decline is found in the industrials sector African, Coloured and Indian (ACI) board Representation by sector: Non-executive directors NED total % 40.2% 40.3% 44.2% Industrial Financial Services Basic resources 32.6% NED Total ACI Representation % ACI 44.3% 40.2% 40.3% 44.2% 32.6% AltX 50% 40% 30% 20% 10% 0% % ACI 12

13 Profile of a non-executive director (3) Resident status Top 5 representation South Africa : 87.8% UK : 02.9% Australia : 02.6% United States : 01.4% China : 01.0% 13

14 Fees 14

15 Chairpersons fees All sectors Small increase in fees at the median to R422,000 (R394,000) Notable increases in the basic resources sector large-cap increase at 51,4% and small-cap at 48,1% Large-cap industrial services still showing the greatest median at R2.1m Remunerations of chairpersons: All sectors (R 000s) Lower quartile Median Upper quartile

16 Non-executive directors fees All sectors Marginal increases at the median and upper quartile Median increased to R288,000 (R276,000) Notable increases in small-cap basic resources sector and particularly in the industrial sector Large-cap industrials still showing the greatest median of R901,000 almost double what they were in 2011 Remuneration of non-executive directors: All sectors (R 000s) Lower quartile Median Upper quartile

17 Shareholder engagement strategies 17

18 The basis of shareholder engagement Creating value for shareholders Annual non-binding advisory vote Vote provides feedback and influence on board Less than 50% in favour? Advised to engage with shareholders Remuneration policies and practices should create value for shareholders Therefore, shareholders have an annual non-binding advisory vote at the AGM to express views on remuneration policies adopted and their implementation 1 This vote allows shareholders to influence board s perspective on remuneration matters, and provide feedback If less than 50% of the votes are in favour of remuneration policy? No obligation to change the strategy and policies Board advised to engage with shareholders and investors to understand their concerns Pro-active discussions with investors around intended changes to the remuneration policy are encouraged 2 Next? But shareholder engagement should not stop here. 1 King III principle King III practice note

19 Dialogue with shareholders should be regular, transparent and informative The aim should be to build constructive relationships with shareholders, based on trust and mutual understanding Shareholder engagement and analysis of investor views should be undertaken at two stages: 1. Before a remuneration policy, long-term incentive or proposal regarding NED fees is tabled and presented for shareholder vote; and 2. After a vote against, or an insufficient number of votes in favour of a remuneration policy, long-term incentive, or NED fees proposal. 19

20 Taking shareholder engagement to the next level Pro-active engagement and analysis Post-facto engagement, analysis and disclosure Have an engagement plan and communication strategy Pro-active analysis of known major shareholders CRISA disclosures should be considered Do the groundwork towards securing support for proposals before the vote Approach shareholders openly: allow them to express views and concerns with ample time, before the media spotlight Shareholder vote Engage with shareholders - ensure their concerns are understood and can be addressed Post-facto analysis of shareholder concerns Post-facto dialogue with shareholders Consider a statement of shareholder views in the annual report setting out how shareholder views have affected the remuneration policy Consider disclosing detail of shareholder issues and how they have been addressed 20

21 What do shareholders want? The non-binding advisory vote is a method for shareholders to express their concern on aspects of executive remuneration which they do not have a vote on. Our analysis of proxy and institutional investor voting indicates that shareholders want to see: A substantial part of remuneration for executive directors in shares, and at risk ; Sufficiently stretching performance conditions for LTIs and STIs, with detailed disclosure of the measures selected and reasons for their selection; Personal KPIs with personal and financial metrics; Awards made at market value (no discounted awards); Appropriate share plan limits (a distinct move towards 5%). 21

22 Why are shareholders voting No? ISS High fixed pay increases Bonuses not linked to company performance LTI with no performance conditions (all or substantial portion) PIC Pay mix substantial part of remuneration not in shares Golden handshakes No performance conditions (STI or LTI) and not disclosed TSR Short vesting period Retesting for LTI Options granted at a discount to MV Short vesting periods General vote against share option plans (volatility, leverage and dilution) Dilutive LTI Ex-gratia payments Excessive NED fees 22

23 Why are shareholders voting No? Stanlib Lack of detail on the remuneration policy, such as performance metrics Rem policy heavily weighted towards EBITDA (prefer policy weighted towards performance measures under control of management) NED fees not aligned to JSE Top 40 Element Lack of comprehensive information relating to the period, conditions, basis for reward, performance criteria and exit clauses of executive contracts No clear disclosure of assumptions used to determine fair value of option for expense purposes Re-pricing of share options Little detail on how bonus payments determined Block allocations [favours incremental (regular) granting of options] Abuse in relation to fringe benefits / allowances of directors 23

24 Why are shareholders voting No? Old Mutual Majority of pay not at risk Personal KPIs should have personal and financial metrics Uncapped STI (should be % of GP) No performance targets & reasons for selecting them Golden handshakes Poison pills i.e. no pro rata vesting of LTI in change of control Repricing of share instruments Discounting on MV at grant Sanlam No evergreen share plans Not making annual awards Not making 100% performance awards Supports 2 hurdles (ROE and TSR) Retesting No pro rata vesting for early termination Discounted awards should be MV Not tax efficient (deductible) Vesting periods shorter than 3 years Dilution limits not reasonable (10% company and 0.5% individual) Dilution limits not reasonable (10%) 24

25 What is expected to be disclosed? Remuneration disclosure by companies is expected to be more transparent, focused and graphical Shareholders want to see: Personal and direct communication from the chairman A focus on action taken by the Remco during the year A clear link between strategy and remuneration policies Increased disclosure surrounding performance conditions, and how the company performed against targets A remuneration report focused on key issues, which is integrated: Tables and graphics illustrating policies and outcomes Easily navigable reports, with plain and simple language 25

26 What is the way forward? Innovative methods of shareholder communication are being introduced internationally. With South Africa close behind major jurisdictions such as the UK, US, Canada and Australia in many areas of remuneration regulation, engagement techniques developed worldwide should be considered and initiated by South African companies. Some options include: Regular group or one-on-one meetings with shareholders Shareholder/Investor roadshows Annual conference calls with institutional investors, focusing on corporate governance matters Virtual engagement via virtual annual meetings and/or online message boards, blogs, webcasts etc where shareholders can express their questions before meetings 26

27 Questions? Martin Hopkins: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Tax Services (Pty) Limited its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers ( ). All rights reserved. In this document, refers to PricewaterhouseCoopers Tax Services (Pty) Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.