AMP Capital considers engagement with companies to be an important component of our stewardship function. It is our view that communication with companies is a far more effective way to encourage positive change rather than simply voting.
On the occasions where AMP Capital does not engage with companies, we will have assessed the situation and consider that further engagement would be ineffective. This situation can occur where we are certain that companies are fully aware of our concerns and the options available to them to resolve them.
Board composition continues to be one of the most important corporate governance issues for shareholders. Despite the significance of this issue, AMP Capital acknowledges it is difficult for shareholders to determine whether they have the right boards governing their companies. The short biographies available in annual reports provide little detail, and without being present in the boardroom, shareholders cannot observe the dynamics of the board nor its overall effectiveness.
AMP Capital uses a range of criteria to assess both the effectiveness of individual directors, and the board as a whole. Votes cast against the election of directors generally reflects concerns related to:
- performance issues and a lack of accountability,
- too few independent directors to represent public shareholders,
- evidence the board has taken actions contrary to shareholder interests,
- poor gender and/or skills diversity,
- poor board attendance, and
- broader issues related to poor governance.
Once again in 2017, AMP Capital supported the majority of directors seeking re-election. Those not supported were predominantly self-nominated, non-board-endorsed candidates, who we considered not ideal candidates.
On some occasions AMP Capital decided to abstain from voting, rather than vote against the election of a director. This may be where there was better representation of independent directors, albeit still a minority, and/or this was the first time the issue of board composition had been raised with the particular company. This action is taken to signal concerns in relation to board composition and is almost always accompanied by direct communication with the company involved.
Compensation: Remuneration Reports
Since the introduction of non-binding votes on remuneration reports in 2005, Australian investors have had a mechanism by which to review and comment on the approach to remuneration used by the companies in which they invest.
The impact of a vote against a remuneration report increased with the introduction of the two-strikes rule, which gives shareholders the ability to vote on whether to 'spill' an entire board of directors (that is, remove the board of directors) over remuneration concerns. (Note: Two strikes occur when 25 percent or more of shareholders vote against the adoption of the remuneration report in two consecutive years.)
In AMP Capital's view remuneration reports should facilitate a clear understanding of the company's remuneration policy, providing evidence that the policy is both fair and reasonable, and is aligned with shareholder interests. In particular we look for clarity of disclosure, satisfactory incentive and termination arrangements, as well as appropriate non-executive director remuneration.
In general, AMP Capital will vote against remuneration reports where they exhibit one or more of the following criteria: poor disclosure, poor alignment with shareholder interests, inclusion of non-executive directors in executive incentive plans, excessive quantum and poorly structured performance hurdles (for example, absolute rather than relative, not sufficiently challenging, too short-term, purely accounting-based, allowing too many opportunities for re-testing etc.). During this period, the specific reasons for voting against Remuneration Reports included:
- Overly generous retention benefits, coupled with generous new grants.
- Low performance hurdles, e.g. vesting well below earnings guidance.
- Retrospectively changing performance hurdles and/or start dates, or using board discretion to vest incentives when hurdles were not met.
- Overly-generous quantum.
- Poor alignment.
- Structural concerns, especially where they potentially incentivise behaviour that is contrary to the best interests of shareholders (for example, making acquisitions, beating budget etc. - with no reference to the longer term benefit to shareholders of meeting these targets).
- Boards unlimited discretion to allow incentives to vest upon a CEO's termination.
- Overly complex incentive structures that would potentially fail to motivate or retain key management personnel.
- Poor disclosure.