Rating corporate governance practices by JSE listed companies. Mark Hodgson, CA(SA), CFA Industrial and corporate governance analyst

Transcription

1 Rating corporate governance practices by JSE listed companies Mark Hodgson, CA(SA), CFA Industrial and corporate governance analyst

2 Click Overview to add heading Avior Capital Markets started its research in Corporate Governance in Rated #1 in the FM analyst rankings since 2007 in the sector. Our approach to assessing corporate governance: Avior developed its own proprietary methodology. Scorecard (number of variables). Qualitative dimension. Written report including proxy voting recommendations. Online governance database including remuneration. Our coverage encompasses the JSE Top 40 companies, ex Top 40 companies and selection of mid-cap companies (JSE, LSE and Swiss primary listings). Our analysis is primarily done prior to the AGM s, but includes advising clients re GM s (BEE deals, Exec remuneration plans, major acquisitions etc.). For Avior governance encompasses ESG (risk management and sustainability issues). 2

3 Click What to we add do heading Our key clients are the large institutional investors mostly SA with some international clients. Investment analyst team allows deeper insights into governance oversight and remuneration through their understanding of financial valuation of the listed group, industry dynamics and management engagement. Timely integrated reports issued c.5-6 weeks or more before AGM recommended to allow adequate engagement with the companies on our reports and for our clients to have time to engage around contentious issues. Some listed companies proactively engage with major shareholders on key issues ahead of AGM or year end (annual engagement). Company secretary or investor relations an important point of engagement. We have engaged with the following: Chairman Lead independent directors CFO s Other executive directors Encourage our analysts to attend AGM s where possible. Client driven and responsive (Deadline driven) 3

4 Click Our key to add reference heading material King III code and checklist (Comply or explain). UK Combined code (Relevant for SAB, OML, INP, MNP, AGL, BIL). Swiss code of best practice (Relevant for CFR). Integrated reporting framework including AFS, Sustainability reports, AGM notices, circulars. JSE Listings requirements. New Companies Act CRISA (Institutional investors code) sustainability considerations (ESG) ownership responsibilities (voting) collaborative approach and transparency PRI (International collaborative network). Past Avior reports, our remuneration database and benchmarking. SA recognised for its good accounting and governance standards 4

5 Click Avior to scorecard add heading Primary Top 40 companies with a corporate governance score:. Out of 5 with the following scale: 0-1 Requires significant change 1-2 Poor 2-3 Adequate 3-4 Good 4-5 Excellent Companies are evaluated based on the following criteria: BOARD STRUCTURE (High) DIRECTORS REMUNERATION PRACTICES (High) CAPITAL STRUCTURE AUDITING AND ACCOUNTING INTEGRATED SUSTAINABILITY (High) Overall score and any specific weaknesses highlighted. 5

6 Click Board to Structure add heading Board size and composition optimal. Holding company board representation on a listed subsidiary: BGA, NED, VOD, AMS, KIO Board size restrictions and representation rights (SAB) Altria 27%, Santa Domingo family 14%. Key board room role players. Independence, institutional memory and refreshing Board skill set identify deficiencies. Board effectiveness: Chairman and CEO dynamic Ex CEO chairman? Chairman level of involvement. Founder CEO dynamic. Executive representation extremes (BIL only the CEO is formerly a board member). Board effectiveness and re-freshing of the board balanced against experience. 6

7 Click Directors add heading Individual evaluation perspective on appointment and re-election. Longstanding personal relationships and cross directorship issues. BEE deals impact on non-exec independence. Skills and expertise. Demographics (Gender, race). Material personal financial interest vs. nil shareholding. International directors skills and expertise. Number of boards (Top 40). Attendance (75% benchmark). Individual directors perspective 7

8 Click Remuneration to add heading Remcom understanding of the share price, the share rating and the business cycle. (earnings quality) Remuneration policy and linkage to remuneration paid especially to executives: Direct skin in the game. Remuneration mix appropriate (Fixed, STI, LTI). Appropriateness of performance measures (HEPS, TSR, ROE). Discretionary and subjective element. Controllable vs. uncontrollable measures. Performance vs. retention LTI relative weightings. Loans to executive directors. Changing the performance benchmarks. Benchmarking: Benchmarking pay against industry peer group. Justification for higher fees for international directors (up to 3x). Retainer and attendance fees for non-executive directors (attendance vs. contribution). Special meetings, Golden handshakes. Purely share based remuneration (legacy options). Adequate alignment with shareholders. 8

