Qantas, Woolworths, Magellan given \u2018first strikes\u2019 by shareholders
\nFocus now on whether directors\u2019 compensations should be tied to ESG goals
\nBut does tying bonuses to ESG performance pay off?<\/p>\n
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At Wednesday\u2019s annual general meeting (AGM), shareholders of Magellan Financial Group (ASX:MFG)<\/a> <\/strong>vented their anger at management\u2019s poor performance, voting 58% against the fund manager\u2019s remuneration report.<\/p>\n While Wallabies legend John Eales \u2013 who is a director of MFG \u2013 survived a protest vote, shareholders have delivered a \u201cfirst strike\u201d<\/strong> against Magellan\u2019s board.<\/p>\n A \u2018first strike\u2019 occurs when a company\u2019s remuneration report \u2014 which outlines each director\u2019s salary and bonus \u2014 receives a \u2018NO\u2019 vote of 25% or more by shareholders at the AGM.<\/p>\n The \u2018second strike\u2019 occurs if a subsequent remuneration report also receives a \u2018NO\u2019 vote of 25% or more, and when that happens, shareholders will vote at the same AGM on whether those directors will need to stand for re-election.<\/p>\n This then leads to what\u2019s called the \u201cspill\u201d resolution<\/strong>, a decision on \u00a0whether the company must hold another general meeting (known as the \u2018spill meeting\u2019) to consider spilling the board.<\/p>\n If this \u2018spill\u2019 resolution passes with 50% or more of eligible votes cast, then a \u2018spill meeting\u2019 will take place within 90 days.<\/p>\n At the spill meeting, the directors in question will be required to stand for re-election, other than the managing director or CEO, who is permitted to continue to run the company.<\/p>\n Apart from Magellan, another ASX company to have been slapped with a first strike this year was Woolworths (ASX:WOW),<\/a><\/strong> where 28.04% of proxy holders voted against its report on executive pay at the October\u2019s AGM.<\/p>\n It was the first time Woolworths had received a first strike.<\/p>\n And last Friday, Qantas (ASX:QAN)<\/a><\/strong> shareholders also voted overwhelmingly by 83% to protest against the airline\u2019s remuneration report after a string of controversies damaged the national carrier\u2019s reputation.<\/p>\n Qantas shareholders were also angry after former CEO Alan Joyce received a $21.4m golden handshake on his early exit.<\/p>\n \u00a0<\/p>\n The string of first strikes has reinforced the growing consensus that execs\u2019s compensation must somehow be tied to metrics other than financials, like the company\u2019s ESG performance.<\/strong><\/p>\n A recent global study conducted by the IESE Business School<\/em> found that\u00a0<\/a>38% of companies now tie their directors\u2019 compensations to ESG goals.<\/p>\n Europe is where most of this action takes place, where linking executive compensation to ESG criteria has resulted in real improvement in European firms\u2019 environmental performance.<\/p>\n But while the concept sounds good, consulting giant PwC<\/em> says linking pay to ESG brings challenges of its own.<\/p>\n \u201cThere is a risk of hitting the target but missing the point, where a \u2018tick the box\u2019 mentality is fostered rather than genuine improvements on ESG matters,\u201d said PwC\u2019s report.<\/p>\n \u201cAn example may be a bank that is reducing its own carbon\u00a0emissions, while still financing companies or projects associated with large carbon footprints.\u201d<\/p>\n There is also the risk of miscalibration of targets, in that companies may set out easily achievable strategic targets that they know they will hit.<\/p>\n \u201cIt is therefore important that ESG factors are integrated directly into the strategy of the firm, with pay incentives being used as a tool for mobilising the executives behind a new set of priorities.<\/p>\n \u201cPay should therefore follow strategy; it shouldn\u2019t drive firm strategy,\u201d the PwC report added.<\/p>\n \u00a0<\/p>\n The short answer is: while there has been a surge in the number of companies linking ESG goals to exec bonuses, it is often unclear how an accomplishment of the goal is measured.<\/p>\n \u201cRarely is the goal described to the level of detail that someone outside the company would be able to interpret what specific progress occurred,\u201d said Just Capital<\/em> research analyst, Molly Stutzman.