The International Corporate Governance Network (ICGN) has published three new best practice guides in relation to board diversity, executive remuneration and non-executive remuneration.
The ICGN is an investor-led organisation of governance professionals with the aim of promoting effective standards of corporate governance to advance efficient markets and economies globally. The ICGN has published three new best practice guides which form part of a suite of guidance on corporate governance that includes the ICGN Global Governance Principles (published in 2014).
ICGN Guidance on Diversity on Boards
The guidance builds on the ICGN Guidance on Gender Diversity on Boards published in 2013, which identified the responsibilities of shareholders and companies alike to promote gender diversity on boards ultimately to enhance corporate governance and the overall success of companies.
The new guidance recognises that a range of social and economic factors contribute to a fully diverse board beyond gender diversity. This promotes directors with experience, social backgrounds and competencies to help enable effective board decision-making and leadership. Moreover, relevant board candidates with the needed skills to promote diversity and board effectiveness should not be discriminated against based on gender, age, nationality, race, sexual orientation or gender identity.
The ICGN encourages:
- companies to develop and disclose board diversity objectives
- shareholders to establish a dialogue with companies, hold boards accountable, and facilitate greater board diversity by submitting their own nominees for consideration to the board
Among other things, the guidance highlights that the nomination committee should, when identifying candidates to recommend for appointment/election to the board:
- consider only candidates who are highly qualified based on their experience, functional expertise, and personal skills and qualities
- consider diversity criteria including gender, age, ethnicity and geographic background, among other factors
- engage independent external advisers to conduct a search for candidates that meet the board’s skills and diversity criteria to help achieve its diversity aspirations
- aspire towards board composition in which each gender comprises at least one-third of the independent directors
It also discusses the role of the board chair (to ensure diversity of opinions and active debate), the existence, maintenance and disclosure against relevant policies, and the importance of annual board evaluation and succession planning.
For further details, see the guidance here.
ICGN Guidance on Executive Director Remuneration
The guidance replaces the 2012 guidance and aims to provide a consistent and global perspective focused on major aspects of remuneration policy and practice that will assist companies in better understanding long-term shareholders’ views, as well as serve as a tool for investors when engaging with companies.
The guidance includes four main changes from the 2012 guidance:
- it provides greater clarity on committee leadership
- it refers to motivational considerations beyond financial remuneration
- it explicitly provides base salary is payment for achieving what is expected of the executive, and that variable remuneration is payment for out-performance
- environmental, social and governance factors have been included in the assessment of performance to help achieve sustainable long-term value creation
Among other things, the guidance:
- discusses the role and composition of, and the support available to the remuneration committee, conflicts of interest between committee members, advisers and management and disclosure obligations to shareholders
- considers the structure of remuneration arrangements (eg, short term and long term incentives), performance-based methodologies, non-financial elements of effective remuneration structures, change in control and other corporate events and post-employment benefits
- states that employment contracts or arrangements should not (i) extend longer than one year (ii) provide guaranteed raises, bonuses or other incentives and that severance payments should be capped and be limited to termination by the company without cause, death or disability
For further details, see the guidance here.
The guidance replaces earlier guidance published in 2013 and contains two main changes since the previous version:
- expectations of non-executive directors to attain a significant shareholding are more clearly defined, and
- explicit reference is made to the remuneration of board chairs
The guidance focuses on the structure of remuneration arrangements, accountability and managing conflicts of interests and ensuring there is adequate transparency of arrangements and disclosure to investors. The ICGN supports the practice of seeking shareholder approval of remuneration arrangements and material amendments to equity-based remuneration plans.
Key highlights include:
- NEDs and board and remuneration committee chairs should be awarded fees that reflect individual experience and qualifications whilst also reflecting the expected time commitment
- the use of share options or any form of performance-based remuneration for non-executive directors or chairs should be discouraged as this may conflict with a NED’s primary role as an independent representative of shareholders
- any shares owned by NEDs should be retained beyond retirement or resignation for at least two years post departure
- NEDs should not be eligible to receive change in control or severance payments and should not receive certain retirement benefits or sweeteners for deferring cash payments into company shares
- that the remuneration should review annually the appropriateness of the elements of remuneration potentially payable to each NED and be able to use a remuneration consultant/other external adviser
- full disclosure to investors should be made both in relation to the rationale behind the NED remuneration plan as well as the actual remuneration awarded under the plan
For further details, see here.