In the context of the company-shareholder dialogue, ESG (environmental, social and governance) topics have been gaining prominence for several years. ESG activism has also been on the rise, with 738 ESG shareholder resolutions reported in Europe from January to September 2022, and 623 in the US and Canada over the same period. Here we provide a summary of the 2022 proxy season—covering several E, S and G topics—in eight European markets (France, Germany, Greece, Italy, Portugal, Spain, Switzerland and the UK ).
Quorum and attendance
Hybrid AGMs have become a golden standard in the post-pandemic world, as a new form of holding more inclusive shareholders’ meetings—technology permitting. For instance, in Spain, a hybrid meeting was the most preferred method for an AGM by the majority of IBEX 35 index issuers in 2022.
At the same time, some markets have returned to more conventional forms of holding shareholder meetings, such as in-person only (the UK) or opted for a virtual-only format (Greece, Germany and Switzerland). In any case, behind-closed-doors meetings are no longer an option across European markets as a result of the pandemic (as used to be the case in France).
In fact, quorum and participation have increased in almost every market. The only exception to this trend was Switzerland, a market that resented changes in the share capital structure. This upward trend is even stronger amongst the free float across Europe, whose participation estimations show greater attendance levels in 2022. This growth in free float is perhaps the most significant trend to watch going forward since it typically represents the most opposing and reactive group of shareholders at AGMs.
Board composition
Forming a majority-independent board is one of the key corporate governance practices amongst international investors and proxy advisors.
Following the 2022 proxy season, all companies in key indexes, aside from the Greek ATHEX 25 and the Portuguese PSI, have boards that were, on average, majority independent.
While two-tiered markets, such as Germany and Switzerland, tend to have majority independent supervisory boards by default, remarkably one-tiered markets have moved towards greater independence levels—in line with the growth in participation and shareholdings of the free float.
Indeed, the presence of controlling shareholders typically results in lower overall independence levels on the board, well below the proportionate representation. Consequently, given that around 50% of Greek and Portuguese issuers are controlled by strategic shareholders, these two markets register lower average percentages of independent directors on their boards (44% in Greece and 36% in Portugal).
However, the rising independence levels across the boards are not yet reflected across the board chair roles. Non-independent non-executive directors continue to be the most common director category to hold a board chair role, mainly in one-tiered board systems. Amongst German and Swiss supervisory boards, 80% and 75% respectively of the board chairs are independent.
Board elections
Board elections are voted on under various formats across the European markets, ranging from bundled to individual elections. Average shareholder support for board elections exceeded 90% in all indexes apart from the Portuguese PSI.
This overall average support generally decreased in all markets when considering free float levels, although in some cases this decrease was very minor (Switzerland, 95% average free float support) and in others very significant (Portugal, 26%).
Remuneration
Remuneration-related items, whose form and content vary significantly across markets, are the least supported resolutions at European AGMs on average. Overall support is around 90% of votes cast, although the gap between general support and free float support has widened, dropping the latter below 70% average support in some cases (Spanish IBEX 35).
Gender diversity on boards
Board gender diversity is addressed from different legal approaches across the European markets, including hard regulation and soft guidelines. Only in rare cases is there no domestic regulation on this matter. However, all markets that opt for regulating gender in the boardroom define thresholds for the least represented gender, ranging from 25% (Greece) to 40% (France, Italy, and the UK).
The use of quotas is not only spreading across Europe but also consolidating as the EU is preparing a new directive that will set numeric gender bars. In practice, most issuers tend to accommodate the legal environment. However, in countries where the quotas are rather soft, issuers tend to drop the efforts with regard to gender diversity, with results below the average gender diversity levels observed in markets with hard targets.
Although board gender diversity has reached relatively acceptable levels across European boards, it is still highly unbalanced in the leadership roles— the posts of board chair and first executive remain far from being diverse. This inequality is often offset by companies appointing several female directors in non-executive board roles, mainly independent directorships.
Say On Climate
Climate resolutions are still spreading throughout the European AGM landscape. While the 2020 proxy season marked the milestone for the introduction of climate resolutions, often sponsored by activist shareholders, say on climate has extended over the continent progressively.
Generally, issuers table proposals that present forward-looking climate strategies to address climate change risks by reducing greenhouse emissions—which often implies yearly reporting commitments that are also submitted to the shareholder vote on an annual basis.
In 2022, 36 management proposals were submitted to the shareholder vote in the European markets under review, versus 19 resolutions in 2021. Energy, finance, industrial and services are the sectors that proposed their climate strategies to shareholders. Indeed, the growth of these resolutions has prompted some institutional investors, such as BlackRock and Vanguard, to review their position on them, as well as global proxy advisors, who dedicated more specific guidelines to tackle this matter.
ESG at the board: challenges ahead
Many company boards (G) have already taken action to increase their awareness of E&S issues and integrate them into their strategy, as evidenced by the substantial growth of climate plans being put forward by the management for shareholder approval. By choice or obligation, many have also increased the amount of information they publish.
However, although these steps are positive, the way these matters are dealt with and released may create categorisation and reporting problems. The use of ESG parameters might undermine the integrity of stewardship reporting and create ample greenwashing opportunities.
In spite of the European Commission’s regulation efforts, the vastness and disparity of ESG has generated huge information “dumping”. Stakeholders are more likely than not to be “drowned in noise”.
Indeed, ESG is an amalgam of sorts. This classification originates with institutional investors wanting to group together, mostly for budgetary purposes, all “non-financial” analyses. But while themselves containing various elements of varying disparity, E&S are essentially parts of a company’s purpose, strategy and risk appetite. Sustainability requires distinct skills, distinct approaches and measurement tools, and distinct reporting. All these are different from those required for governance.
The number of shareholder resolutions across E, S and G provides further evidence that G is the key element for investors—of the 738 shareholder resolutions in Europe, only 25 were “pure E&S resolutions”.
And recently, BlackRock, the largest fund manager in the world, indicated that “…nearly 90% of our engagements in 2021 covered a governance topic”. This is because E&S is about where a company wants to go and what it wants to be, while G—governance—is all about how to get there. The two are linked, of course, but quite distinct.
Eduardo Sancho Garcia is manager, corporate governance, at global consultancy Morrow Sodali