1. The board composition puzzle
Going into the AGM season, there was nervousness from companies who hadn’t achieved the Hampton-Alexander Review target of 33% female board representation. In these cases, while proxy advisers might recommend against committee chair nominations, we haven't seen widespread major dissent resulting in directors not being re-elected.
But the more telling reason is this: gender diversity is only one part of a much more complex board composition puzzle. Ethnicity, independence, tenure, skills – these are just a handful of factors boards need to consider when succession planning to fill immediate vacancies and the longer terms needs of the business. Investors will weigh up these different factors when voting against chairs, or individual directors, if they have issues with the board composition. So far this season, negative voting appears to have been saved for those companies suffering a combination of issues.
Advice: Show your working. Put in place a plausible plan, including a detailed narrative demonstrating how your company will meet both gender diversity targets and wider board composition ambitions.
2. Executive remuneration vs. employee experience
There has been a significant lack of tolerance for remuneration reports that do not closely align with investor expectations on executive remuneration best practice.
In a year where employees went above-and-beyond and shareholders potentially were not receiving dividends, and/or have been tapped for additional capital, it’s difficult to justify performance-based bonus pay-outs, salary increases and issuing long-term share option incentive plans. That’s even more true where government funding has been accepted and not repaid. We have seen sub-80% passes on remuneration related resolutions as a result.
Advice: Align executive remuneration decisions with the stakeholder experience during the pandemic, showing understanding that we are all in this together.
3. Annual AGM authorities – time for a rethink?
Despite it having been normal market practice, we are starting to witness some investors pushing back on resolutions for general meetings of shareholders at short notice. This could be due to the increase in important, accelerated activity requiring shareholder approval – such as raising capital, acquisitions and disposals – making 14 days a challenge for investors to prepare and make informed decisions.
Routine share capital authorities are also seeing opposition from some shareholders, which may be linked to concerns around capital management during the past year. The opposition is down to the way boards have wanted to use these authorities previously, and concerns around shareholder dilution.
Advice: Consider your rationale for requesting these authorities and how these have been used over the last year.
4. Hybrid ahead
As in 2020, most companies are running hybrid AGMs, and this is the likely way forward. Virtual-only is still a no-no. Companies that have tried to update their articles of association to allow them to hold virtual-only meetings continue to receive pushback from investors.
5. Going digital with proxy engagement
This year, digital is both essential and highly effective when it comes to proxy engagement. Video calls are bringing the right people together more often, enabling regular check-ins and more detailed conversations to take place.
Advice: The format may be digital but the same rules apply to engaging proxy advisers and investors as in any other year: be thorough, timely, consistent and continuous.
6. Climate change
We’ve yet to see a major push for climate change resolutions or major dissent on companies’ climate change activities, albeit investors are making their positions and expectations very clear. With the reporting requirements against the Task Force on Climate Related Financial Disclosures (TCFD) kicking in at the start of 2021, and the UK hosting the UN Climate Change Conference of the Parties (COP26), the pressure on companies will continue to build.
Advice: Prepare for increased reporting on your company’s climate change impact and plans. Know that investors will likely want an executive remuneration KPI aligned to activity.
7. Section 172 comes into its own
Section 172 statements continue to evolve and are a key tool for boards to use when explaining how they have engaged and taken into consideration different stakeholders when making difficult decisions this year. The genuine message of the importance of engagement and consideration of stakeholders in decision making is becoming the golden thread throughout the narrative of the Annual Report.
Advice: Build on your narrative from last year. Be genuine. Bake-in best practice from other companies.
8. Auditing auditors
Due to increased external scrutiny from numerous stakeholders and the Brydon Review recommendations, the choices of audit committees soon be placed under the microscope. If an auditor’s reputation is called into question, it reflects badly on any company who chooses to trust them with their auditing.
Advice: When it comes to re-election, evaluate performance, value and effectiveness thoroughly. Consider if now is the time for an audit tender to evaluate a wide pool of potential auditors.