11 Dec 2013
The resulting focus on executive compensation and risk management is, according to experts, unsurprising. “Investors are looking at risks differently than in the past” said Kayla Gillan, PwC Investor Resource Institute Leader. “The financial crisis that affected capital markets across the globe demonstrated that companies can be rocked to their core when connections between lending practices, securitization programmes and capital funding levels are not clearly understood and monitored.”
In both surveys, Through the investor lens and ProxyPulse 2013 Season Recap, executive compensation is singled out for tough treatment, reflecting a view held by some that high reward can encourage risky behaviour.
Around half of investors surveyed say that their decision to invest is driven in part by risk factor disclosures (46%) and executive compensation structure (51%). And even though 43% of investors said that engaging with companies over their compensation structure was ‘very or somewhat difficult’, it’s not a conversation that’s being avoided, ProxyPulse points out in its section on ‘say on pay’ votes.
Although the survey finds that approval of pay plans was up on 2012, this was attributed to companies making changes as a result of their previous year’s vote. According to the survey, a resounding 66% of investors think that boards are not effective at controlling executive compensation, and 79% said that “much or somewhat more” disclosure of the board’s role in risk oversight would improve investment decisions.
“The message received is clear: investors want to know more about the risks that companies have identified, and how they are managing them,” said Ms Gillan. “For nearly every topic within our survey, investors are looking for more information, not less.”
In Canada, a relatively similar picture emerges. Their national survey asked whether investors found information on corporate governance useful for making decisions, and whether such information was currently adequate. Many said that overall, the information they got was adequate, but some were concerned that typical measures of good corporate governance resulted in a “tick the box” mentality.
“Some recent corporate governance scandals in Canada have involved companies who at first glance appeared to have great corporate governance ‘best practices’ but on closer examination, they didn’t actually protect shareholder interests,” said Lucy Durocher, a senior manager in accounting consulting services at PwC Canada.
There too, there appears to be an appetite for a wider information set. Ms Durocher added: “a number of investors commented that who is on the board is really important – they’re making their own assessments about who is truly independent and whether the governance procedures are high quality.” But she implied that this might not be possible in many other countries where the population is larger and the industries are more diverse.
And it looks like the need for more information on corporate governance isn’t just limited to investors in North America.
In South Africa, PwC assessed the company reports of the top 40 firms on the Johannesburg Stock Exchange against integrated reporting criteria and found that there was a “tendency towards constrained governance reporting”.
“In analysing our overall results, the governance element emerged as an area where reporters did not provide much insight into their governance practices,” said Zubair Wadee, a partner at PwC in South Africa. He added: “the majority of reporters provide ‘boiler plate’ disclosures on corporate governance, which do not reflect what those charged with governance have actually done in adding value to the company.”