Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
ACSI takes aim at exec pay, cyber risk
Updates to ACSI’s governance guidelines – which underpin the industry fund-owned proxy adviser’s voting recommendations – have put executive remuneration at the top of the agenda after a year where fat CEO paychecks rubbed salt in the wound after poor service from companies like Qantas.
“The record number of strikes against remuneration reports this year is a clear reminder that shareholders are watching outcomes closely, and there is a need to better link incentives to the delivery of value to shareholders over the long-term,” said ACSI chief Louise Davidson. “We hope that our new guidelines assist companies to make necessary changes where that link is broken.”
ACSI’s guidelines warn that “excessive pay, persistently high variable reward outcomes and lack of alignment with shareholders” can affect a company’s reputation and social licence to operate. Bonuses must also truly be “at risk” if executive performance isn’t up to standard, and based on “transparent and measurable objectives”, while fixed salaries shouldn’t be linked to company size or performance benchmarks created by third-parties to avoid creating perverse incentives.
ACSI also warned companies to drop lackadaisical attitudes to cyber-risk by determining how they would respond to a cyber security incident, including how they intend to identify and notify affected customers and stakeholders. And they should investigate the security expertise of directors or the advice on hand from third-parties, as well as how they store and manager their data.
Company responses to climate risk are expected to be “credible and Paris-aligned”, and informed by science-based assessments of carbon constraints required to avoid dangerous climate change. Better practice disclosures will include information on business models, capital allocation and the technology investment required to support transition plans and emission reduction targets.
“ESG risks and opportunities continue to be financially material to investors,” Davidson said. “Our governance guidelines reflect our expectations of how Australian boards can best protect long term value for their investors, especially the retirement savings invested by superannuation funds.
“This year has highlighted the financial problems companies can bring upon themselves when those risks aren’t managed properly, and when short-term thinking takes priority over long-term success. We expect boards to oversee these issues appropriately and move beyond a ‘check the box’ approach to governance.”
