Losing momentum: WGEA data shows the gender pay gap stands at 20.1% but the number of firms acting to address it is declining The Workplace Gender Equality Agency (WGEA) has released its latest gender equality scorecard tracking progress towards gender parity in Australian workplaces, including progress towards closing the gender pay gap. The findings in the report are based on data provided by 4,943 employers (employing 40% of Australia's workforce) for the reporting period 1 April 2019 to 31 March 2020 in accordance with the Workplace Gender Equality Act 2012. Some Key Findings The gender pay gap continues to (slowly) narrow ▪ The gender pay gap, which the WGEA describes as 'the difference between the average earnings of women and men, expressed as a percentage of men’s earnings' – has narrowed (slightly) year on year since 2013/14. ▪ For the 2019-2020 period women’s average full-time base salary across all industries and occupations is on average 15% less or $15,144 per annum less than men’s. This is a slight improvement on 2018-2019 when the gap stood at 15.5%. ▪ Women’s average full-time total remuneration across all industries and occupations is on average, 20.1% less or $25,534 per annum less than men’s, down from 20.8% in 2018-2019. Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 5 ME_171017618_1 ▪ The financial and insurance services sector remains the sector with the highest total remuneration gender pay gap at 27.5% or $45, 497 per annum (down from 29.3% in 2018-2019). ▪ Comparing earnings for full time employees in specific occupations, men continue to earn more than their female peers across every manager category and non-manager occupation. For 'key management personnel' the gap widens is 23.4% ($89, 141) and to 20.5% ($67,768) for 'other executives/general managers'. Fewer employers are taking action on pay equity ▪ Slightly more organisations than last year (46.4% in 2019-2020 vs 44.7% in 2018-2019), conducted a gender pay gap analysis of their payroll data. ▪ However, of this group, almost half (45%) took no action to address the issue. The number of employers who did take action was 54.4% - down 6.1% decrease on last year. ▪ Looking at this more closely: – The proportion of organisations reporting pay equity metrics to the executive decreased 4.7% to 26.6% – The proportion of organisations taking corrective action decreased by 2% to 26.7% – The number of employers setting targets to reduce organisation-wide pay gaps increased 2.3% to 9.2% ▪ A common explanation (68.9% of cases) given for taking no action to address identified pay gaps was that tehre was 'no unexplained or unjustifiable pay gaps'. A worrying loss of momentum WGEA Director Libby Lyons described these findings as 'worrying' and cautioned business not to relegate the issue to the back burner. '…there has been a worrying drop of 6.1 percentage points in employers taking action on closing their pay gaps. Sadly, only 54.4% of employers who did a gender pay gap analysis took action to close the gaps. This trend must not continue. Experience tells us that when employers measure their data, identify their problem areas and take action to address it, the pay gap closes. Research shows that actions to close pay gaps are three times more effective when the results are reported to the executive or Board. Our economic recovery depends on utilising the skills and experience of a diverse, gender-balanced workforce. Women and men must have an equal opportunity to re-engage and participate in the workforce. Employers have an important role to play to make this happen by ensuring the momentum towards gender equality is sustained. It is good for business and integral to our economic recovery'. The AFR and The Guardian quote Ms Lyons as further commenting that the lack of action confirms that 'gender fatigue' is setting in and that this risks halting the momentum on the issue. [Sources: WGEA Gender Equality Scorecard 2019-2020; [registration required] The AFR 26/11/2020; The Guardian 26/11/2020] Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 6 ME_171017618_1 Disclosure and Reporting 'Disappointing': The FRC's review of Corporate Governance Code reporting finds that overall reporting does not meet the FRC's expectations Key Takeouts ▪ The UK Financial Reporting Council's latest Review of Corproate Governance Reporting found that overall, companies are failing to live either investor expectations or the FRC's expectations, with a number of companies adopting a 'tick box approach'. ▪ The FRC expresses concern that an 'unexpectedly high number of companies' claimed full Code compliance without demonstrating it in their reports. Where non-compliance was acknowledged, ofen the disclosure was 'boilerplate'. ▪ On the issue of workforce engagement, the report found that most companies are electing to appoint a designated non-executive director to the board, but provide little detail as to why they opted for this approach, what the role of the NED is/how the NED will engage with the workforce, or the outcomes of the NED's engagement efforts/the impact. ▪ In terms of the extent to which employee feedback is being factored into remuneration decisions, the report found no examples of reporting that described employee feedback received by the remuenration committee and what follow up actions were taken in consequence. ▪ The report also questions whether companies are sufficiently focused on shareholder concerns – for example, the report found that 67% of companies who experienced significant shareholder dissent due to remuneration issues, 'appear not to have addressed shareholder concerns at all'. ▪ Going forward, the FRC has identified five areas in which it would like to see improvements made. These are detailed at the end of this postt. The UK Financial Reporting Council's (FRC) latest