Institutional engagement

Transcription

1 ASX 200 Roundtable Summary paper 2011 Institutional engagement Sponsored by:

2 Institutional Engagement Mapping the complex web of stakeholders that determine how institutional owners hold, manage and vote their securities The Australian Institute of Company Directors hosted a series of roundtable events in August 2011 sponsored by the Commonwealth Bank of Australia, at which Ms Karin Halliday Manager Corporate Governance at AMP Capital Investors (AMPCI) led discussions on institutional engagement and share voting. Events were held in Melbourne, Sydney and Perth. The Australian Institute of Company Directors appreciates the participation of ASX 200 directors in these roundtables. This paper provides a summary of key themes from the roundtable discussions. The ideas presented in this paper are not necessarily the views of AMPCI or the Australian Institute of Company Directors and may not reflect the consensus view of roundtable participants. Introduction The way in which institutional investors hold, manage and vote their securities is complex. This complexity is compounded by the fact that the performance of these functions varies from institution to institution. Similarly, for institutional investors looking in at companies from the outside, making good assessments about corporate governance and performance is not always straight forward. However, sound corporate governance practices are important to institutional investors because it is more difficult for these large investors to move out of a corporation s stock. In light of the importance of institutional investment to corporations, directors have expressed a keen interest in deepening their understanding of how institutional investors make corporate governance, voting and investment decisions. At this series of roundtables, directors engaged in an open discussion about the influences upon institutional decisionmaking and in particular sought an insight into AMP Capital Investors approach to voting and engagement. AMP Capital Investors Approach AMP Capital Investors (AMPCI) services a range of different clients and has a multi-style approach which comprises three core teams. These teams are the: Capital Team: a team which makes investments for clients based on the expertise of its brokers and investment analysts; Multi-strategy team: a team which makes investments for clients based on systems, (for example quant funds and index funds); and Sustainable Funds team: a team which selects investment strategies that meet particular environmental, social and governance indicators. All of these teams will invest to a differing extent, in companies within the ASX 300. As such, AMPCI will be entitled to vote its securities holdings at a large number of company meetings. AMPCI has centralised its voting process and the responsibility for voting shares across AMPCI portfolios rests with the Corporate Governance Manager. To ensure that a co-ordinated approach is taken to share voting the Corporate Governance Manager ASX200 Roundtable: Institutional Engagement Page 2

3 AMPCI has a policy of voting at all company meetings for which it holds securities. All of these teams will invest to a differing extent, in companies within the ASX 300. As such, AMPCI will be entitled to vote its securities holdings at a large number of company meetings. liaises with the investment teams described above and is physically located in AMPCI s offices between the three teams. It was noted that even though the various AMPCI funds have different interests (for example, different time horizons, different focuses on sustainability etc.) it was rare that these differences caused AMPCI to vote differently on a corporate governance issue. AMPCI also does not engage in scrip lending so all of its shares are available for voting and do not need to be called back before company meetings. Time constraints AMPCI has a policy of voting at all company meetings for which it holds securities. Given the number of companies held in AMPCI portfolios, AMPCI will vote at approximately 350 to AMPCI also does not engage in scrip lending company meetings each year, including annual general meetings (AGMs), extraordinary general meetings and scheme meetings. This means that approximately 1800 to 2000 resolutions must be considered and voted on every year. The majority of this work occurs in the peak AGM season, being a six to eight week period in October and November. Over 80% of company meetings fall within this period. The large numbers of resolutions which need to be considered in this short period place all institutional investors under significant pressure. The effect of this time constraint also means that it is important for companies to engage with institutional investors prior to the peak period as opportunities for engagement are likely to be limited in the lead up to the AGM. Inputs to the voting decision AMPCI considers a number of different sources of information when making a voting decision on a particular resolution. These include: Database information - AMPCI maintains an internal database which contains its own research, publicly available company information, records of previous correspondence with companies, records of meetings with ASX200 Roundtable: Institutional Engagement Page 3

