Corporate governance remains high on the business agenda. The media spotlight on the impact of business on the environment has sharpened while perennial boardroom issues such as executive remuneration and director overboarding continue to cause unease with shareholders amidst an uncertain macroeconomic climate.
However, changes in UK company law and the UK Corporate Governance Code have now empowered dissatisfied shareholders more than ever before. Resolutions which receive more than 20% of votes against require the company to explain what actions it will take to engage shareholders to comprehend the reasons behind the negative reaction. It also necessitates an update on shareholder feedback and further actions taken within six months and final summary in the annual report.
Investors therefore can cause concrete change through their voting, forcing companies into action over issues that they may be dragging their heels on. The balance of power has shifted and companies must react accordingly to maintain the highest standards of corporate governance and avoid damaging disputes with their own shareholders.
Areas of dispute
Resolutions put forward for approval at the AGM are increasingly vulnerable to investor protest votes, with six “close calls” (vote is within 10% of the required majority) in the FTSE 100 and 19 in the FTSE 250 through the past AGM season. Six votes were also lost among FTSE 350 companies over the period.
The authority to allot shares on a non-pre-emptive basis saw the most close calls, followed by remuneration policy or report and the ability to hold general meetings on not less than 14 days’ notice.
In addition, for nearly a third (31%) of the companies surveyed, directors’ resolutions received the lowest votes in favour out of all resolutions put to the meeting. This indicates that there is a clear willingness to hold the board and its directors to account, and ensure they have both the time and commitment to carry out their duties.
Shareholder activism has seen a notable increase over recent years, a trend we expect to see continue through 2020. There are two strands to activism—”overt” activism which is driven by specific activist funds, and “covert” governance-related activism which is driven by traditional institutional investors as responsible stewardship.
The UK remains a hotspot for activism due to long-established procedures of companies engaging with their main institutional investors as encouraged by the Stewardship Code and transparency around shareholder data.
Activism typically relates to governance issues, M&A, operational improvement or problems around the balance sheet however nearly all the time the resolutions proposed are in relation to the removal of existing directors or the addition of new directors.
This is because passing an ordinary director removal or election resolution is easier than a special strategy-related resolution that requires a super majority of 75%.
Shareholder engagement is not a “box-ticking” exercise, nor is it a process that can be left—comfortably—to the last minute. Investment managers and corporate governance and stewardship teams are working more closely together than ever before.
It is crucial that companies prepare suitably for their AGM, a process that must start long before the meeting to avoid last-minute firefighting. Visibility and proactive shareholder engagement will be the key to quelling any investor dissent and getting the company on the front foot.
On the basis of this conclusion, we offer these recommendations to UK companies in the run-up to the 2020 AGM season:
- Companies should conduct a year-round process of corporate governance engagement with shareholders, aligned to the financial calendar and investor relations programmes;
- Proxy advisers remain a vital constituent within corporate governance engagement. Companies should be aware of the recommendation frameworks employed by the key advisers in the same way that their policies are aligned to the strategies used by key shareholders;
- Good and improving corporate governance performance should be highlighted throughout the financial calendar, arguably placed within a demonstrable framework that sets out key policies and benchmarks;
- Engagement should be conducted by key non-executive members of the board and committees. Proactive shareholder engagement should be a component part of the job description of these members rather than an optional extra;
- Employee representation is likely to be a focus for shareholders going forward. Resolutions and policy relevant to this point should be carefully considered and particular attention should be given to the experience and job descriptions of the nominees;
- Non-executive director nominations should be supported by detailed biographies, highlighting the relevant expertise now required by the Stewardship Code and which are aligned to a transparent skills matrix;
- In the event of likely shareholder dissent at 20% or more for a resolution, UK businesses should not only engage quickly and actively with shareholders but prepare for the potential to be placed on the Public Register—specifically to align the reporting process with the financial calendar.
Shareholder dissent is no longer an exception, it is the new normal, and so against an increasingly volatile equity capital market, poor corporate governance could impact shareholder value as much as weak financial results.