2022 February Proxy Governance Update

In This Edition

• Diversity – Embedded Expectations?
• Tenure And Overboarding – A Continuing Theme?
• Executive Remuneration – Is It Important To Have ESG Metrics?
• Climate Change – Will AGM Voting Be Impacted By A Company’s Approach?

Thoughts For February

We could learn a lot from Roald Dahl, known as one of the world’s best storytellers, about how to frame our communications and engagement. A few of his quotes may bring a wry smile to your face and resonate!

“I understand what you’re saying, and your comments are valuable, but I’m gonna ignore your advice" – Fantastic Mr Fox

“Having power is not nearly as important as what you choose to do with it” – Roald Dahl.

Diversity – Embedded Expectations?

Gender diversity is now firmly embedded as a requirement and the focus is now moving to ethnic diversity. For those boards who have yet to meet the gender requirements, there will be no leniency provided. Whilst year-end is a moment in time, we recommend any non-compliance with targets at that time, is adequately explained as to the cause, circumstances and when this will be addressed. With ethnic diversity, targets are now expected to be met for FTSE 100 companies, and credible plans are expected to meet the targets for FTSE 250 companies.

Gender Diversity

ISS - have updated their wording around gender diversity at board level. For 2022, a public commitment to bring the composition of the board in line with the recommendations of the Hampton-Alexander Review by the following AGM will no longer be enough to avoid a negative recommendation for FTSE 350 companies.

Glass Lewis - have amended the language to clarify that the assessment of board-level gender diversity is based on the self-identification of directors and that they consider directors that self-identify as non-binary to contribute to the gender diversity of a board.

*2021 guidelines. 2022 guidelines are pending as of the date of this update.

Ethnic Diversity

ISS - will generally recommend against the chair of the nomination committee (or other directors on a case-by-case basis) if the company is a constituent of the FTSE 100 index (excluding investment companies) and has not appointed at least one individual from an ethnic minority background to the board.

Furthermore, ISS expect that companies within the FTSE 250, FTSE SmallCap, ISEQ 20 and listed on the AIM with a market capitalisation of over GBP 500 million (excluding investment companies) appoint at least one individual from an ethnic minority background to the board by 2024. These companies are expected to publicly disclose a roadmap to compliance with best market practice standards of having at least one director from an ethnic minority background by 2024.

Glass Lewis - will generally recommend against the re-election of the chair of the nomination committee at any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group, and to provide clear and compelling disclosure for why it has been unable to do so.

*2021 guidelines. 2022 guidelines are pending as at the date of this update.

Tenure And Overboarding – A Continuing Theme?

Overall, there is little change, with the general limit of five mandates being well understood. The important time commitments required for the roles of executive director and chair continue to be a focus. We recommend fulsome disclosures on the assurance processes in place to mitigate any concerns over a director’s ability to devote sufficient time to perform their duties for the company. Attendance at board and committee meetings will be monitored as an indication of a director’s ability to devote sufficient time.

ISS - where directors have multiple board appointments, ISS may recommend a vote AGAINST directors who appear to hold an excessive number of board roles at publicly listed companies, defined as follows:

• Any person who holds more than five mandates at listed companies will be classified as over-boarded. For the purposes of calculating this limit, non-executive directorship counts as one mandate, a non-executive chair counts as two mandates, and a position as executive director (or a comparable role) is counted as three mandates.
• Also, any person who holds the position of executive director (or a comparable role) at one company and a non-executive chair at a different company will be classified as over-boarded.

When applying this policy, ISS will consider the nature and scope of the various appointments and the companies concerned, and if any exceptional circumstances exist. A stricter view may apply for directors who serve on the boards of complex companies, those in highly regulated sectors, or directors who chair a number of key committees. Likewise, a more lenient view may apply for directors who serve on the boards of less complex companies (for example, externally managed investment companies).

Glass Lewis - believes that directors should have the necessary time to fulfil their duties to shareholders. In their view, an overcommitted director can pose a material risk to a company’s shareholders, particularly during periods of crisis. They will generally recommend that shareholders oppose the election of a director who:

• Serves as an executive officer of any public company while serving on more than two public company boards.

OR

• Serves as a non-executive director on more than five public company boards.

They generally count board chair positions as two board seats given the increased time commitment associated with these roles.

When determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote sufficient time to board duties, they may consider relevant factors such as:

• The size, location, and scope of operation of the other companies where the director serves on the board.
• The nature of the role (including committee memberships) that the director holds at these companies.
• Whether the director serves as an executive or non-executive director of any large privately-held companies.
• The director’s attendance record at all companies.

They will also generally refrain from recommending a vote AGAINST a director who serves on an excessive number of boards within a consolidated group of companies or a director that represents a firm whose sole purpose is to manage a portfolio of investments that include the company.

Executive Remuneration – Is It Important To Have ESG Metrics?

 Executive remuneration frameworks and outcomes continue to be the topic that exercises the minds and time of Remuneration Committees, advisers and investors. We recommend a review of the Investment Association (IA)  Principles of Remuneration, together with the detailed expectations of the policies of ISS and Glass Lewis. Below we focus on key changes from the IA and one specific area of interest, being the linking of executive remuneration to ESG metrics

IA Principles of Remuneration

The Investment Association (IA) has published its annual guidelines ‘Principles of Remuneration’ (the Principles) together with a letter to Remuneration Committee Chairs highlighting changes to the Principles.  Key messages in the IA letter are:

• Levels of Remuneration: The Principles have been updated to emphasise that Remuneration Committees should provide a clear rationale for an increase to any element of, or to the overall level, of remuneration.
• Value Creation Plans (VCPs): Given the increased adoption of VCPs over the last AGM season, the Principles have been updated to include a specific section on investor expectations on VCPs.
• Grant Size: The Principles have been updated to reflect investor preference for companies to reduce awards at grant where share prices have fallen rather than relying on discretion when awards vest.

Linking executive remuneration to ESG

ISS - have added some wording around ESG performance conditions within the remuneration discussion section. Thus, in line with the IA Principles of Remuneration (which the ISS UK and Ireland benchmark policy refers to), ISS states that Environment, Social and Governance (ESG) performance conditions may be used but targets should be material to the business and quantifiable.

Glass Lewis - regarding the use of E&S metrics in the variable incentive programmes for executive directors, Glass Lewis does not maintain a requirement of the inclusion of such metrics in incentive programmes. They believe companies should be afforded the flexibility of their use in either the short- or long-term incentive. Where E&S metrics are included, they expect robust disclosure on the metrics selected, the rigour of performance targets, and the determination of corresponding pay-out opportunities. For qualitative E&S metrics, the company should provide shareholders with a thorough understanding of how these metrics will be or were assessed.

Climate Change – Will AGM Voting Be Impacted By A Company’s Approach?

ISS - for companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain, ISS will generally recommend a vote against the board chair in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy. For 2022, the minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to comply:

• Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD).
• Appropriate GHG emission reduction targets (any well-defined GHG reduction targets). Targets for Scope 3 emissions will not be required for 2022 but the targets should cover at least a significant portion of the company’s direct emissions.

Glass Lewis - will generally recommend that shareholders vote against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies that fail to provide explicit disclosure concerning the board’s role in overseeing material environmental and social issues.

In further detail under the section “Overall Approach to ESG” Glass Lewis state that when management and the board have displayed disregard for environmental or social risks, have engaged in egregious or illegal conduct, or have failed to adequately respond to current or imminent environmental and social risks that threaten shareholder value, they believe shareholders should consider holding directors accountable. In such instances, Glass Lewis will generally recommend against responsible members of the board that are specifically charged with oversight of the issue in question.