This year’s AGM season is fixed firmly in the context of a world still reeling from the effects of the Covid-19 pandemic and the economic impact of successive lockdowns. Last year proxy advisers, investors and activist investors, while not entirely silent, were at least more lenient than usual.
According to a new report from EQ, the UK’s leading share registrar and a specialist in governance and investor relations services, this is unlikely to be the case in 2021. Paul Matthews, chief executive of EQ Boardroom, a division of EQ, says this year will see investors resurrect their interest in the “nuts and bolts” of long-term sustainable strategies and non-financial reporting expectations.
“This is due not just to recent and upcoming regulatory changes but also due to high-profile environmental and social campaigning,” he says. “We expect a sharpened focus on risk management, emerging risks and social responsibilities even before we clearly emerge from the pandemic.”
The report covers significant areas to which boards will need to pay close attention, including AGM logistics, regulatory change, ESG, executive pay and workforce engagement.
AGM season logistics
As a result of the pandemic, most AGMs last year were held as closed shareholder meetings, following permissive legislation contained in the UK’s Corporate Insolvency and Governance Act.
As yet, there are no plans to extend provisions in the Act beyond 30 March, so companies should be planning for physical meetings once again.
But balancing engagement with safety is vital. The report suggests companies provide “direction” but retain flexibility. This year’s advice is to recommend investors avoid meetings but ensure they vote by proxy using electronic means.
That said, companies should be ready to change course should current or future government legislation and guidance be redrawn.
Sheryl Cuisia, managing director of Boudicca, an EQ company, says: “A thorough plan to engage institutional investors and large shareholders throughout the year is absolutely vital, especially with so many people continuing to work from home.”
Last year’s headline issue was the preparation of section 172 statements. Unsurprisingly, given the Covid-19 crisis, there was little in the way of fresh regulatory reform during 2020 that companies should be preparing now.
That said, the government has enforced guidelines published by the Task Force on Climate-related Financial Disclosures (TCFD). EQ flags the issue with a warning that “some investors have indicated that they expect early adoption”.
A new era for ESG
Better disclosure and enhanced discussion of Covid-19 impacts are the order of the day here, alongside similarly emphatic demands relating to climate change, sustainability, diversity and inclusion, and executive remuneration.
EQ says: “Investors are reacting to a change in market sentiment and also client appetites, driven often by millennials who see the environment, gender and other social concerns as reputational issues.”
The advice is that companies should set a high standard of reporting for themselves but, be warned: offering only good news will appear “disingenuous”.
The report also flags that progress on issues such as gender and ethnic minority representation will be under scrutiny. “Show how you have made progress in line with your s172 duties and address how you have progressed towards the Parker Review and Hampton-Alexander targets,” the report says.
Executive pay requires careful navigation
This year, pay will remain a top agenda item. According to EQ, companies should be prepared to answer serious questions about their organisation’s future pay strategy—regardless of whether their industry has performed well or struggled due to Covid-19.
Stakeholders, the EQ report says, understand the need to retain top talent, but pay awards come at a time when dividend payments have been suspended, a fact investors are all too aware of.
EQ says investors expect companies to recognise how Covid-19 has affected business in the long run. “Every company will need to consider how best to address this conundrum,” EQ says. “What is vital is recognising how Covid-19 has impacted the business and its long-term sustainability.”
The use of furlough schemes, redundancy programmes, reduced hours and pay cuts have all become sensitive topics needing careful navigation.
“Trade bodies, including the Investment Association, expect remuneration committees to take into account the effect of the pandemic on the general market, company share price and dividend payments.” The report adds: “Another key consideration is how pay decisions could be read by the workforce, risking their good will and engagement at a difficult time.”
EQ advises companies to engage with stakeholders and explain the rationale underlying pay decisions; make robust disclosures and consider whether a higher proportion of bonus payments should be deferred as shares.
The UK’s Corporate Governance Code asks companies to maintain engagement with their employees, which has become even more important during the pandemic as people turned to home working. Though the requirement for workforce engagement appeared in 2018, it was only in 2019 and last year that reporting on the subject began to take shape.
EQ says: “With so many people working from home, keeping them engaged and passionate about the business for the long-term has never been more important to stakeholders.”
Recommendations to boards include “honest” reporting of the issues uncovered by workforce engagement and how they are addressed; demonstration of how remuneration committees consider workforce opinion; and a frank narrative detailing Covid-19’s impact on workers.
“We fully expect companies to have developed both their board processes and reporting in this area, and a thorough and genuine wellbeing and engagement strategy is a necessity in the backdrop of the current landscape,” EQ says.
‘Creating genuine change’
A “lively” AGM season is almost certainly on the way. At the same time as battling Covid-19, companies must contend with unignorable demands to increase diversity, improve employee engagement, and become more environmentally conscious.
Though this is not a business-as-usual period, investors are unlikely to lift the pressure significantly on these topics.
The world has changed, EQ’s report says. A new generation of investors wants to see companies becoming more sustainable and more inclusive. AGMs are a vital element in ensuring shareholders know that work is under way every day.
“This is not about tweaking AGM communications,” the report concludes. “It is about creating genuine change and showing how performance and remuneration match the purpose and future focus of the company.”
Download EQ’s 2021 AGM Season Forecast.