How directors can avoid protest votes against executive pay

Under the two-strikes rule, boards face a spill if they suffer shareholder votes of more than 25 per cent against executive pay proposals at two consecutive annual general meetings.

Onus is on boards

Ms Edwards, who will on Thursday be formally unveiled as the next chairman of the AICD, said boards needed to work harder to avoid such confrontations with shareholders and proxy advisors.

“Very good companies will engage very closely with their investors so that investors don’t feel the need to vote against the remuneration report. I think that the onus is actually on boards to put enough time and genuine effort into communicating and working through [grievances] with their investors,” said Ms Edwards, who is a director of life insurer TAL Australia and Yarra Investment Management.

Both companies are non-listed, but Ms Edwards is also a director of Propel Funeral Partners, an ASX300 company, and has sat on the boards of Australian Ethical Investment and Hunter Hall, both of which are listed on the stock exchange.

Ms Edwards, a trained actuary and the immediate past president of the Actuaries Institute, will take up the AICD role in July, replacing John Atkin, chairman of Qantas Superannuation and a director of intellectual property services group IPH.

The incoming chairman said engaging with proxy advisors was also a critical part of the board’s role.

“Most proxy advisors are really good. Sometimes proxy advisors are doing a tick-a-box approach and make mistakes. It’s a significant body of work for a company to engage with proxy houses and their investors, but it’s a key part of the role. Otherwise, you will potentially get a strike,” Ms Edwards said.

Of all the challenges facing directors, Ms Edwards argued the biggest was the need to speed up digital transformation.

“There’s probably no bigger challenge than the digital and technological transformation that Australia needs to have. We need to catch up, particularly in artificial intelligence,” the trained actuary said, pointing to a 2020 report from the Organisation for Economic Co-operation and Development that showed Australia ranked 23rd out of 26 countries for the percentage of businesses using AI.

The challenges around AI and generative AI were two-fold, she said. If companies don’t move fast enough, they risk a decline in productivity. But moving too fast might mean that the technology is inadequately governed or that companies inadvertently break the law.

Directors, Ms Edwards said, needed to improve their digital skills.

An AICD study found that 8 per cent of ASX 200 directors had deep digital skills, while a further 12 per cent had strong backgrounds in maths, science and technology.

Ms Edwards was encouraged that there reasonable tech skills at board level, but argued more were required.

“There are some skills on the board, but I think that needs to be uplifted for everybody, and I think most boards would agree.

I think it’s a great idea if not every director should be expected to stay nine years.

— Naomi Edwards

“I think [it is important] to have somebody [on the board] who has really strong technology and digital skills. But I also think that every director around the table needs to be upskilled enough to have a very strong strategic understanding about AI and technology, and to be able to apply really good awareness about how markets are changing rapidly,” Ms Edwards said.

“There was a really big uplift in the past five years around cybersecurity. That’s been very successful, but I think all boards need a lot of training and upskilling around how to govern for AI. How do we ensure we’re not inadvertently breaking rules or discriminating [against individuals]? Equally, how do we adopt this quickly in order to compete globally?” Ms Edwards said.

In addition to formal training, incoming chairman recommended that directors bring “curiosity to the table” by using generative AI themselves as their search engine, or embarking on reverse mentoring with knowledgeable executives.

A circuitous career

Ms Edwards, who studied maths at Canterbury University in New Zealand and who is also a former chairman of industry superannuation fund Spirit Super, has arguably followed a career path to the top of corporate Australia with more detours than most.

In her early 20s, she was working at life insurer National Mutual in New Zealand and studying to be an actuary, but quit to go rockclimbing around the world for three years.

In her early 30s, Ms Edwards made another detour. At the time, she was a senior partner at Deloitte, running the financial industries group, but left to become a stand-up comedian.

Further, she was determined to make money out of comedy, primarily because people around her insisted it was impossible to do so.

Ms Edwards constructed shows that involved a well-known public figure, who would hopefully draw audiences. In the performances, she played a right-wing talk show host, who would interview a left-leaning politician or activist.

Animal rights ethicist Peter Singer and former Greens leader Bob Brown were two early participants.

“Everyone was intrigued. I didn’t have to make money from comedy. It was just a challenge,” Ms Edwards told BOSS in 2023. The actuary quit comedy in 2005 after accepting a job to chair Tasplan, Spirit Super’s predecessor.

Ms Edwards rejected suggestions that the typical talent pool from which directors are selected was too narrow, arguing that boards had been thinking outside the box for the past two to three years to ensure the appointment of directors who had deep technology and digital skills.

She backed a recommendation made last month by prominent director and Pacific National chairman Catherine Livingstone that six-year terms be considered the norm for board members, rather than nine years. Such a change was critical given the rapid changes in technology.

“I think it can be hard to get your head around a one-term appointment. But I also think that with the pace of change in the external environment, because of technological and digital change, you just don’t get the [appropriate] turnover on boards if everybody is there for the full nine years,” Ms Edwards said.

“You don’t get enough opportunity to bring new people in who might have the [right] skills. I don’t think there should be any hard tenure limits, but I think it’s a great idea if not every director should be expected to stay nine years,” Ms Edwards said.

Ms Edwards also agreed with Ms Livingstone that directors should spend more time talking to politicians and public servants about policy formation, noting that collaboration between business and government had occurred successfully in cybersecurity.

The actuary was cautious about the prospect of super funds nominating directors to company boards, as has happened at Woodside. HESTA, a super fund with more than $80 billion of assets, has put forward director candidates for the chairman to consider.

“I do think that the primary responsibility for the board composition needs to rest with the board,” Ms Edwards said.

“I think that it’s totally in the board’s interests to engage with their institutional owners about their issues and their views and to take on board suggestions. But ultimately, boards are in the best position to determine the composition,” she added.

Ms Edwards said that she would not like to be a nominee director, on the grounds of a perceived conflict of interest.

Being a nominee director should not lead to a split between a director’s responsibility between the large shareholder and the company more broadly, she said, “but it may feel like that”.