9 Click Control to structures add heading Longer term perspective. Ownership mentality corporate action impact on how acquisitions are financed. Existence of special voting or pre-emption rights. When company performing not as much an issue. Dividend policy impact. Family succession uncertainty. Underperforming listed subsidiaries. Minority rights protection: Existence of control structures. High voting shares / negative control. Dual complex legal structures. Takeover offer. Share buy-backs impact on control and liquidity. Critical aspect to understand. 9

10 Click Auditing to add and heading Accounting Audit chairman role critical. Complexity with financial companies (Insurance actuarial committee, Banks - financial instruments). Ex audit partner issues (cooling off period). Technical skills and business experience. Risk committee as part of Audit committee responsibilities Risk appetite and risk management process often complex. Investment or acquisition committee. Accounting policy judgments and impact on financial results and remuneration. Quality of the CFO and CEO s understanding of the numbers. Integrity of the numbers and reporting process. 10

11 Click Integrated to add sustainability heading Integrated report: Does the company explain its business model adequately and how is it managing business to sustain and grow value creation. Employee and broader community engagement credible. Water and electricity usage (Cost and availability issues). Logistics companies spillage costs, safety, quality of roads. Carbon tax impact on profitability. BBBEE scorecard and how this aspect is being effectively managed - Key customer exposure? Ownership and employment equity Huge amounts of data needs to be collected by listed companies for integrated reporting: Has the company analysed and set targets from this information? Is the information independently assured or internally generated? Separate sustainability reports Sustainability data in the Rest of Africa / impact of acquisitions on existing targets. Ongoing journey (sufficient improvement each year). 11

12 Click Practical to add issues heading to consider Meeting attendance - Holding company directors non-attendance or by tele-conference. Related party disclosure High management fees (technical fees), director relationships. Government role - as both a regulator and shareholder. Competition fines Construction sector, Food sector. Does the board chairman / LID / IR regularly engage with key investors or stakeholders. AGM Engagement : Active engagement with non-executive directors and management formally and informally Key non-executive directors in attendance (Audit chairman and Remuneration chairman) How the company responds to questions posed publically Voting disclosure and transparency Trading related update Engagement with stakeholders. 12

13 Click Governance to add heading / responsible Investing value added More wide ranging insights into a company over and above purely its investment merits. Multi-mangers and intermediaries requirement push. Risk appetite and related risk management process (quality of earnings). Regulatory and social /political risks. Better understanding of key soft issues: Low share rating and executive remuneration. Looking at broader issues of sustainability and non-financial measures in relation to company activities: Safety record (HAR) Wider community engagement Water and energy availability Regulatory fines BP Gulf of Mexico disaster Bribery and corruption risks (Competition fines and UK Bribery Act) Managing challenges of operating in the Rest of Africa (Angola, Nigeria etc) Minimal disclosure here Higher risk countries: Syria, Iran, Zimbabwe etc. Business practices and industry related dynamics relevant. 13

14 Click Governance to add heading analysis insights Lower scoring companies can still be outperforming investments (Trend aspect). High scoring companies may be relatively mediocre share investments. Identifying key governance related issues. Company responses to more critical reports and adverse voting recommendations. Peer related industry comparison and more subtle dynamics. Ongoing evolution in governance requirements (Followers, leaders, overseas trends). Remuneration evaluation across geographies and different industries is complex. More focus and commentators evident. 14

15 Click Conclusion to add heading Complements and enhances our fundamental research (governance review and internal risk assessment analysis scoring and evaluation methodology). Tracking governance progress through absolute and relative scores and ratings. Better understanding of control structures impact / minority rights. Improving the alignment between shareholder value executive remuneration and corporate strategy. Assessing risk better and going beyond the numbers. 15

16 Click Thank to You add! heading ANY QUESTIONS? Avior recognised and trusted by its clients for its fundamental research quality. 16