Should proxy advisory firms recommend limits on board committee roles?
Board committees exist within all types of organisations across all sectors and serve all manner of functions within those organisations. As a general guide, most companies will be required to have as a minimum committees dealing with some of the core functions of the organisation, such as audit, risk, nomination and remuneration. Some board committees are mandated, such as those required for ASX300 companies by the Australian Securities Exchange (ASX) Listing Rules, or those required for financial institutions by the Australian Prudential Regulation Authority (APRA)’s Prudential Standards. The ASX Corporate Governance Council’s (the Council) Corporate Governance Principles and Recommendations set out sound practice concerning board committees and the recommendations have largely been adopted by all listed entities.
The Council’s guidelines note that, while ultimate responsibility for a listed entity’s decisions rests with the full board, having a separate committee can be an efficient and effective mechanism to bring the transparency, focus and independent judgment needed on decisions regarding audit, nomination, risk and remuneration – all vital aspects of board oversight and responsibility. The Council’s guidelines reflect the importance of ensuring that board responsibilities are met through the formation of board committees as well as providing transparency to investors as to how this is achieved.
Board committees spread the workload of a board, but board committee charters put in place formal mechanism to ensure that the delegations made by the board to its committees receive appropriate oversight by the board and that the board takes responsibility for any resolutions arising from committee deliberations.
Proxy advisory firms CGI Glass Lewis and ISS Governance have policies on ‘overboarding’ of directors, as does the Australian Shareholders’ Association (ASA), while the Australian Council of Superannuation Investors will review multiple directorships on a case-by-case basis rather than setting a fixed number of appointments before it will recommend an ‘against’ vote in director elections or re-elections.
CGI Glass Lewis will recommend an ‘against’ vote where non-executive directors serve on more than six major boards, but notes it may recommend voting against a non-executive director who serves on more than five major boards. It counts service as non-executive chairman of a board as being equivalent to two ordinary non-executive directorships and will also recommend an ‘against’ vote where an executive director holds more than one non-executive director role in an unrelated company.
ISS Governance’s voting policy states that it will recommend an ‘against’ vote where a director sits on more than a total of five listed boards (it also treats a chair as equivalent to two board positions), or where an executive director holds more than one non-executive director role with unrelated listed companies.
The ASA holds the same position on ‘director overboarding’ as ISS Governance, but will only support executive directors of ASX200 companies serving on unrelated ASX200 boards if the individual is well established in the role and transitioning away from an executive career.
But in its 2016 Voting Policies, CGI Glass Lewis now includes notice that it will also typically recommend voting against an audit committee member who is up for election or re-election ‘if the member sits on more than three public company audit committees, unless the audit committee member is a financial expert, in which case the limit shall be four committees’.
The proxy advisory firm’s voting policy states that shareholders should not attempt to micromanage the business or its board and executives but use their influence to push for governance structures which protect shareholders. On that basis, it appears CGI Glass Lewis reads board committee appointments as a matter of governance structure over which shareholders should have influence.
Boards disagree, arguing that this push to exert control over appointments to board committees is micromanaging the business of the board. They say that the recommendation does not take account of the value that a director brings to the deliberations of an audit committee from sitting on a number of them, which provides them with a wealth of experience in holding management to account in regards to the financial accounts and ensuring the maintenance of financial integrity. Indeed, boards argue that limiting the application of that experience directly contradicts the proxy advisory firm’s contention that boards working to protect and enhance the best interests of shareholders typically possess breadth and depth of experience and diversity.
In questioning why a proxy advisory firm should exert influence over how the board manages the efficient allocation of its workload, boards also query why CGI Glass Lewis considers the work of an audit committee to be more onerous than the work of a board as a whole, given it recommends fewer appointments to an audit committee than to a board position.
Boards are the agents of shareholders, and shareholders have every right to examine whether the governance frameworks put in place contribute to shareholder value creation and risk‐reduction. It is considered inappropriate for Australian shareholders to be afforded the capability to direct the conduct of the board — this is supported by Australian case law. This intervention by a proxy advisory firm seems to blur this essential boundary.