4 it is important for companies to engage with institutional investors prior to the peak period as opportunities for engagement are likely to be limited in the lead up to the AGM. directors and details of previous voting decisions. Voting policy - AMPCI has a broadly written voting policy which is applied on a case-bycase basis to company resolutions. Proxy Advisory Reports and Recommendations AMPCI also subscribes to the reports and recommendations of proxy advisory firms. Influence of proxy advisers AMPCI is firmly of the view that the reports and recommendations of proxy advisers are only one input into the decision-making process of share voting. A very small number of AMPCI clients request that AMPCI vote in line with the recommendations of proxy advisers. Even with such an instruction, AMPCI will not automatically accept the recommendations of proxy advisers and will communicate with these clients when AMPCI intends to vote contrary to a proxy advisers recommendation. Generally, approximately 15% of resolutions did not obtain AMPCI s support. In 2010, AMPCI reviewed its voting outcomes and noted the following: on 61% of occasions AMPCI made voting decisions that were the same as proxy advisers recommendations in 18% of cases, AMPCI took a stronger approach to voting against company resolutions than the recommendations of proxy advisers; and in 21% of cases, AMP Capital Investors took a more lenient approach to company resolutions than the recommendations of proxy advisers. In AMPCI s view, voting very much remains with the share owner and is not directly or indirectly delegated to proxy advisers, however, this may not be the case for all institutional investors. Directors raised concerns about institutional investors that blindly following proxy advisers and the adequacy of the resources that proxy advisory firms have to conduct this work. Concerns were also raised by directors about the use of voting platforms that pre-populate voting outcomes in accordance with the voting recommendations of a particular proxy adviser. Engagement The importance of effective engagement between institutional investors and companies should not be underestimated. ASX200 Roundtable: Institutional Engagement Page 4

5 The importance of effective engagement between institutional investors and companies should not be underestimated. Engagement through direct discussion provides a key input to AMPCI s decision-making during the AGM season. Although AMPCI will engage with companies during the peak season if it has questions, most engagement occurs during the non-peak season. The usual engagement process is for face-toface meetings to be set up with Chairmen, Committee Chairs and Chief Executive Officers; however, phone calls from these directors to discuss corporate governance issues are also a helpful method of engagement. Given the impact of good corporate governance on performance more investment analysts at AMPCI are joining the Corporate Governance Manager at meetings with directors. It was clear during the roundtables, that directors were alive to the need to adhere to their continuous disclosure obligations in any meetings or conversations with institutions....the larger more well resourced companies have more sophisticated engagement practices and approaches. In the event that AMPCI votes for the first time against a resolution or abstains from voting because of concerns over a corporate governance issue, AMPCI will write to the company after the AGM to explain the basis for the decision. It was noted that the responses from companies to these letters varies. In some cases the response is thank you followed by constructive engagement and occasionally in others it is more akin to please do not interfere with our business. In AMPCI s experience, the larger more well resourced companies have more sophisticated engagement practices and approaches. Remuneration issues Directors were interested to understand the factors that AMPCI took into consideration when arriving at voting decisions on remuneration reports. It was noted that the primary consideration was whether the company s remuneration structure was aligned with shareholders interests. In this regard, key areas of inquiry include: What are the performance hurdles? Do they provide sufficient stretch targets? Is the at-risk component really at risk? When does the remuneration ASX200 Roundtable: Institutional Engagement Page 5

6 it was suggested that poor disclosure rather than problems with remuneration structure itself may cause institutional investors to lodge against or abstain votes on remuneration reports vest? Do options vest automatically? What happens in the event there is a change of control? How is change of control defined? Which individuals are included in remuneration plans and incentives? It was also noted that AMPCI has a preference for performance incentives to be based on relative total shareholder return and that in AMPCI s view an appropriate time frame for a long term incentive is three years. AMPCI is of the view that a company s remuneration practices provide a good insight into a company s corporate governance. Despite this, there was general agreement between AMPCI and directors that remuneration had received too...ampci s view an appropriate time frame for a long term incentive was three years. much focus in recent times, when other issues such as strategy and the structure of the board were equally as important. As a result of the time constraints facing the consideration of remuneration in the peak AGM season, it was suggested that poor disclosure rather than problems with remuneration structure itself may cause institutional investors to lodge against or abstain votes on remuneration reports. For example, if an institutional investor cannot easily identify or understand from the report when options vest, the institutional investor may not have time to clarify the information before the voting cut-off. This may result in an against or abstain vote being recorded. Companies, including those with good remuneration structures, were therefore encouraged to ensure that their disclosure was as clear as possible to prevent these voting outcomes from occurring. As a general trend, the number of companies requesting engagement with AMPCI since the introduction of non-binding votes on remuneration reports and more recently with the introduction of two-strikes legislation, has continued to increase. ASX200 Roundtable: Institutional Engagement Page 6

