Extra, Extra, Read All About It – A Spicier AGM Season

As we put pens down on another AGM season this year, which saw a greater number of ‘first strikes’ against ASX 200 June year-end remuneration reports (16 vs 12 in 2022) and ‘near misses’ (17 vs 5 in 2022) as at 4 December 2023, the COVID-19 leeway afforded by external stakeholders in the past few years has seemingly disappeared.

What were the key issues?

1)     Paying for flat or lower financial performance in a lower growth economy

As interest rates and cost of living pressures impacted industries at different speeds, some companies set lower financial targets in FY23 to ensure targets remained realistic and sufficiently motivating for management (e.g. Harvey Norman), noting that many companies came off record years in FY22. However, even where FY23 financial performance was higher than pre-pandemic levels, external stakeholders have criticised some companies for setting the bar lower year-on-year, even where there has been strong financial performance over a multi-year period.  

As a low growth environment is expected in FY24, are expectations of year-on-year growth no longer realistic? We expect that a greater number of companies will have set flat or lower targets for executive bonuses in FY24, due to industry factors, hence it will be interesting to see whether external stakeholders are more receptive next AGM season.

2)     Shareholder frustration at poor total shareholder return (TSR) performance

For some companies where bonus payouts were not particularly high, shareholder scrutiny may have been attributed to long-term negative shareholder returns, as opposed to flaws with the remuneration framework. Of the ASX 200 companies which received a near miss or first strike, a number of these companies had negative 1-year and/or 3-year TSR (until 30 June 2023), compared to the ASX 200’s return of 15.3% (1-year) and 36.4% (3-years), likely generating a level of frustration amongst investors.  

3)     Paying out bonuses for non-financial performance when financials were a miss

Whilst many of this year’s remuneration framework changes in the financial services (FS) sector have resulted in the greater prevalence of non-financial measures to meet the requirements of APRA’s CPS 511 remuneration standard, proxy advisor ISS has criticised the high portion of incentives being linked to these vaguer metrics instead of traditionally preferred financial metrics.  

Outside of FS, the focus appears to remain very much on financial performance. Where lower financial performance, even if outside the control of management, has resulted in executive bonus outcomes paying out close to or at target, there have been instances where this has not been well received. The Lottery Corporation received some pushback over its use of upwards discretion to award bonus outcomes ‘at target’ after financial targets were missed (impacted by unfavourable jackpot outcomes).  

Despite the rise of ESG measures in incentive programs, it appears that financial performance continues to remain king in the eyes of investors, or at least should be the primary consideration. To temper the influence of non-financial measures on incentive outcomes, a number of companies have introduced a bonus payout cap, limiting payout levels when threshold financial targets are not met.  

4)     Perceived generous use of Board discretion

Whilst commonplace for the Board to retain discretion over remuneration outcomes (to provide flexibility), concerns have been raised externally in the following instances this AGM season:

• Adjustment of financial measure calculations. As incentives are designed to fairly reward management’s efforts, it is not uncommon for Boards to adjust financial measures to remove one-off impacts or events outside of management’s control. However, meeting the expectations of external stakeholders and ensuring fairness to management is not always seamless. For example, CSL received a near miss on its remuneration report vote with one of the concerns being the exclusion of the impact of the Vifor acquisition from financial metrics. In addition, one of the reasons for Treasury Wine Estates’ ‘first strike’ was due to its use of discretion to allow the return on capital employed (ROCE) performance measure (weighted at 75% of the FY21 LTI) to vest at 92% of maximum (despite actual ROCE performance being below threshold), with the intention being to fairly recognise that the tariffs placed on Australian wine exports by China were outside the control of management.

• Payment of discretionary bonuses to former executives was one of the reasons for Fortescue’s first strike, where it paid one-off cash awards to its former CEO ($1.98m) and CFO ($1m) to recognise their contribution to the company.  

Despite the pushback received on the use of Board discretion in some circumstances, there were instances where its use was supported externally (e.g. Domain), indicating that there is still a place for discretion’s use. In emerging practice, to guide the use of discretion and avoid the need to make decisions ‘on the fly’ come end of financial year, some companies have established a principles of adjustment framework to provide broad guardrails, whilst still largely leaving discretion to be… discretionary.

As the curtain falls on another AGM season and companies take stock of the feedback from external stakeholders, we expect the focus in the new year to shift towards anticipating and planning for expected FY24 remuneration hotspots.