Last month, Ipreo, Value Trust, and hkp/// group organized an afternoon session on the subject of Governance, Performance & Pay in the context of Board, Management and Institutional Investors, at the facilities of the Swiss Exchange.
With the Swiss Shareholder Meeting Season 2017 almost complete, the subjects of Compensation, Pay for Performance and Governance have been increasingly addressed by both the Corporate and Investor communities. Agenda items, historically viewed as routine, have at times received large portions of the share capital voting against. The need for a corporate issuer to understand why these investors are applying their opinions and are often critical of the company’s’ practice, engagement and transparency from both sides is becoming increasingly important.
To discuss these issues, Ipreo, Value Trust, and hkp/// group were joined by a variety of accomplished speakers, including Natacha Dimitrijevic from Hermes Investments, Andrew Gebelin from Glass Lewis, Dr. Eveline Saupper, Board and Compensation Committee of Clariant, Syngenta, Georg Fischer and Flughafen Zuerich.
Angelika Horstmeier, Ipreo’s Director of Corporate Global Advisory Services, was on hand, and she’s provided the Blog with a comprehensive recap of the event.
Governance, Performance & Pay Roadshow 2017
After a brief welcome by the Swiss Exchange, Ipreo’s own Andreas Posavac introduced the audience to a recent investment flow study that was conducted to show who is managing the investments into Switzerland and what trends are visible. He showed that investments are moving from active to more passive styles, with Index and Quantitative investments styles gaining in momentum. With the increase of these “IR immune” investors comes the challenge of an often very active and engaged governance department, which decides on the voting behavior of these investments at Shareholder Meetings.
Posavac explained how the increasing dissent shown on certain topics at the Shareholder Meeting often stems from these investors, sometimes influenced by external advisors. Quite often, these investors have formulated voting guidelines that they apply when being asked to support a certain Agenda item, and these are at times quite restrictive in what is permissible or not.
Andrew Gebelin, representing the Proxy Advisor Glass Lewis shared the recent updates Glass Lewis had made to their General Voting Policy; including a call for increased clarification on the performance metrics applied in Say on Pay policy, as well as clarification on their director tenure classification.
He walked through the Glass Lewis perspective on Pay Quantum and expressed his view that if there is an increase, this should always be accompanied by a detailed and exceptional rationale. He touched on the subjects of the annual bonus and how disclosure of metrics, weightings, and a simple explanation on the metrics of a minimum and maximum pay-out level, will ensure more transparency for investors reading the reports. In terms of long term incentive schemes, the measurements of TSW or share price could be relevant to the setting of performance targets, but other measurements such as ESG factors or non-financial performance targets.
Whilst Glass Lewis clients are institutional investors – who often have a “custom” policy which is more detailed than the general policy of this Proxy Advisor – it was very helpful for the audience to hear the concept of the analysis applied to each Shareholder Meeting Agenda put forward in order to be better prepared for addressing any concerns of their own.
Natasha Dimitrijevic, representing the managers of the British Telecom Pension Fund Hermes Investments, then proceeded to give the audience deep insight into the investor perspective and the various challenges that they are faced with when analyzing an executive pay proposal. Introducing their own principles for remuneration, she gave details of the expectations set for the topics of structure, stewardship, alignment, shareholding and accountability. Her principle message was that the simpler a remuneration scheme is, with a clear disclosure on fixed and variable pay and targets, the more favorably it will be seen, as opposed to a complex scheme that offers limited insight into the details.
“What is performance?” That was the question posed by Prof. Dr. Christian Aders from Value Trust. By looking at the definition of performance from the shareholders’ and management’s perspectives, he clearly showed the differences in understanding. By using TSR as the sole factor for performance measurement, companies often face higher expectations every year from their investors. He advised that companies should benchmark themselves to their peers in their TSR and equity return bench-marking.
Michael Kramarsch of hkp/// group then gave a general overview of Say on Pay votes across Europe, where they are already binding but advisory only. With Switzerland receiving some major dissent at their consultative votes on the compensation reports, he highlighted that Proxy Advisory Firms such as Glass Lewis, ISS, and Ethos have influence over the investors’ voting behavior, therefore impacting those companies who received a vote recommendation to vote against their compensation report.
Kramarsch emphasized that this level of influence and the individual opinion of stakeholders will be here to stay, so companies are required to listen to their opinions and to consider their guidelines when creating and amending their own compensation schemes.
The afternoon was completed by a panel discussion including Dr. Eveline Saupper, Andrew Gebelin, Angelika Horstmeier (Ipreo), and Michael Kramarsch. After Dr. Saupper gave a personal account of his experience with the force of negative votes within a listed company, questioning whether those negatively voting investors are really aware of the company’s story and current market situation, the panel discussed the various viewpoints from company, to investor and Proxy Advisor.
Compensation subjects are often met with strict scrutiny by investors and Proxy Advisors alike and whilst the company may be facing the market and legislative issue of their own, these cannot be ignored.