ASIC update: Informing and engaging shareholders
A speech by John Price, Commissioner, Australian Securities and Investments Commission at the Australasian Investor Relations Association 2018 – Annual half-day seminar, (Sydney, Australia), 7 June 2018
Thank you for inviting me to open the Australasian Investor Relation Association's 2018 annual half-day seminar.
Australia's corporate community is currently experiencing a period of heightened focus on trust. A period where expectations of companies and their management are magnified.
Key to this issue, is a company’s relationship with its shareholders.
Shareholders are, of course, the ultimate owners of the company. As investor relations professionals, you are the conduit between shareholders and your company.
You are not only responsible for ensuring the information flow from your company to its shareholders, but you are also an essential link in the chain to allow shareholders to exercise their rights to hold companies to account.
It is against this backdrop, that I am pleased to be here today to share some of ASIC’s insights into shareholder engagement and the role of proxy advisors in the listed corporate landscape.
I will also be touching on some of our recent work on financial reporting, which focuses on the importance of companies making timely and meaningful disclosure of their financial position to the market.
To conclude, I will briefly outline some of the key challenges on ASIC's radar for the upcoming years, including our focus on culture and conduct.
Proxy advisors and shareholder engagement
Investor relations professionals play an essential role in ensuring that the relationship between the company and its shareholders is as productive as it can be.
We have been experiencing increased activity of shareholder bodies and large institutional investors at some recent high-profile annual general meetings (AGMs).
Many shareholders choose to express their dissatisfaction through voting against director re-elections and against companies’ remuneration reports, holding directors individually and collectively accountable for governance failings in a company.
For example, at the recent AGMs of both AMP and QBE, these companies have received their largest 'against' votes on their remuneration reports, with both companies receiving their 'first strike'.
'First strikes' can indicate a general dissatisfaction by shareholders of the way the companies reward and remunerate their key management personnel and their board. Of course, these are the very people who play a key role in establishing the culture and conduct of an organisation.
In a period where corporate governance is increasingly under the spotlight, culture and conduct should be a key focus area for companies.
We encourage every company to be having a conversation about their internal culture and conduct.
Focusing on improving culture will help drive better conduct, and this is central to investor and consumer trust and confidence, market integrity and growth.
One of the ways that companies can ensure they are on the right side of discussions about culture, conduct, and corporate governance, is to engage with their shareholders.
The recent level of engagement by shareholders is not a new phenomenon, but rather a continuation (and a magnification) of the increased shareholder engagement we have observed over the last few years in corporate Australia.
AGM surveillance program
During our 2017 AGM surveillance program, the results of which are set out in ASIC Report 564 Annual general meeting season 2017 (REP 564), we observed shareholder engagement as a key feature of the AGM season.
Although voting outcomes in calendar year 2017 AGMs were generally consistent with the 2016 AGM season, and less 'first strikes' were received on remuneration reports, we observed a strong sense of shareholder engagement and observed:
- companies making changes to remuneration structures (to avoid second strikes)
- an increased number of ‘close calls’ in relation to companies receiving their first strike
- greater individual director accountability through increased ‘against’ votes for directors standing for re-election.
Shareholder concerns in relation to environmental, social and governance (ESG) issues remain a hot topic, alongside gender diversity and board diversity more generally.
Shareholder requisitioned resolutions were also placed on the table in response to ESG issues, including climate change and human rights.
While we observed such resolutions gaining only minimal shareholder support from non-requisitioning shareholders, the existence of the resolutions themselves are indicative of areas for shareholder concern that companies should be considering.
The importance of having a meaningful shareholder engagement strategy that applies to retail shareholders through to institutional investors and proxy advisory firms alike, has been highlighted in recent times.
ASIC continues to recommend that companies engage with their shareholders early, and constructively, opening up and maintaining dialogue throughout the year to ensure that concerns are understood, and to enhance the long-term performance and value of the company for all investors.
Your role, as investor relations professionals, is key to ensuring that this relationship is as productive as it can be.
In REP 564 we set out our observations on the role of proxy advisers and Australian listed companies, and our observations on the reports they produced for the 2017 AGM season.
Proxy advisors undertake research and prepare reports, generally on behalf of an institutional investor client base, recommending how shareholders should vote on resolutions being put to the shareholder meeting.
We see proxy advisers as playing an important role in the market, by scrutinising governance practices and producing 'against' recommendations where they have concerns with governance practices of a company, including remuneration structures, ESG or diversity concerns.
ASIC actively engages with proxy advisers, and monitors the way that they engage with companies.
We consider that shareholder engagement strategies should extend to proxy advisers so that companies can seek to understand the basis for 'against' recommendations and address any concerns as they arise throughout the year.
Investor relations professionals should ensure that their companies have productive working relationships with proxy advisers who are active in their sector. If your company does not have an action plan in place, we would suggest that this is a key issue to be addressed before your next shareholder meeting.
Engaging early, and engaging fully, with proxy advisers will assist a company to ensure that they understand any concerns that proxy advisors may have with the company, concerns which, if gone unanswered, may result in 'against' votes.
On the flip side, proxy advisers can give a fresh perspective on issues the company itself may be struggling with, or highlight where the company is against industry benchmarks on issues such as ESG, diversity and human rights.