Review of Corporate Governance Reporting assessed the quality of a sample of reports from one hundred FTSE 100, FTSE 250 and small cap companies. Overall, the FRC found that though there were some good examples of reporting, 'overall – reporting does not demonstrate the high quality of governance that the FRC expects'. For example, a number of companies were described as adopting a 'tick-box' approach to compliance with little useful detail or explanation in their reports. Some Key Findings Code Compliance statement ▪ The FRC expresses concern that an 'unexpectedly high number of companies' claimed full Code compliance without demonstrating it in their reports. For example, of the 58 companies in the sample who claimed full Code compliance, 43 did not report non-compliance with Provision 38 which recommends pension contributions for directors be aligned with the workforce, despite non-compliance with the provision. ▪ Where non-compliance was acknowledged, ofen the disclosure was 'boilerplate'. ▪ The report makes clear that the Code allows some flexibility and that full Code compliance is not necessarily expected. Rather, the FRC's expectation is that companies 'provide a clear and meaningful explanation of how a company’s actual practices achieve good governance standards in line with flexibility offered by the Code even though they may not have fully complied with a Provision of the Code'. Statement of purpose – less than a quarter of companies' reporting on purpose met FRC expectations ▪ Though 86% of companies included a purpose statement in their reports, the FRC found that the quality of varied considerably with many not living up to the FRC's expectations. Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 7 ME_171017618_1 – Of all the reports in the sampls, less than a quarter (22%) of statements described a purpose that specifically articulated why the company existed, the market segment they operate in, their unique selling points, and/or how they intend to achieve their purpose'. – In 11% of cases, the statement of purpose amounted to a 'marketing slogan' – In 22% of cases, the statement was 'vague' and 'did not specifically articulate why the company existed, the market segment they operate in, their unique selling points, and/or how they intend to achieve their purpose'. ▪ The report found that many statements of lacked detail around how the company is 'generating value for shareholders and contributing to wider society'. For example, 45% of purpose statements either did not describe any social or stakeholder dimensions or only referenced them indirectly. ▪ The report found that it was not clear from the sample reports how boards are exercising their oversight function to ensure that their company's purpose works as a driver for company decision making. For example, 76% of reports did not clearly describe how the board satisfied themselves with the alignment of their purpose with their business practices. ▪ The FRC suggests that companies should refer to the FRC's guidance on purpose, and focus on ensuring that reports clearly demonstrate the connection bewteen purpose, values and strategy. Culture – companies need to improve their reporting on how culture is monitored/asssessed ▪ The FRC welcomed the fact that almost all companies in the sample discussed their company culture, usually in a letter from the Chair. ▪ Overall, the FRC considers that 52% commented on their culture in a 'meaningful way' and 75% als commented on their values and linked this to culture. ▪ Better examples of reporting: – explained how the senior leadership teams had sought insight from all stakeholders (internal and external) when reviewing their culture and how their culture is linked to values and strategy. – clearly linked the actions to improve culture with associated KPIs – explained the link between supporting the health and wellbeing of the workforce and investing in training to achieve high performing culture. ▪ Although reporting on culture has improved compared to early adoption reporting last year, the FRC considers that reporting on how culture is monitored and assessed needs improvement. For example 20% of companies surveyed did not include any reference to how culture is being assessed or monitored. ▪ The FRC expects more companies to take a more 'rigorous approach to culture and set up effectiv ways of monitoring and assessing both the culture and its alignment with purpose, values and strategy, including setting out any actions taken in this area in line with Provision 2' of the Code. Tenure, succession planning and board independence ▪ Succession planning: On the issue of board succession planning, the FRC found little improvement on the review published earlier in the year with reports overall providing minimal detail or insight into the board's actual succession plan. The FRC expects to see an improvement in reporting in this area, particularly where companies highlight succession planning as an outcome of a board evaluation. The FRC would also like to see improved 'cohesion bewteen diversity commitments, board evaluations and succession plans'. ▪ Chair tenure: Nine companies in the sample had a Chair who remained in the post beyond the recommended nine year peiod, and overall, the FRC considers that the explanations provided for this were 'poor' or non-existent. The report emphasises that unless there is a strong case for an individual to remain in the post beyond the recommended period, there is a risk that the board/company will become overly reliant on their views/skills. As a rule, the FRC considers that 'boards are more effective when they have a broad mix of skills, knowledge and experience and regularly refreshed'. ▪ Board evaluation – little detail on outcomes: The FRC states that there was an improvement in reporting around board evaluation processes, boards remain reluctant to disclose the details around the outcomes of the evaluation process or the steps being undertaken to address issues identified in past evaluations. The FRC states that 'reporting on board evaluations should not be approached as a compliance exercise. Instead, a clear set of recommendations, actions, and a time period for review of progress against agreed outcomes should be made'. Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 8 ME_171017618_1 Diversity and inclusion ▪ The FRC found that though many companies stated the importance of diversity and diverse boards in their reports, they offered little explanation/evidence to bear out this out eg setting comprehensive diversity targets. ▪ For example, the FRC found that few companies had 'ambitious diversity targets across multiple under represented groups' for both the board and senior management. – Though a majority (63%) of companies included divesrity targets in their reports, few disclosed board diversity targets (beyond gender targets). – Just over a quarter of reports (26%) set targets for both the board and senior management. Where targets were set for senior management, 'diversity targets received far less attention than their board counterparts'. ▪ 37% of companies did not appear to have any voluntary diversity targets. The FRC comments that 'those which attempted to justify this approach said that ti was a deliberate decision due to their policy of recruiting "on merit"'. Commenting on this, the FRC states, that it 'expects to see all companies promoting and recruiting on merit. Those who use it as a justification for not actively pursuing diversity policies should demonstrate how their approach brings about diversity in the boardroom and workforce'. ▪ Parker Review: The FRC expresses concern that only 20 companies in the sample explicitly mentioned the Parker Review as one of their targets given that the deadline for meeting the diversity target set by the review is fast approaching – the Parker Review recommends that FTSE 100 boards include at least one female director from an ethnic minority background by 2021. ▪ The FRC encourages companies to enhance the clarity of their reporting on diversity and more particularly to: set appropriate targets for both senior management and the board and to ensure that it is clear from the report how they are tracking against them. Remuneration Overall, the FRC found that reporting on remuenration was mixed with improvements in reporting in some areas and generally poor reporting in others eg KPIs and pension contributions. ▪ KPIs: – 71% of companies in the sample dsiclosed non-financial KPIs. However, of this group, only 12 met the FRC's expectations by explainingthe choice of KPI, explained the design of the KPI and linked it back to the company's strategy. – 43% of companies used specific non-financial KPIs in either their annual bonuses, long-term incentive plans (LTIPs), or both. However, 30% specified 'only vague' personal or strategic objectives and a further 27% did not tie any non-financial KPIs to remuneration. ▪ Pension contributions: The FRC found that a number of companies are yet to a align pension contributions paid to executive directors with the rest of their workforce, despite the growing shareholder focus on the issue. The FRC cound the 43 companeis who claimed full Code compliance, did not demonstrate compliance with Provision 38 (pension contribution alignment). Only 32% of companies aligned director pension contributionsw ith the workforce, which the FRC comments is a far lower proportion of companies than expected. ▪ Remuneration committee workforce engagement: Provisions 33 and 41 of the Code state that remuneration committees should take into account workfroce views in the context of setting the remuneration policy for executive directors and to ensure that executive remuneration aligns with wider company pay policy. The FRC found no examples of reporting that described employee feedback received by the remuenration committee and what follow up actions were taken in consequence. The FRC flags this as an area for improvement, stating that it expect to see companies ;reporting the steps that they have taken to engage their employees on their remuneration policies'. ▪ Workforce pay: 83% of companies reported on workforce pay (dsiclosed a pay comparison between the CEO and a group ofemployees as well as CEO pay ratio disclosures). The FRC commenst that this is primarily due to recent changes in the law. ▪ Exericse of the remuneration Committee's discretionary powers: The FRC found that 'a clear majority' of companies provided a full explanation of their remuneration committee's discretionary powers including details around malus/clawback, bonuses and LTIPs. There were also a number of examples of reports that included examples of situtations in which the remuneration committee exercised its discretion and why. Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 9 ME_171017618_1 Stakeholder engagement ▪ Section 172 statements: Overall, the FRC concluded that cmpanies are not providing sufficiently detailed information in their section 172 statements. – The FRC found that though nearly all companies referenced some form of engagement, the engagement efforts described were 'often a one sided exercise' eg providing presentations or visits to suppliers/customers. The FRC comments that though these activities could potentially become meantingful engagemements, few companies demonstrated this in their reporting. – The outcomes of engagement were often described in general terms and it was not clear what actions were taken in response/how the outcomes were reflected in subsequent decision making. – Only a small number of companies detailed the metrics used to measure the success of