As we near the end of another year, the curtain also finally falls on annual general meetings. That is, until we do it all again next year.

Don't get me wrong, annual general meetings (AGMs) are an important part of corporate governance. These meetings provide all shareholders (regardless of how large their shareholding) the opportunity to engage with a company's Board of Directors and senior leadership team and exercise their rights as owners of the company.

But I think there is room for improvement, particularly as it relates to non-executive director remuneration.

Shareholders generally supported increasing director fees in 2023

For many companies, the most recently completed financial year signified the first full year undisrupted by Covid. With the return of more normal business conditions, certain standard business and governance practises which had taken a backseat over recent years have also returned to the fore.

Combined with rampant inflation over recent years, it was not surprising to see that director remuneration commonly featured in resolutions to shareholders during the 2023 calendar AGM season.

In 2023 and focussing on the companies in the S&P/NZX50 Index, 17 of the 50 companies (34%) had resolutions relating to director remuneration (this includes Fletcher Building which subsequently withdrew its resolution and Hallenstein Glasson which is due to hold its AGM mid-December).

Shareholders were broadly supportive of increasing director fees in 2023. All 15 resolutions relating to director fees so far put to shareholders were passed as they met the requirement for a simple majority.

Fees are what you pay, value is what you get from appropriately qualified directors

Institutional investors are fortunate to meet with Board members regularly. Over the last couple of years, there has been a common thread weaved through some of our governance meetings. These are often highly inspiring meetings; discussing the attractive growth ambitions for successful Kiwi companies with proven track records and strong management teams. But, despite their success, these companies at times grapple with board succession and the ability to attract the desired candidates to the board.

Lo and behold, New Zealand listed board roles and pay are not always as financially attractive when compared to Australian listed company opportunities, or those further afield.

But it makes sense that the capabilities and expertise of the board reflect the operations, risks, and opportunities of the business (both technically but also geographically). If we want our New Zealand companies to succeed on the international stage, it is advantageous to have relevant international expertise at the board level.

We should expect to pay fair rates to attract and retain such talent. In fact, the NZX Corporate Governance Code 2023 policy on remuneration states “the remuneration of directors and executives should be transparent, fair and reasonable”, and yet all too often we hear little support for the rare gems on the NZX who compete with the best on a global stage, have a long-track record of delivering superior shareholder returns, conform to global good governance norms and yet are pigeon-holed to a motley crew of NZX constituents.

When assessing non-executive director remuneration, we look to what directors at similar companies are being paid after factoring size, industry and complexity (but not limited solely to New Zealand). We also look to understanding the composition of the board, how it conforms to good governance norms, and the strategic capabilities of the board. The performance benefits of good governance have been well documented but interestingly less attention tends to be given to the cost of good governance.

Practically, this means we would be open to supporting higher director remuneration (versus that suggested by simple peer benchmarking) if companies impose limits on how many board positions a director could hold and collectively the board demonstrates strong strategic leadership while still satisfying their ever increasing compliance obligations.

While it strays from conventional practise, there may even be instances where, with the support of data-based evidence, we may support international directors being paid more versus their local director peers. Some disagree with this view as New Zealand based directors may shoulder more of the workload, but in our view, this falls under the Chair’s responsibility to ensure the board is well functioning and contribution by all is fair and reasonable.

We form our own view on voting resolutions, but it remains unhelpful that proxy advisor recommendations are bent on benchmarking New Zealand companies relative to often inadequate NZX related peer sets, even when business operations and earnings are predominately based outside of New Zealand, when ASX related companies maybe more appropriate comparables and with no consideration for the cost of good governance.

Fisher & Paykel Healthcare and EBOS are classic examples where in 2023 proxy advisors recommended shareholders vote against the increase in non-executive director remuneration as they are 'already above the average of NZX-listed market cap peers' and further increases would put them 'materially above average of [NZX] market capitalisation peers' despite the proposed fees sitting at the 25th percentile in the case of Fisher & Paykel Healthcare and between 28th to 40th percentile for EBOS based on ASX and NZX peer sets as determined by independent remuneration consultants. On balance shareholders rightly disregarded proxy advisor recommendations in these instances with Fisher & Paykel Healthcare and EBOS director fee resolutions receiving 83% and 82% votes for respectively.

Boards should put their best foot forward in providing high quality information

The NZX Corporate Governance Code 2023 does not specify that a company must engage a remuneration consultant in relation to director remuneration proposals but given the importance of transparency to foster confidence there is a clear trend for resolutions being supported by benchmarking data or a recommended fee structure from an independent remuneration consultant.

Having said this, the supporting information remains of varying quality; benchmarking work is not particularly informative, often it's not clear how the comparator group has been set other than being 'agreed', there is no consistency between reports (even those authored by the same independent market advisors) and what is presented.

We implore directors to include more fulsome summaries of these independent reports, which ideally include an independent recommendation.

Investors have a role to play in shaping improved outcomes

Shareholders may have supported board fee increases in 2023, but this should not be expected to always be the case.

As institutional investors increasingly move to publishing their proxy voting it is reasonable that there will be an increasing onus on active investors to justify voting that goes against the recommendations of internationally renowned proxy advisors. Improving the quality of information supporting resolutions helps with this process.

Institutional investors and companies both have a roll in communicating concerns and highlighting where things can be improved, whether it be to proxy advisors, independent consultants or each other. This year we voiced our concerns to numerous companies around the quality of information supporting their non-executive director remuneration resolutions. Although we are not bound by proxy advisor recommendations, we have also communicated our concerns with their methodology particularly as it relates to benchmarking non-executive director remuneration solely to a NZX peer set.

At the end of the day, the health of investor returns, New Zealand capital markets and ‘NZ Inc.’ depends on everyone aspiring to be better than average, and for those that succeed, lets pay them appropriately.

This article originally appeared in the NBR on 9 December 2023 (paywalled).

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