In 2024, the compensation policies of listed companies in Austria will once again be put to the vote at their annual general meetings – for most companies for the second time since the second European Shareholder Rights Directive was transposed into Austrian law by AktRÄG, the “Aktienrechts-Änderungsgesetz” (Stock Corporation Amendment Act). Among other things, the implementation of sustainability targets in Management Board compensation is frequently discussed. It is becoming more apparent that sustainability issues need to be anchored in the Supervisory Board as a whole. What do the voting guidelines of leading investors and proxy advisors say about this? hkp.com spoke to corporate governance advisor and Partner Dr. Pia Lünstroth about the requirements institutional investors place on the Supervisory Board when it comes to sustainability.
Dr. Lünstroth, the hkp/// group has analyzed the voting guidelines of major institutional investors. What were the results?
Pia Lünstroth: First of all, we identified several similarities in the investor landscape of ATX and DAX companies, specifically by ignoring the major anchor investors in Austria.
What are the similarities?
Pia Lünstroth: Seven of the top 15 investors are represented in both indices. In addition, domestic investors hold around 15 % of the invested assets. In Austria, companies such as Erste Asset Management and Raiffeisen Kapitalanlage-Gesellschaft are important local investment companies, comparable to DWS Investment, Deka Investment, Union Investment and Allianz Global Investors in Germany.
Keyword sustainability. You get the feeling that although this buzzword is used in a very inflationary way, it is also being used in a very concrete way and is finding its way deeper and deeper into corporate governance. Is this view deceptive?
Pia Lünstroth: No, not at all. Sustainability is rightly the subject of much discussion in business and society and this has naturally gravitated to corporate governance. One example of this is the demands for sustainability expertise on Supervisory Boards. In Austria, around a third of ATX companies pool the sustainability expertise on their Supervisory Boards in a dedicated committee that deals with sustainability issues. There are various names for this, such as the Strategy and Sustainability Committee or the ESG and Sustainability Committee. These committees bring the topic of sustainability closer to the corporate strategy, which is extremely positive.
What exactly are investors demanding with regard to anchoring sustainability in the Supervisory Board?
Pia Lünstroth: Surprisingly little. On the part of US representatives, expectations of sustainability competence are not even demanded at all or only in exceptional cases - for example at State Street Global Advisors. The requirements therefore tend to come from European investors. They demand that Supervisory Boards have the relevant skills and must provide evidence of them. However, they leave it up to the companies to decide how they organize their Supervisory Boards with regards to sustainability issues. There is thus no demand to organize a separate committee for sustainability issues.
Another key issue is the integration of sustainability targets into the remuneration of the Management Board, for which the Supervisory Board is responsible. What have your investigations revealed in this regard?
Pia Lünstroth: Here too, US investors and proxy advisors do not necessarily demand the integration of sustainability targets. Rather, they attach importance to the way in which these targets are implemented and formulate framework conditions. The pay-for-performance concept is at the forefront of their minds. This means that in some cases, the expectations formulated in the voting guidelines fall short of the public statements made by the respective investors.
What exactly does the integration of sustainability look like in the Management Board compensation of ATX companies?
Pia Lünstroth: Almost all ATX companies have integrated ESG targets into their Management Board compensation. The weighting of these targets is often between 10% and 30% in the variable remuneration elements, particularly in the short-term incentive and less frequently in the long-term incentive (LTI). In around a quarter of companies, however, they are included in both elements. Environmental and social targets are used more frequently than governance targets.
Integrating sustainability into committees and systems is one thing, communication is another. What have your analyses revealed in the area of sustainability communication to the capital market?
Pia Lünstroth: Overall, Austrian investors set fewer guidelines on sustainability in the Supervisory Board than German investors. The scope of the voting guidelines is also much smaller in some cases. Only on the subject of disclosure is there a requirement in the voting guidelines of Austrian investors that directly affects the Supervisory Board and is in line with the expectations of US investors.
What is the requirement?
Pia Lünstroth: It calls for detailed disclosure of climate risks, e.g. in accordance with the framework established by the Task Force on Climate-related Financial Disclosures (TCFD). In addition, Erste Asset Management states that it will vote against individual members of the Supervisory Board, a committee or possibly the entire Supervisory Board if sustainability reporting is lacking.
What is your final conclusion from the analysis?
Pia Lünstroth: Overall, the current analysis of the expectations of the most influential investors in ATX companies and their proxy advisors regarding sustainability in the Supervisory Board paints a heterogeneous picture. There are fundamental differences between European and US representatives. At the same time, in some cases the expectations formulated in the voting guidelines are far inferior to the public statements of the respective investors.
What advice can you give Supervisory Boards in the ATX on this basis?
Pia Lünstroth: Supervisory Boards of listed companies should absolutely take the differences in the investor landscape seriously, but should not allow themselves to be unsettled. It is important to seek dialog at an early stage. There must be a fundamental, but also detailed discussion about how sustainability is anchored in the classic Supervisory Board topics: organization and cooperation, competencies and composition, as well as management and remuneration. Ultimately, it is about nothing less than integrating sustainability appropriately into corporate strategy and management for the interests of the company and its investors and stakeholders.
Dr. Lünstroth, thank you very much for the interview.