their stakeholder engagement efforts. – Most companies did not report on any mechanism through which stakeholders could independently raise issues. Where a mechanism was disclosed, it was typically limited to whistleblowing processes. Workforce engagement The Code recommends that, in line with directors' obligations under s172 of the Companies Act 2006 (UK), boards should engage with their workforce using one or more of the following methods: 1) appointing a worker director; 2) establishing a formal workforce advisory panel; and/or 3) appointing a designated non-executive director (NED). Where boards opt not to use one or more of these methods, the Code enjoins them to explain what alternative arrangements are in place and why the board considers them to be effective. Overall, the FRC's expectation is that reports should include detailed information about how the chosen workforce engagement mechanism enables the views of the workforce to be drawn to the board's attention and the outcomes of that engagement. The review found that there is room for improvement. ▪ Appointing a designated NED: Consistent with the findings of the Spencer Stuart Index (for a summary see Governance News 11/11/2020 at p4) the FRC found that the most popular option was to appoint a designated NED to the board – 40% of the companies sampled took this approach. The FRC found that despite the fact that reports indicated that companies had decided on this approach because they considered it to be the most appropriate option, detail was lacking on why this was the case. The FRC comments that in most cases, the NED's role was left undefined and what information was provided was 'ambiguous and limited'. The FRC also found there was overreliance on the results of staff surveys/use of NED-led staff visits to ensure employee voices are heard and a lack of substantive information about the impact the NED's activity had on decision making/outcomes. ▪ Alternate arrangements: 31.7% did not adopt any of the three options given in the Code. Though some companies indicated that this was because they considered their existing practies to be adequate, others indicated that theya re planning to strengthen their existing practices, though they did not provide much information about how. Some companies also highlighted the importance of all NEDs engaging with the workforce to understand the workforce views, but the majority of these were observed to be reliant on the use of annual engagement surveys (and possibly the use of Q&A sessions/internal interactions). ▪ Workforce advisory panel: 11.7% elected to establish a workforce advisory panel. The FRC comments that the information provided indicated a 'more robust and structured process for obtaining employee views' as compared with the information provdied on the roles of the NEDs. However, the FRC also comments that there was a lack of detail provided around how the panel's activities impact board decision making. The report observes that some companeis have adopted a 'hybrid model' with a designated NED chairing the workforce advisory panel, which the FRC considers has the benefit of enabling two way comunication between employees and the board. ▪ Worker director: Only 2% of companies opted to appoint a workforce director. The FRC comments that in light of the very small sample, there is insufficient information to draw conclusions. ▪ The choice of mechanism was not always clear: The FRC comments that while the majority of companies disclosed their choice of mechanism, it was unclear from the report why they considered their choice to be the most effective option for their company. The FRC adds that 'there was a degree of difficulty' in identifying which of the three suggested mechanisms or alternate arrangements were being adopted in some reports. Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 10 ME_171017618_1 Lack of focus on shareholder concerns The FRC used the Investment Association's Public Register – the register tracks significant opposition by shareholders to resolutions and any resolutions withdrawn before a shareholder vote at listed companies – to track responsiveness to shareholder concerns. ▪ The FRC's analysis of companies due to submit their six month update after the shareholder meeting by 31 October identified that 40% of companies made no announcement. ▪ 67% of companies who experienced significant shareholder dissent due to remuneration issues, 'appear not to have addressed shareholder concerns at all'. The FRC comments that this is 'deeply concerning' as it signals both non-compliance with the conde and a 'lack of regard for significant shareholder concerns'. The FRC's expectation is that companies 'genuinely engage with a wide spectrum of their shareholders, not only the largest few, to understand and try to address their concerns as far as practically possible'. The FRC also expects that wider stakeholder and shareholder views and actions taken in response are communicated clearly and 'within a specified timeframe'. Expectations going forward Overall, the FRC wants to see companies providing clear, detailed information about how they are meeting each of the Code provisions, or where they are not doing so, a clear explanatio as to why. A key message is that companies should avoid a 'tick box' approach and/or the use of high level 'boilerplate' in reports. More particularly, the report identifies five areas where the FRC would expects improvements going forward. ▪ Purpose: The FRC expects companies to have a well-defined purpose and for reports to clearly explain the progress being made towards achieving it. ▪ Stakeholder engagement: On the issue of stakeholder engagement, the FRC would like to see discussion of the issues being rasied by stakeholders, the topics considered, the feedback received during engagement