Turning towards the future, we saw a year where COP26 was high on everyone’s agenda, demonstrating that medium and long term priorities required focus and action now. We listened to various stakeholders as part of our advisory and shareholder engagement work, investors and proxy advisory agencies amongst them. And so it seems fitting that we share with you our review of 2021 AGM voting and conclude with our expected areas of focus for 2022. With thanks to the author of this article, Cormac Chesser, Corporate Governance Manager.
Analysing The Past, To Steer The Future
By Cormac Chesser, Corporate Governance Manager
This review provides an overview of past voting behaviour at FTSE 350 meetings amongst major investors who publicly disclose their voting behaviour, to provide greater insight on the trends in voting at FTSE 350 AGMs observed over the 2021 AGM season. The review points to likely trends over the 2022 AGM season and complements other research from EQ that can be found on the ‘Preparing for Your 2022 AGM’ webpage.
For more information about the source and selection of data please refer to the section "About the Data".
To conclude, the patterns noted above cannot be divorced from the impact of the COVID pandemic on both business operations and shareholder engagement. It remains to be seen if the increase in opposition to remuneration resolutions, and Remuneration Policies, in particular, will perpetuate itself into the future. Certainly, UK plcs should take note of this trend, as it may presage greater assertiveness on the part of investors where a Company’s remuneration practices do not comply with their expectations. Furthermore, while we do not expect the general increase in support for the election of director resolutions to decline precipitously, growing investor focus on governance of a given company’s environmental and social impacts is likely to result in opposition to the resolutions to appoint directors in the coming years.
In their engagement priorities, Blackrock notes that they focus on:
- Board quality and effectiveness
- Climate and natural capital
- Corporate strategy, purpose and financial resilience
- Incentive alignment with value creation
- How the Company impacts people.
Given their areas of focus, it seems likely that they will continue to oppose the reappointment of directors whose performance under one of these headings they find lacking. The same is true for executive remuneration, and their focus on value creation should provide a significant hint to UK plcs as to what their expectations will be in that regard.
This investor has four principles of governance they consider to be key in the long-term success of companies and their investors. Those are:
- Board Composition, as they believe that ‘good governance begins with a great board of directors’
- Risk and strategy oversight, as ‘every strategy involves risk, and every risk presents strategic opportunity’
- Compensation, which they see as fundamental to ‘sustainable, long-term value for a company’s investors’
- Governance structures, as shareholders ‘should be able to hold directors accountable’.
Given their generally moderate proxy voting record, we expect them to continue to reserve their right to express dissent for what they consider egregious breaches of the principles noted above.
In their investment philosophy statement, Aviva notes that they integrate ESG factors in their investment approach across asset classes, and use their voting power ‘to ensure that companies are being run for those that own them – not simply those that run them’.
Accordingly, it seems likely that they will continue to show a high level of opposition to breaches of what they consider best practice for UK plcs.
Legal & General
In their Responsible Investment section, Legal & General state their belief that ‘environmental, social and governance (ESG) factors – such as climate change, social inequality and executive pay – are financially material. So we see responsible investing as the incorporation of ESG considerations into investment decisions.’
UK plcs can expect Legal & General to continue to show a high level of opposition to breaches of UK corporate governance best practice over the coming proxy season, particularly in terms of executive remuneration.
As we reflect on what we have seen, and what we expect to come, we invite you to review our most recent articles on the E, S and G of ESG.
Throughout 2022 we will be revisiting key governance topics and areas of interest to all of those involved in ESG. A solid corporate governance framework, adapting and reacting to the drivers and changes in societal expectations, provides the fundaments and support for delivering long term sustainable success.
About The Data
The source data comes from ProxyInsight, who collated the data underlying analysis from publicly available disclosure of investor voting behaviour. Due to differing disclosure requirements in different jurisdictions, there is variability in the available data. For your information, we summarise the requirements in each jurisdiction and their impact on disclosure.
In the United States, mutual funds and other investment management companies are required to disclose their proxy voting decisions by submitting an N-PX form with the Securities and Exchange Commission (SEC). Filings are for the year June to June, and the deadline for submitting the N-PX form is 31 August. As a result, filings for US investment managers are quite comprehensive, giving a clear picture of trends in voting behaviour on the part of US institutional investors.
The Shareholder Rights Directive II (SRD II) governs the disclosure of shareholder voting behaviour in the European Union (EU). The expectation is quite general, however, merely stating that investors should disclose voting behaviour unless related to insignificant matters or immaterial holdings.
As a result, disclosure is currently much less uniform in Europe than in the US. On 19 October 2021, the European Banking Authority (EBA) announced that it had published final draft standards for disclosure by investment firms of their investment policy, focused on the exercise of their voting rights. Accordingly, such disclosures should become more standardised shortly.
Currently, disclosure requirements in the UK derive from SRD II, which was transposed into UK law before departure from the EU. The requirements are defined in the Financial Conduct Authority’s (FCA) Handbook, under COBS 2.2B.6-7, which require a firm’s engagement policy to describe how the firm exercises its voting rights and to provide annual disclosure of voting behaviour in line with SRD II.
Scope of the Data
In the interests of comparability, brevity and relevance, we have limited the sample of investor voting behaviour based on the following constraints.
The review focuses on voting at the AGMs of FTSE 350 companies held between January and September of each year for the last four years (2018-2021). The January to September period allows for delays in disclosure up to year-end 2021. The 2018-2021 period provides a baseline for investor voting trends before the full impact of the Pandemic on the global economy and investor voting behaviour. On average, 300 meetings of FTSE 350 companies occurred in this period, meaning that it captures the vast majority (approximately 85%) of FTSE 350 AGMs held each year.
The analysis focuses on the most significant resolutions traditionally presented at FTSE 350 AGMs; election of directors, the Remuneration Report or say on pay (SoP), and the Remuneration Policy. These resolutions were selected as they are the ones most likely to see significant shareholder dissent based on concerns around corporate governance or company performance, amongst other areas of investor concern.
To gain greater insight into investor voting decisions, the review focuses on investors who consistently disclosed voting behaviour in approximately 1/3 of all meetings in each period (approximately 100 meetings).
The constraints noted above provide a group of approximately 60 investors, and in the interests of brevity, we have decided to focus on the top 20 investors by meetings voted.
The sample includes:
- 11 UK investors, including familiar names like Legal & General and abrdn
- 7 US investors, including familiar names like Blackrock and Vanguard, as well as some investors who may be less familiar to UK plcs, like the Ohio Public Employees Retirement System (OPERS)
- 2 European investors, namely Allianz and UBS.
The sample provides a good cross-section of the various types of institutional investors with a significant interest in the UK market. While the trends identified in their voting behaviour are not representative of every single investor in the FTSE 350, they can tell us much about trends in voting at FTSE 350 AGMs in the round.