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Sunday 19 October
Executive remuneration — too much hype, not enough governance
Leading superannuation funds today called for less hysteria in regard to executive remuneration, in favour of a greater focus on returns for shareowners.
Research commissioned by the combined Public Sector and Commonwealth Super Schemes (PSS/CSS), Catholic Super Fund (CSF) and Northern Territory Government Public Authorities Superannuation Scheme (NTGPASS) has failed to find a link between remuneration for executives and performance for shareowners. The same research found that remuneration is strongly correlated with the size and complexity of the company, but the link to company performance in terms of return on equity and return on assets is largely absent.
The research of 172 of the largest companies in the S&P/ASX200 index found that, in 2002, 95% of these companies had in place Board -level remuneration governance processes. Despite this, only 26% of companies disclosed individual performance hurdles linked to shareholder value. More over, nearly half of the 107 companies that issued options did not provide investors with a value for those options. This is despite options comprising an estimated 12% of total executive remuneration.
“Criticising how much executives earn is great for the headlines, but misses the real issue for shareowners: is executive remuneration in line with shareowners' interests? Focusing on absolute remuneration levels does little to address this vital question or improve governance, it just promotes misdirected anger,” said the CEOs of the three funds in a joint statement
“At the same time, company directors have contributed to this remuneration soap-opera by failing to communicate remuneration in the context of shareowner rewards.
“We need to see an improvement in the substance of remuneration governance and disclosure exercised by directors to reduce the risk of regulatory intervention as well as to build investor confidence.
“It's time to sensibly work toward a greater focus on aligning reward of both shareowners and executives.
“Going forward we expect company directors to improve governance of this issue through effective disclosure of executive rewards aligned to our interests as long term owners; and we encourage other shareowners to demand the same from the companies in which they invest.
“Equally, we want investment analysts and managers to advocate on behalf of shareowners' interests.”
PSS/CSS, CSF and NTGPASS will be instructing their governance advisor to meet with certain companies where alignment of executive remuneration with shareowner interests is unclear. These engagements are intended to ensure concerns are conveyed directly to companies and seek improved understanding, particularly from Board Remuneration Committees, where they exist.
PSS/CSS, CSF and NTGPASS conduct proactive dialogue with companies in the interests of members' long-term returns and in alignment with the risk management arm of their fiduciary duty. The objective of these engagements is not a catching-out or screening-out exercise but rather to ensure a level of dialogue that is dedicated to the long-term interests of the Funds.
The Funds believe that significant opportunity to improve long-term returns through governance will be achieved as an increasing number of long-term investors adopt proactive strategies to constructively engage with the companies in which they are shareowners.
Facts on the Public Sector and Commonwealth Super Schemes (PSS/CSS):
The PSS and CSS are two of Australia's leading super funds which:
• provide retirement benefits and superannuation services to over 270,000 members Australia-wide;
• have around $10 billion funds under management;
• safeguard the long-term interests of members through Australia's first and leading comprehensive governance program, launched in 2001;
• were the first to raise the governance issue of risk disclosure in areas such as auditing (April 2002), environmental disclosure (September 2002), workplace health and safety (April 2003); and energy use (July 2003); and
• are committed to keeping members well informed so they make the most of their retirement opportunities.
Facts on Catholic Superannuation Fund (CSF):
CSF membership is represented across the teaching profession in Catholic schools and associated agencies in Victoria, Tasmania and the Northern Territory. The CSF commenced in 1971 and represents the interests of approximately 30,000 members with combined investment assets of about A$1.1 billion. CSF formally commenced its investment governance programme in November 2002.
Facts on the Northern Territory Government and Public Authorities Superannuation Scheme (NTGPASS)
The Northern Territory Government and Public Authorities Superannuation Scheme is a defined benefit scheme for employees commencing employment in the Northern Territory Public Sector after 1 October 1986. The Scheme was closed to new members from 9 August 1999. NTGPASS invests over $300 million on behalf of over 8,000 members and formally commenced its investment governance program in July 2003.
Facts on BT Financial Group:
BT Financial Group is the wealth management business of Westpac Banking Corporation. BT Financial Group encompasses the three former entities of Westpac Investment Management, Rothschild Australia Asset Management and BT Funds Management. BT Financial Group is one of Australia's largest investment management groups offering a range of investment management solutions to clients. The Governance Advisory Service (GAS) is a leading-edge approach to governance risk management developed with institutional investors to meet the challenge of long-term governance risk management. GAS currently advises clients representing around $3,500 million of Australian share investments.