The AGM season is here, the first since pressure from Covid eased, and there are big issues to discuss with shareholders.
Paul Matthews, chief executive of EQ Boardroom, part of Equiniti (EQ), says shareholders will want to see that boards have emerged from the crisis with a firm sense of where their organisations are going.
“As the pandemic becomes endemic shareholders want to know a company’s strategic vision and how that is shaping decisions,” he says. “We’re not stuck in reaction mode anymore: It’s adapt and move on.”
EQ has prepared a forecast of how the issues are likely to play out during AGMs in 2022. It’s important to think ahead. Last year investors were more relaxed because the pandemic was still causing pain. That leniency is unlikely to linger.
EQ sees this year’s tough conversation coming across three issues: the logistics of AGM gatherings; ESG issues; and executive pay. All three could be points of tension, and all will require careful negotiation if boards are to keep investors onside.
AGM logistics
The past two years has seen many companies move their AGMs online. This year, with the threat of Covid receding, many boards will question whether they should be inviting investors to gather in a room once again.
Rather than rushing to pre-Covid style AGMs, boards may want to ask what best serves shareholder needs. Last year alone more than 100 listed companies made changes to their articles allowing hybrid AGMs. The attraction of meetings held online may remain.
But they come in different forms. This year boards are looking at a range of options that include hybrid meetings with live Q&As, in-person only gatherings and simple one-way webcasts.
Making a choice comes down to what shareholders want and what’s in the articles.
“Most articles,” says the EQ report, “state that shareholders should be given the ability to be ‘heard’. Work out what that means to your company.
“Knowing your shareholders, is enabling them to submit a questions beforehand going far enough?”
So far companies have seen a big appetite for attending virtual meetings, though they are more popular with a younger generation of shareholders. Virtual AGMs offers an opportunity for shareholders to attend from any location and might present an opportunity to move AGMs out of London. Start times can be flexible and help avoid the possibility of clashing with other AGMs.
“When there are no strict rules on what you must do, it’s time to work out your shareholders’ and your own priorities and go from there,” says the report.
ESG
When it come to ESG there is much to consider, not least because investors will be considering the subject of environmental performance in the year after COP26 and as reporting guidelines of the Task Force on Climate-related Financial Disclosures (TCFD) become mandatory.
Investors will want to see how companies are performing against environment targets and whether they meet key demands in TCFD. They will also want clear board accountability for climate and sustainability issues. Some investors may be willing to vote against boards on the issue if they find themselves disappointed with what they hear.
Some measures could impress investors. CEOs may have responsibility for climate risk but boards could bolster governance on the topic with climate-focused sub committees or by appointing non-executives with specific experience.
Uppermost in the minds of investors is that climate is a key issue that demands boards look into the future and act.
“Medium and longer-term issues are set re-emerge strongly this AGM season,” says Anne-Marie Clarke, head of corporate governance at Boudicca from EQ. “Our advice is: disclose, disclose, disclose. Detail your rationale. If not complying with the code explain why.”
Societal issues could be on the AGM agenda too. Not least among them is gender diversity at board level and whether investors will intensify the pressure by demanding companies take more action to develop talent pipelines.
Elsewhere, nomination committee chairs could face demands to explain how their boards will meet Parker Review targets for ethnic diversity in the boardroom.
“As the [nominations committee] chair is normally the chair of the board,” says the report, “it’s not difficult to see how the multiple governance areas could ultimately result in investors voting against the chair of the board. Not a comfortable situation from anyone’s perspective.”
With Covid an ever-present risk there will be shareholder interest in how boards prepare for other unforeseen external shocks, or “black swans”. “It’s possible that we will see questions about what has been learnt over the last 18 months and what is being done to prepare for further upheavals,” the report says.
Elsewhere the spotlight may well fall on votes to reappoint auditors and signing off remuneration reports. Last year nearly 50% more companies received their lowest vote of approval on these two issues.
EQ recommends clarity on long-term “ESG aspirations” and the metrics that accompany them. Accountability needs to be clear and ensure shareholders can see the ESG work is an effort across finance, risk, sustainability operations, “internally and through the supply chain”.
Executive pay
Executive pay became a headline issue during the pandemic, with investors easing the pressure as boards became sensitive over compensation, dividends and bonuses. Having returned to a environment closer to normality, investors could well resume their focus over pay levels they consider unwarranted.
That means the onus will be on boards to lay out the reasoning behind their remuneration decisions. EQ says shareholders may want to see executive pay rises balanced by an increase in employee pay especially at a time “when many people are struggling with the cost of living.”
Boards should also be prepared to detail their plans for repaying government emergency funds. Boards might also want to consider whether their entire remuneration policy is “fit for purpose” given continuing concerns with pay during the pandemic.
“With so many variables, the key in 2022 is explain executive compensation decisions in the nuanced context of your company,” EQ says.
Much of this is not new. Companies have had two years of reorganising AGMs and plenty of time to come to terms with ESG and executive pay issues. But, says Richard Davies, managing director of RD:IR, there is increasing interest from investors in “real change” and “evidenced ESG improvement”.
“Investors are alive to the fact that there will be no capital to manage if we don’t look up. It’s not just about ethics and morals now, it’s how they can save their assets from destruction.”
Read the EQ – AGM forecast 2022 here
This article was written in partnership with EQ.