The Australian Council of Superannuation Investors (ACSI) said it supported the inclusion of non-financial metrics, though they needed to be transparent and measurable. Its executive manager of governance, engagement and policy, Ed John, added that boards may need to be more active in clawing back pay in some cases.
“Historically, poor treatment of customers, regulatory breaches and conduct issues have had minimal impact on remuneration outcomes. This needs to change,” he said.
“Greater use of clawbacks and longer deferral periods may be needed to align incentives with ethical corporate behaviour.”
Institutional Shareholder Services’ (ISS) head of Australian research, Vas Kolesnikoff, said the key issue highlighted by the royal commission was that boards had failed to withhold bonuses or claw back pay when there was poor conduct.
He said there was a concern that non-financial targets, such as those relating to governance or diversity, could be “gamed” and were often opaque and hard to assess.
The debate comes after National Australia Bank, Westpac and ANZ Bank suffered hefty protest votes from shareholders on executive pay last year as the sector was rocked by allegations of financial misconduct at the royal commission. Commonwealth Bank managed to head off a shareholder “strike” against its remuneration report after slashing executives’ short-term bonuses.
We have seen some investors push back on non-financial targets, while others see non-financial targets as core to keeping a long-term focus.
Australian Institute of Company Directors chief executive Angus Armour said the challenge for boards was that “stakeholders” had differing and sometimes contradictory views on executive pay.
“We have seen some institutional investors push back on non-financial targets, while other investors see non-financial targets as core to keeping a long-term focus,” he said.
Mr Armour said there might be a role for APRA in helping boards “withstand short-term pressures from some investors by encouraging a more holistic view of pay and performance”.
AustralianSuper’s director of ESG and stewardship, Andrew Gray, said the fund supported a role for non-financial measures, but it was up to boards to determine how much weight to put on such metrics. He also emphasised the importance of board discretion.
“Even in a highly structured remuneration scheme, the board should assess the reasonableness of the final remuneration outcomes and use discretion as appropriate,” he said.
PwC partner Emma Grogan said putting less emphasis on non-financial targets was “directionally right” and backed a lower weighting on total shareholder returns (TSR). Ms Grogan said APRA’s suggestion for a 25 per cent weighting on TSR would be a “massive” shift from the current practice in banks.
Three of the largest investors in the Australian stockmarket, Vanguard, Blackrock, and State Street, did not comment on APRA’s proposal.
Clancy Yeates is a business reporter.