The changing corporate landscape continues to make the AGM season an uncertain time. Investors are more courageous and more likely to vote against boards on a range of issues.
This season boards are also grappling with reorganising their AGMs in response to coronavirus and the need to cancel mass gatherings.
Despite that, whether in virtual events or in postponed meetings later in the year, boards still have to contend with the concerns of their investors. In the UK, boards have suffered a wave of shareholder revolts in recent years and shareholders promise to be even more strident this season.
According to a report from Equiniti, a financial and administration services company, more investor action is expected in 2020 following changes in governance codes and standards. In some cases investors and proxy advisers are likely to go even further in their demands than official guidelines.
Equiniti says: “A number of key issues have made investors more likely to put pressure on boards through voting at AGMs.
“Boards should look closely at the topics that may be flashpoints and consider how they will deal with investor demands.”
Developments are expected across five key themes this year: regulatory impact, executive pay, environmental, social and governance issues (ESG), board accountability and shareholder activism.
There is much to think about here as UK companies prepare to write Section 172(1) reports for the first time, highlighting how they’ve addressed issues affecting employees, suppliers, customers and the environment.
Boards will also be coming to terms with provision five of the UK Corporate Governance Code, which requires them to gather the views of employees using one of a number of options such as worker directors, an advisory panel or a dedicated non-executive director.
Provisions 40 and 41 present demands for new considerations—“clarity, simplicity, risk, predictability, proportionality and alignment to culture”—when reviewing remuneration policies. This should come as no surprise. Boards have been managing intense scrutiny of their executive compensation arrangements for some time. Both regulatory and shareholder focus is mounting.
Elsewhere, there is potentially more scrutiny on the way from auditors as they come to terms with a revised International Standard on auditing and going concerns.
In addition, boards may feel the impact of investors dealing with a brand new Stewardship Code. This could see greater caution and increased pressure from asset managers when considering their voting position at AGMs.
Equiniti says: “The regulatory landscape has changed markedly, making more demands of boards. Governance codes are not mandatory, but they need to be understood and implemented. As they are renewed many investors will revamp their own policies, some of them going further than the code recommendations.”
Companies in the UK can also expect a significant number of remuneration policy votes this year, given the need for boards to gain approval every three years.
There is much to manage. Boards are dealing with requests to reduce executive director pensions in line with the wider workforce, while the number of companies operating “post-holding periods” will likely increase dramatically as investors call for periods to be extended to two years.
Investor focus on the relationship between ESG factors and non-financial reporting and remuneration structures is unlikely to let up, while a spotlight will remain on Long Term Incentive Plans (LTIPS). The Investment Association has said investors are ready to consider other structures, so all eyes will be on whether it will happen.
ESG is the issue of our age. Equiniti expects previously passive fund giants to exercise more active oversight of their shares on this topic and advises companies to be proactive in their engagement with portfolio managers and governance analysts.
In the UK ESG is expected to remain a hot-button issue as part of Section 172 reporting, while the Department for Business, Energy and Industrial Strategy has imposed new reporting requirements for total energy use.
According to the Equiniti report, asset managers are voting with their feet and using dedicated indexes to target the allocation of their funds.
Equiniti says ESG is not just a challenge but also an opportunity as the number of indexes using sustainability factors rises.
“Companies with good credentials can target these funds as sources of capital, and those that don’t take it seriously will have a difficult time achieving a strong performance.
“The world of investment has woken up to the fact that if you don’t have a sustainable company there won’t be anything to invest in further down the line.”
Equiniti’s report also highlights how shareholder attention is shifting to encompass not only the chair and key executives but also committee chairs.
2019 was marked in the UK by the large number of directors standing down and new director elections, likely because of companies addressing board composition but also investor concerns over the long periods directors may have served.
Equiniti says 2020 will be tougher as boards come to terms with tighter guidelines.
“It will take a lot more effort to retain the status quo, especially related to audit, pensions, the workforce and pay ratios. Chairs are encouraged to engage more regularly and more thoroughly than ever before, demonstrating to what extent they have listened and acted on advice.”
Taken together, developments across regulation, executive pay, ESG factors and board accountability have given shareholders much to consider and much to act upon. Though down 11% on 2018–19, the Equiniti report points out that shareholder activism remains robust. The 12 months to June last year saw close to 600 new campaigns globally. And in Europe, the UK remained the largest target market with 52 campaigns.
High-profile activism campaigns frequently seek to oust boards, but they are also concerned with issues such as auditors, executive pay, strategic direction and equity issuance. Board-related concerns accounted for half of all issues raised with companies.
Equiniti says activism places a premium on preparation. For example, knowing that the business model, governance, remuneration and ESG practices are sound and transparently reported.
“Understand your shareholders. What do your investors want, not just in terms of individual fund managers but also funds as a whole? What are they buying and selling and why? What are the patterns? Get in early. Consider a roadshow at the start of the year.”
The definition of “corporate governance” has emphatically broadened. Public companies now need to consider every aspect of their strategies and how they do business—from their social and environmental impact, cybersecurity and data usage to employee representation and company ownership.
According to Equiniti, what is often forgotten in proxy season is that both sides—boards and investors—seek the same things from companies: to make money sustainably and to behave responsibly.
“Rather than boards or investors taking an adversarial approach, collaboration is key. Best to work on creating long-term relationships where questions can be discussed before they become issues and judicious solutions can be reached without haste.”
AGM Season Forecast 2020 is available from our partner Equiniti Group PLC, a financial and administration services company, which provides expert insight and support for boards as they prepare for the AGM season. You can download a copy of the report here.