People, culture and remuneration
Introduction
One of the pillars of our Investment Framework is to back the people and culture that sit behind the companies in which we invest. We think that companies that are well managed, honest, entrepreneurial and considered can deliver strong returns to investors whilst also achieving social and environmental outcomes. We also appreciate that no company is perfect, and that missteps will be made even by industry-leading companies. Our expectation is that when errors are made, companies learn from their mistakes, and embark on a path of improvement.
Many large institutional investors – including superannuation funds in which many of us have our life savings – have continued to own shares in companies that have shown to be irresponsible corporate citizens. Many of those large institutional shareholders have been arguing for years that they would much rather engage with companies than find alternative, ethical investments. We believe that engaging with companies and encouraging them to invest for a more sustainable future is important, but when the change is occurring too slowly, or not at all, then an alternative approach is needed. Providing capital to companies (and the people running them) that are attempting to turn themselves around is important, but only to those that are genuine in their efforts.
Example 1: AMP
AMP once the leading wealth management company in Australia and New Zealand, has again been in the spotlight for the wrong reasons, this time for promoting (to one of the highest paid and most powerful positions in the company) an executive who was fined by the company for sexual harassment. This comes soon after the 2019 findings from the Financial Services Royal Commission, which found AMP had charged customers for services it was never intending to provide. ELMRI believes the ongoing problems at AMP are systemic and so, despite the rhetoric, we are dubious about any potential ‘turnaround’ in their business practices.
Our view is that company culture and people are what drives shareholder value creation, and are also key determinants of a company’s sustainability and ethical practices. We focus on the remuneration structures of those people at the top of the organisation, as we believe that they provide insight into the culture and priorities of the organisation.
AMP Chairman David Murray is a seasoned finance and banking executive who previously led CBA as the CEO and held the position of Chairman of the Future Fund. He is also one of the highest-paid individuals in this role, being remunerated $850,000 almost entirely in cash. The CEO of AMP, Francesco De Ferrari, was recruited from Credit Suisse in 2018 and was remunerated $13.4m last year. His short-term bonus increased earlier this year from 120% of base salary to 200% of base salary, despite shareholders incurring billions of dollars in losses. The excessive total remuneration and increased short-term incentives are both inexcusable, especially when we know that short-term greed is what led to the Global Financial Crisis over a decade ago. It is also what led to AMP charging clients for a service they were never going to provide, a revelation from the Royal Commission.
Perhaps the most alarming aspect of AMP is David Murray’s continuous scepticism surrounding the effects of climate change. As the Chairman of a major financial institution, and in a position of leadership, his views on climate change matter. It is undeniable that the younger generation is deeply concerned about climate change, but the Reserve Bank of Australia (RBA) and other established institutions and bodies have also raised their concerns about the risks of climate change. In March last year, RBA Deputy Governor Guy Debelle warned that ‘both the physical impact of climate change and the transition are likely to have first-order economic effects’ and that the RBA will take the impact of climate change into consideration when setting interest rates. Despite these warnings, David Murray continues to deny the effects of climate change, and his inability to adapt to new and changing information gives us an insight into the boardroom of AMP and the company itself.
Example 2: Fisher & Paykel Healthcare
In comparison, Fisher & Paykel Healthcare, a portfolio company with a strong corporate culture tackling global challenges (and one we believe is well-managed by passionate people) has an appropriate remuneration structure. CEO Lewis Gradon was remunerated $NZ 3.2m last year and Chairman Tony Carter was remunerated $NZ 234,000 in a year where shareholders enjoyed significant returns. On the matter of sustainability and climate change, the company set up an independent Ecodesign Advisory Board to provide guidance and support in relation to ecodesign and environmental sustainability. On issues of diversity and equality, the company some years ago undertook an internal review to understand the cause of the ~3% gender pay gap and was subsequently able to create a more inclusive and diverse working environment. Now the company has no gender pay gap.
We think that it is the people, values and culture of Fisher & Paykel Healthcare that makes it a forward-looking and innovative company, and their considered approach is applied across all aspects of the business, whether environmental, equality or commercial matters, an approach which benefits all stakeholders.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.
This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.
ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.
Past performance is for illustrative purposes only and is not indicative of future performance.