At GECN Group Annual Meeting, PvP, ESG, and Proxy Advisor Issues Dominate

July 11, 2024

The very idea of “global governance” was once oxymoronic. Those days are long past, as evidenced by the range of common cross-border policy and practice issues that dominated discussions at the annual meeting of the Global Governance and Executive Compensation (GECN) Group.

The annual meeting serves to enrich, inform, and deepen the collaborative work of the five independent advisory firms that comprise the GECN Group. Like any good board meeting, the event—hosted each year by a different GECN Group partner firm—provides plenty of topics for discussion in the moment and for introspection as the firms’ principals return to their home countries and their day jobs.

“There is an old maxim that when you travel to a new country or a different culture, the biggest learning is not from the new things you see,” said Gabe Shawn Vargas, chair of the GECN Group and senior partner at HCM International headquartered in Zurich, Switzerland, “but how different things will look when you return home.”

Amanda Voegeli, Southlea Group president and managing partner, concluded the four-day meeting by leading a panel discussion at the Toronto Club, the country’s oldest private club in the city’s financial district. Canadian business leaders and human resource executives were in attendance. Featured were insights from Robin A. Ferracone, a founding partner of the GECN Group and CEO of Farient Advisors in the U.S.; Michael Robinson, vice chair of the GECN Group and founder of Guerdon Associates in Sydney, Australia; and Chris Blair, CEO of 21st Century in Johannesburg, South Africa; and Stephan Hostettler, managing partner of HCM International.

A distillation of the key points made during the 90-minute discussion sorted by the speaker’s country of origin follows. (Remarks were edited and condensed from the transcript of an audio recording).


Farient blog panelists


The United States: The Importance of Alignment

Boards continue to navigate a tension between good governance and talent retention that sometimes forces boards to give out-sized, one-time, or special rewards. These rewards are typically looked down on by shareholders and proxy advisors and often cause misalignment between pay and performance. Ferracone is the leading proponent for aligning executive pay with performance. Her book, Fair Pay, Fair Play: Aligning Executive Performance and Pay, which details Farient’s proprietary model for analyzing performance and pay alignment, continues to be relevant with clients, investors, and reporters who cover executive compensation.

Ferracone advises against counting unvested restricted shares in executive compensation. She explained some of the intricacies of equity compensation, and the importance of understanding the impact of vesting periods when designing pay plans. On ESG, Ferracone remarked that governance issues tend to swing like pendulums, but companies are generally doing a better job of linking sustainability to strategy and showing value creation. ESG measures appear in long-term incentive plans and focus more on greenhouse gas (GHG) emissions.

“The best thing for a company is to figure out what’s right for their shareholders, even if that means engaging with more investors,” Ferracone said. The rapid emergence of data analytics and artificial intelligence as business differentiators is intensifying the talent wars in those sectors “with clients aggressively promoting people for succession planning and to prevent poaching of skilled talent…Shareholders recognize the need for talent protection when it comes to pay,” she added.


Australia: PSUs and MSUs

Pay varies with performance, with top-performing companies having long-tenured executives and consistently high total shareholder return (TSR), said Michael Robinson. Pay highlights include performance-based structures and a maximum annual multiple. CEO pay doesn’t always move with inflation but can increase by 2% in high inflation times. Setting above-target performance share units (PSUs) in cash to address liquidity and personal exposure concerns is an emerging practice. A variation of management stock units (MSUs), restricted share units (RSUs), while less common in Australia, remain attractive as they typically offer more leverage than options.

Canada: Better Analytics in Incentive Plans

The remit of compensation committees has expanded to include the wage gap between the top and bottom of the company. A shift in executive compensation from a multiple of salary to a multiple of total direct compensation (TDC) is becoming more common, said Amanda Voegeli. Absolute TSR provides downside protection and is more likely to be aligned with shareholders. Combining relative and absolute TSR tends to please the proxy advisors and principal shareholders. She recommends MSUs replace options, especially for higher-yielding companies. Canadian companies also wrestle with “real” share ownership, which has consequences for shareholder alignment and ownership. Environmental, social, and governance (ESG) initiatives in incentive plans are becoming more analytical as they shift to carbon emissions disclosures. Board members and managers disagree on pay for performance, blaming each other for inflation. She cautioned that shortened terms for stock options and the decreasing average lifespan (tenure) of CEOs may lead to counterproductive pay-for-performance decisions.


South Africa: A Two-Tier Economy

There is continued focus on the minimum wage, which was hiked some two percent in March, and an increasing emphasis on living wage policies. (A living wage is enough money to meet basic needs.) Stock ownership programs have grown in popularity among employees and become a competitive differentiator among employers, Blair recounted. There’s also been increased usage of multi-year retention structures, with unvested shares held for 5-10 years and then transferred to the individual. As an example of the country’s two-tier economy, global companies typically adhere to ESG practices while local ones neglect them. South African companies use short-term measures to protect brand reputation while lacking progress towards long-term ESG outcomes. Boards struggle to balance short-term TSR with long-term reduction goals for GHG emissions.


Switzerland: Greater Discretion

Swiss companies have a different approach to executive compensation, focusing on performance-based pay rather than following a fixed median salary. Shareholders vote annually on the budget for executive compensation, and board members are held accountable for how they use that budget. Board members want greater guided discretion in evaluating CEO performance, Hostettler explained, while executives push back on mandatory shareholding requirements, citing personal exposure and diversification concerns. These tendencies highlight the importance of shareholder ownership guidelines and the success of companies with “anchor” shareholders. Some companies don’t care about shareholder votes, prioritizing family interests over governance. Like directors serving companies in other countries, he said, we “face conflicting ESG measures and trade-offs.”


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