7 More attention is now being paid by institutions to succession planning issues given the importance of board structure to company performance. Director election In voting on director elections, AMPCI will consider the director s biographical information, the notice of meeting, any board performance reviews and the performance of the company. It is rare for AMPCI to vote against the election of a director. However there are two scenarios when AMPCI would consider doing so. First, if there is a concern about lack of independence on the board and secondly, where selfnominated directors are not seen as likely to add value to the board s existing skill set. More attention is now being paid by institutions to succession planning issues given the importance of board structure to company performance. In addition, more consideration is being paid to board diversity, although at this stage AMPCI has not voted against the election of a director for diversity reasons. AMPCI noted that 60% of the companies in which it holds shares still did not have a female director on their board and that corporate Australia therefore still has a long way to go on this issue. Lost votes In 2006 AMPCI conducted a review of its voting instructions compared with the voting results of company meetings lodged with the ASX. The review found that in 4% of occasions AMPCI s against or abstain votes alone exceeded the total against or abstain votes recorded by the company in the voting results. This raised concerns that institutional shareholders proxy votes were going missing or were lost. Given the number of lost votes identified, questions were raised as to the likely causes of this problem. Although in some instances, incorrect facsimile numbers and the non-recording of abstain votes were the issue, the main problem appeared to be the gap between the lodgement date required by the voting platform and the proxy voting cut-off date with the share registry. Buying and selling of securities during this gap and the short time frame between the receipt of proxies and the AGM, makes reconciliation difficult for the share registry. These issues are likely to come into more focus, given the heightened importance of voting on Remuneration Reports. What does this mean for directors? The following points emerged as key themes in this series of discussions: ASX200 Roundtable: Institutional Engagement Page 7

8 Clear corporate disclosure is key to ensuring institutional investors are able to make informed voting decisions Where to go for more information: AMPCI Corporate Governance Report 2010 available at: corporate-responsibility/pdf/ corporate-governance-report. pdf?direct S. Crosby Making Every Vote Count Company Director December 2008 companies may benefit from engaging early, and outside of the peak proxy season, with institutional shareholders; clear corporate disclosure is key to ensuring institutional investors are able to make informed voting decisions; board composition is becoming an increasingly important consideration for institutional investors; the influence of proxy advisers on voting decisions is likely to vary depending on the processes and systems used by, and the resources devoted to voting, by the institutional investor. Disclaimer Copyright in this material (Material) is strictly reserved. Any disputes arising out of the Material are subject to the laws of the state of New South Wales, Australia. No part of the Material covered by copyright should be copied or reproduced in any form or by any means without the written permission of the Australian Institute of Company Directors. The Australian Institute of Company Directors endeavours to contact copyright holders and request permission to reproduce all copyright Material. Where the Australian Institute of Company Directors has been unable to trace or contact copyright holders, if notified, the Australian Institute of Company Directors will ensure full acknowledgment of the use of copyright Material. The Material has been prepared for information purposes only and is not intended to embody any professional or legal standard. The Material does not constitute legal, accounting or other professional advice. While all reasonable care has been taken in its preparation, neither the Australian Institute of Company Directors nor any contributor makes any express or implied representations or warranties as to the completeness, currency, reliability or accuracy of the Material. The Material should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, both the Australian Institute of Company Directors and all contributors exclude all liability for any loss or damage arising out of the Material Australian Institute of Company Directors ASX200 Roundtable: Institutional Engagement Page _11