The key findings of proxy advisors during the 2017 AGM season were:
- resolutions attracting 'against' recommendations from the proxy advisers generally related to remuneration reports, director elections and key management personnel remuneration
- remuneration reports received the greatest proportion of ‘against’ recommendations (as a percentage of resolution type)
- the average ‘against’ vote for all resolutions attracting at least one 'against' recommendation was not sufficiently significant to alter the outcome of the resolution
- clients of proxy advisers have strongly represented to ASIC that they do not follow proxy advisers’ recommendations automatically, but make their own voting decisions.
ASIC expects to see a continued presence and influence of proxy advisers in the coming years, which in turn increases the importance of companies having productive engagement strategies with proxy advisers in their industries.
Moving on to financial reporting: one of our key focus areas in the upcoming financial year.
Just last week, ASIC put out a media release noting that companies should focus on new requirements that can materially affect their reported assets, liabilities and profits for their 30 June 2018 financial reports.
Major new accounting standards will have the greatest impact on financial reporting since the adoption of the International Financial Reporting Standards (IFRS) in 2005.
The standards can significantly affect reported results, systems and processes. They can also affect debt covenants and other financial condition requirements, tax liabilities, dividend paying capacity and remuneration schemes.
The new standards cover: revenue recognition; financial instrument valuation (including hedge accounting and loan loss provisioning); lease accounting; accounting by insurers; and criteria for recognising assets, liabilities, income and expenses.
Full-year reports at 30 June 2018 must disclose the future impact of these standards. Half-year financial reports at 30 June 2018 must comply with the new requirements for revenue recognition and financial instrument valuation.
Directors and preparers should also consider any continuous disclosure obligations, and the impact on any fundraising or other transaction documents.
ASIC will be reviewing more than 200 full-year financial reports at 30 June 2018 and selected half-year reports.
In the operating and financial review (OFR), listed companies should disclose information on risks and other matters that may have a material impact on the future financial position or performance of the entity. This could include digital disruption, new technologies, climate change, Brexit or cyber security.
Directors may also consider whether to disclose additional information that would be relevant under integrated reporting, sustainability reporting or consider the recommendations of the Task Force on Climate-related Financial Disclosures where that information is not already required for the OFR.
I would encourage you all to have a look at our media release from last week as this will be an area of key importance for us.
The final topic I wanted to finish up on today, is an overview of what else ASIC will be focusing on for the coming years.
We have recently published our Corporate plan. This plan sets out what we see as the key challenges and risks, and the way we plan to tackle them.
In the changing landscape, we continue to focus on our fundamental vision of facilitating financial markets to fund the economy and the economic growth of Australia.
We do this through the lens of our strategic priorities of:
- promoting investor and consumer trust and confidence
- ensuring fair and efficient markets
- providing efficient registration services.
Our Corporate plan identifies culture and conduct as one of our five key long-term challenges.
Culture and conduct
Poor culture often leads to poor conduct, and ASIC will always concern itself where the result is a lessening of investor or consumer protection, or the inefficient operation of financial markets.
We see culture and conduct as being a core theme of our surveillance work in the near term, and it will no doubt also manifest itself in our 'business as usual' work, as recent erosion of trust in some of our country's leading institutions has created and will continue to create compliance issues in the near term for companies.
Companies should continue to focus on ensuring their shareholder engagement strategies are as robust as they can be, including ongoing communication with shareholders, and the structure of their periodic engagement.
Adopting best practice governance recommendations, such as voting on a poll rather than a show of hands, can contribute to increased shareholder engagement and satisfaction as it more accurately reflects the will of the shareholders.
We encourage companies to review their executive remuneration policies to ensure they effectively balance risk and reward, and promote a culture that does not incentivise the wrong behaviours.
In this space we suggest that the Australian Prudential Regulation Authority’s (APRA’s) most recent report on remuneration is a worthwhile read for all companies, not just those who are prudentially regulated.
Other long-term challenges
We will also be focussing on other long-term challenges, as set out in our Corporate plan:
- building financial capability of investors and consumers, to help prepare them to navigate the ever-changing financial landscape
- managing digital disruption to existing business models and channels, and cyber resilience
- globalisation of financial markets, products and services, and the challenges and opportunities this presents for the market and for regulators
- structural and demographic changes in the Australian marketplace, including our ageing population and the specific issues facing this demographic, in conjunction with the increased funds under management in the superannuation industry.
Depending on the industry in which you operate, these challenges may also, to differing degrees, affect your organisations.
Long-term success in an ever-changing corporate environment requires organisations to ensure that the core values of good governance remain a fundamental focus.
As an organisation, you need to know what 'good' looks like in your industry, and ensure that you continually strive to meet and exceed those standards.
Let me conclude today by very briefly referring to a recent report commissioned by APRA into the Commonwealth Bank of Australia (CBA) that neatly encapsulates some areas of good governance worthy of consideration. That report mentioned the need for:
- more rigorous board and executive governance of non-financial risks
- exacting accountability standards reinforced by remuneration practices
- substantial operational risk management and compliance functions
- asking the question ‘Should we?’ in relation to all decisions and dealings with customers
- cultural change to support enhanced risk identification and remediation.
I think these are in fact recommendations that all companies should be considering. I look forward to your questions.