The 2023 annual general meeting season represented a return to ‘business as usual’ following the Covid pandemic, as shareholders refocused on long-term, sustainable shareholder value.

Across Europe, shareholders were most likely to challenge resolutions related to executive pay, in part due to the long-term incentive plans (LTIPs) companies issued to managers at the height of the pandemic, and which typically matured last year.

More than 35% of resolutions relating to executive pay were contested—defined as attracting 10% or more negative votes—during the 2023 AGM season in seven European markets (the UK, the Netherlands, Germany, Spain, France, Switzerland and Italy).

Despite the slight proportional decline (36.1% in 2023) of shareholder opposition, compared with 2022 (37.1%), remuneration remains a key topic for shareholders.

Within the category of executive pay, the Georgeson analysis found that the proportion of resolutions relating to remuneration reports contested by shareholders rose to 42.9% in 2023 from 39.4% in the previous year. In comparison, the proportion of contested remuneration policy resolutions declined more significantly to 29.2%, from 34.8%.

The data show that shareholders in European companies continue to perceive a misalignment between compensation and shareholder interest. Shareholders also seem to be taking greater issue with how policies are implemented but appear less concerned about their structure.

Long-term incentive plans

Across Europe during the 2023 AGM season, many shareholders focused on how remuneration committees had approached vesting decisions concerning 2020 LTIPs awards; a time when a large proportion of companies experienced an unusually low share price, owing to the pandemic.

LTIP awards are calculated according to salary multiples. When share prices fall below their usual value, the remuneration committee must award a higher number of shares to the executives to achieve the same monetary award.

When the post-pandemic financial markets recovered and share prices rose, many executives saw their vested LTIP awards delivering a substantial ‘windfall gain’; profits gained through anomalous market changes, but not necessarily management leadership. As a result, some investors questioned the underlying performance and value delivered by the management team and, in some cases, argued that awarded LTIPs resulted from market movement and not an individual executive’s skill.

In such ‘windfall’ cases, shareholders typically expect remuneration committees to take appropriate measures to reduce remuneration, avoid possible gains, and report on the event. Shareholders especially wish for action in cases where the company has suspended the dividend, received government handouts under a furlough scheme, or has significantly reduced the company workforce.

Companies are likely to receive less opposition when their boards actively engage about their priorities with shareholders throughout the year and proactively respond to arising potential questions, concerns or shareholder proposals. By engaging early and often, companies can foster stronger relationships with their shareholders and better align their practices with investor expectations.

Virtual or hybrid AGMs

The 2023 AGM season also marked a pivotal change (in part instigated by the pandemic) because investors accepted virtual meetings in some European markets. These changes will continue to evolve in the coming AGM seasons as discussions—about shareholder rights and access—extend into the long term.

During the past months, temporary legislation that permitted virtual AGMs in many European countries expired. In 2023, Germany was the first European country to introduce legislation for virtual-only AGMs that also provided a legal framework to replicate nearly all the same shareholder rights available at physical AGMs, such as live questions and live voting. The new legislation has no expiration date, and companies can elect to hold virtual-only AGMs on the condition that they obtain shareholder approval for such every five years.

Not all stakeholders, however, are enthusiastic about the proliferation of virtual-only AGMs, particularly in markets where legal shareholder protections do not match those offered by the German legislation. Some European company shareholders have voiced concerns that virtual-only meetings may eventually undermine board accountability and encroach upon shareholder rights. One such shareholder concern is accessibility to boards and management to ask questions during annual meetings. Some shareholders fear that the end result will be a potential decline in board accountability.

Companies that engage directly with investors to understand and address their concerns before making significant changes may receive less shareholder resistance. Those who fail to engage with shareholders will likely receive more scrutiny or opposition on governance topics.

For the forthcoming AGM season, investors will likely maintain their focus on accountability and transparency issues, which were deferred during the pandemic as shareholders adjusted their positions due to the exceptional circumstances. Specifically, shareholders have refocused their attention on areas such as remuneration, risk management, ESG factors, and maximising share value and return on investment.

Shareholder engagement is key for boards and management during the next proxy season as companies face increased challenges owing to changing regulations, investor demands and an evolving economic market. Companies should continue to engage with shareholders to educate investors and help foster an understanding of a company’s position on topical issues.

Daniel Veazey is corporate governance manager and Domenic Brancati is global chief operating officer, both at Georgeson