<\/p>\n Measuring accomplishments on ESG goals can be challenging to monitor because some ESG risks simply aren\u2019t quantifiable, nor can they be defined in terms of dollars and cents.<\/p>\n For example, ESG data on supply chain information or environmental and social impacts can be difficult to obtain, while tracking data that are accessible can be complex and resource-intensive.<\/p>\n However there are companies which have made a success of their ESG-tied remuneration program; like for example, US-based Chipotle<\/strong> which established its program in 2021.<\/p>\n Chipotle has made its ESG goals easy to measure; for instance, the company stated that it needs to purchase at least 37.5 million pounds of local produce for its operations a year.<\/p>\n Other easy-to-measure goals Chipotle has implemented include improving the company\u2019s diverse employee retention, and the number of restaurants with composting programs.<\/p>\n \u00a0<\/p>\n On the ASX, about 55% of companies have tied a proportion of their chief executive\u2019s bonus to ESG metrics.<\/p>\n A study by the University of Technology Sydney (UTS)<\/em> shows that Financials<\/strong> and Mining<\/strong> were the two most common sectors where ESG is being tied to compensation.<\/p>\n \u201cWe found about 17% of bonus pay is typically attributed to ESG targets. For the average chief executive in our study, this translates to around $200,000 in extra income,\u201d said UTS\u2019 report.<\/p>\n But there\u2019s been some controversy. The Commonwealth Bank (ASX:CBA)<\/a><\/strong> was \u00a0criticised for \u2018vague performance targets\u2019 after the bank tied its CEO\u2019s bonus to to relatively intangible metrics.<\/p>\n In its 2020 report, CBA\u2019s \u201cpeople measures\u201d covering \u201cculture, wellbeing, talent and capability\u201d made up 9% of the chief executive\u2019s bonus.<\/p>\n The CBA was also criticised for \u2018massaging\u2019 its annual safety report.<\/p>\n According to the UTS report, the bank\u2019s\u00a02017 annual report\u00a0showed 1.1 injuries per million hours worked. However, in its\u00a02018 annual report, the bank revised the 2017 figure\u00a0from 1.1 to 1.6, which meant the 2018 report showed injury rates as having decreased relative to the previous year.<\/p>\n And in 2023, the CBA\u2019s annual report featured a change to the way full-time equivalents are calculated, but without explaining how or why the previous years\u2019 figures were adjusted.<\/p>\n \u201cWe therefore advise users of this information to exercise caution when comparing performance to adjusted numbers, particularly as little information is typically given to explain why the adjustment was made,\u201d said UTS\u2019 report.<\/p>\n \u00a0<\/p>\n Despite these apparent challenges, tying exec compensation to ESG goals has its obvious merits.<\/p>\n As the drive to combat climate change continues to take centre stage and policy becomes more stringent, establishing and achieving ESG goals will inevitably be fundamental to a firm\u2019s long-term success.<\/p>\n Linking specific components of executive compensation to ESG performance metrics can also be a good way to both highlight a company\u2019s commitment to its sustainability goals, and to focus senior executives\u2019 responsibilities in delivering on these ambitions.<\/p>\n \u201cConnecting these goals more closely with executive pay would be a natural next step, however it is important that these are done with care and thought, so as to ensure financial incentives are truly driving the ESG agenda,\u201d said PwC.<\/p>\n For retail ESG investors, achieving ESG goals often drives their own personal values, and is simply just the right thing to do.<\/p>\n \u201cThe corporate world is at a crossroads, where companies and leaders are debating their fiduciary responsibilities, while society is demanding that businesses be held accountable to a wide constituency,\u201d added PwC.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n <\/span><\/p>\n The post The Ethical Investor: \u2018First strikes\u2019 on Qantas, Woolworths, and Magellan turn focus on ESG-linked pay<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Tying compensation to ESG goals<\/h2>\n
Is tying exec pay to ESG paying off?<\/h2>\n
What about ASX companies?<\/h2>\n
The right thing to do<\/h2>\n