Annual Director Elections – our survey results

There has been a recent focus by investors and regulators globally on annual director elections for listed companies. In Australia, organisations such as ACSI are encouraging listed entities to hold annual director elections on the basis that they increase director accountability.

The UK Corporate Governance Code requires all directors of listed entities to be subject to annual re-elections on a comply or explain basis. In the United States, 88% of S&P 500 companies now hold annual director elections.

Survey results

Governance Institute is interested in obtaining members’ and other stakeholders views on this issue. Will annual elections improve governance in listed entities or could they undermine board effectiveness?

We conducted a survey of members of our Legislation Review Committee (LRC), the policy committee that assists the board of Governance Institute in promoting good governance in listed entities. We asked them if they supported the introduction of annual director elections for listed entities. If they did, we also asked whether they thought such a requirement should be introduced by way of the ASX Corporate Governance Principles and Recommendations (ASX Principles) or through changes to the Corporations Act.

Fifty nine per cent of LRC members who answered the survey did not support the introduction of annual director elections. Of the forty one per cent who supported annual director elections, sixty seven percent considered any requirement should be introduced through the ASX Principles, while forty percent considered it should be introduced by amending the Corporations Act (some members responded yes to both options).

As we were interested in the views of our broader governance community, we conducted a more comprehensive second survey of our data base in December 2019. Survey participants were asked whether they supported annual director elections for listed companies and the advantages and disadvantages.

Sixty eight per cent of respondents did not support the introduction of mandatory annual director elections for listed entities by an amendment to the Corporations Act. When asked if they supported the introduction of annual director elections on an ‘if not, why not basis’ under the ASX Principles, 47 per cent responded no, 38 per cent responded yes and 15 per cent provided a mixed response.

While all of the respondents to the first survey either worked in, or advised listed entities the respondents to the second survey were from a broad cross section of the governance community:

Advantages

The top three advantages of annual director elections chosen by respondents were that they:

• allow a regular and timely opportunity for boards and investors to consider director performance
• drive better accountability, and
• work to improve the focus of directors on the need to be engaged in their role.

However, thirty four per cent did not consider that there were any benefits to annual director elections for listed companies.

Free text responses identified some advantages which included:

• will reduce overboarding and promote better management of conflicts of interest
• stronger member engagement due to annual feedback results, and
• requires directors to consider why they add value to the organisation.

Disadvantages

Sixty four per cent of respondents identified insufficient time for shareholders to assess a director’s contribution to the board as a disadvantage of annual director elections. Over fifty per cent of respondents also identified the potential for reducing the experience and the effectiveness of non-executive directors in challenging management and incentivising directors to take a short-term approach as disadvantages.

Of particular interest were the responses of the thirty-eight percent of respondents who volunteered additional disadvantages of annual director elections. They focussed on encouraging short-termism view and also questioned shareholders’ ability to properly gauge the performance of a director after a single year of service.

Examples of these responses included:

‘Identifying suitable new directors is a substantial effort which is followed by a learning curve about the company and re-establishing the operating culture of the board. To then turn around to re-elect a director when you are really just getting started seems to be counter-productive. Also, shareholders have no real insight into the contribution of individual directors – they just see the total board impact. I do not understand how accountability is enhanced by annual election.’ (CEO or c-suite executive/Listed)

‘Limits capacity to develop necessary deep knowledge and understanding of the company itself, its industry sector and its strategy.’ (Senior governance or risk management professional/Listed)

Another downside identified by respondents was the administrative burden which would be created by annual director elections.

From the view of a board secretary – there is a lot of work involved in preparing for, holding, and finalising elections. To do this annually takes up time and may just end up as ‘rubber stamping’ rather than realising the benefits mentioned in the points above. (Senior governance or risk management professional/Public sector)

Additional administration work for the election – from notice and profile information to proxy form and notification. (Early career governance or risk management professional/Unlisted)

The following respondents stated their preference for director elections to be held at least biannually:

It takes about a year for a new NED to embed themselves into the Board and the organisation. So needs to be 2 year minimum. (Non-executive director/NFP)

Perhaps biannual director elections would allow time for investors to better assess director engagement and contribution. (Retired/NFP)

Three or four year rotations work well in my experience. (Early career governance or risk management professional/Unlisted)

Elections every three years on a rotational basis is the ideal scenario for corporations. (Senior governance or risk management professional/NFP)

Directors should be in the role for a minimum of 3 years as they settle in and contribute to the long term of a company along with succession planning. (Retired/Unlisted)

The results of our surveys raise interesting questions about the benefits and disadvantages of annual director elections. A majority of respondents considered that the benefits of annual director elections did not outweigh the downsides, particularly taking into account the increase in administrative costs and additional effort involved.

While, respondents to both surveys did not support the introduction of annual director elections by way of changes to the Corporations Act, a higher percentage supported its introduction via the ASX Corporate Governance Principles on an ‘if not why not’ basis. Perhaps this is an indicative of the view that annual election of directors should not be applied to all companies on a mandatory basis because no ‘one-size fits all’.

Companies considering introducing annual director elections would need to carefully balance the advantages against the disadvantages in the context of their organisation and consider the following issues:

• Will it impact on the ability of individual directors to take a long term approach to strategy and risk?
• Do shareholders have sufficient information to properly consider the contribution directors make to the board?
• Will it limit a director’s capacity to develop the necessary deep knowledge and understanding of the company, its industry sector and strategy?
• How will it impact on board culture?
• Will it lead to a lack of corporate memory?
• How will it impact the company’s succession plan?
• Will it make it difficult for the company to attract new directors?
• Does the company have sufficient secretariat resources to support annual director elections?
• Will it be disruptive and distract the board’s attention?
• Is the company subject to constitutional or regulatory requirements concerning board composition that would make annual director elections problematic?
• Will it improve stakeholder engagement and drive accountability or simply become another ‘tick the box’ exercise at the AGM?
• Can effective board performance evaluations deal more effectively with issues such as overboarding of directors, management of conflicts of interest and board performance?

Members with views on annual director elections are welcome to provide us with their feedback by contacting us at policy@governanceinstitute.com.au.