with shareholders and employees and how this is impacting decision-making, strategy and the long-term success of the company. ▪ Remuneration: Reports should show the impact of engagement with stakeholders on remuneration policy and outcomes including the imapct that engagement with the workforce has had on executive remuneration policy. ▪ Culture: The FRC would like to see more focus on assessing and monitoring culture including consideration of methods and metrics used ▪ More detailed reporting on diversity, board evaluation and succession planning: The FRC states that it would like to see more attention paid to these issues in reporting, and generally, more detailed information included in reports. [Sources: FRC media release 26/11/2020; Review of Corporate Governance Reporting] Towards simpler, comprehensive sustainability reporting? The SASB and IIRC will merge into a new Value Reporting Foundation The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) have announced plans to merge into a new organisation, the Value Reporting Foundation (Foundation) in 'mid 2021'. The purpose of the merger is to progress work towards a simpler more comprehensive reporting system, in line with investor demands. This will be achieved through developing existing links between concepts in the existing Framework and the SASB Standards which are already being used, in combination, by a number of organisations. As such, the merger will advance the work of CDP, CDSB, GRI, IIRC and SASB as outlined in the Statement of Intent To Work Together Towards Comprehensive Corporate Reporting released in September. Over time, other groups are expected to join the Foundation – according to SASB/IIRC's joint statement, some have already expressed interest in doing so. The new Foundation will be headed by SASB CEO Janine Guillot. [Source: Joint IIRC/SASB media release 25/11/2020] Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 11 ME_171017618_1 Institutional Investors and Stewardship State Street Global Advisers is set to join Climate Action 100+ State Street Global Advisors (SSGA), has announced it will join the Climate Action 100+ investor initiative. Climate Action 100+ has seen a 142% growth in the number of signatories since the initiative first launched in 2017, with three of the top twenty asset managers – BlackRock, Invesco and no SSGA – all joining in 2020. The initiative now includes 545 institutional investors with $52 trillion in assets under management. The statement says that SSGA regards joining the group as an important extension of its stewardship activities. 'In joining Climate Action 100+, we look forward to sharing with our peers what we’ve learned in our engagements with more than 600 companies across multiple industries and markets on climate-related issues since 2014. We also are excited about this opportunity to work closely with other asset managers and asset owners to scale our impact on climate change risks. For us, driving more transparency around climate change risk and its impact on long-term value is urgent'. SSGA's announcement has been welcomed by other signatories. [Sources: State Street Global Advisers announcement; IGCC media release 01/12/2020] Governance News | COVID-19 Special Edition Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 12 ME_171017618_1 The EU ombudsman has called on the Commission to tighten guidelines following an inquiry into BlackRock's appointment as ESG adviser Context ▪ The European Commission is developing plans for the integration of ESG factors into the EU's banking prudential framework. ▪ As part of this work, the Commission awarded a contract to BlackRock to undertake a study into the current situation and the challenges in dealing with the issue, following a tender process. BlackRock was selected from a pool of nine bidders. ▪ Subsequently, European Ombudsman Emily O'Reilly received three complaints about the Commission's decision to award the contract to BlackRock: two from members of the European Parliament and one from civil society group. ▪ This prompted the ombudsman to open an inquiry into how the Commission evaluated BlackRock's application in the call for tender process. No maladministration, but current processes should be tightened The Ombudsman determined that 'there are legitimate concerns around the risk of conflicts of interest that could negatively impact the performance of the contract' given BlackRock's interest in future EU regulation of this kind. However, though she found that the Commission should have been more rigorous in its assessment of BlackRock's application, and more particularly that the Commission should have done more to verify that appropriate safeguards were in place to manage conflicts of interest, the Ombudsman did not conclude that this amounted to maladministration in light of the limitations of the EU rules on awarding contracts. The Ombudsman determined that the Commission's internal guidance on public procurement does not place sufficient weight on identifying possible conflicts of interest or ensuring there are adequate processes in place to manage them. The ombudsman states, 'Questions should have been asked about motivation, pricing strategy, and whether internal measures taken by the company [Blackrock] to prevent conflicts of interest were really adequate'. The ombudsman called on the Commission to improve its guidelines for assessing bidders for contracts related to public policy. In addition, the Inquiry found that the relevant definition in the Financial Regulation - the EU law governing how public procurement procedures financed by the EU budget are conducted - of what constitutes a conflict of interest 'is too vague to be helpful'. The Ombudsman asked the Commission to consider strengthening the conflict of interest provisions in the Financial Regulation.