When attendees at this year’s CGPro online preview of AGM themes were asked to vote for the main topic on their minds, ESG challenges and director re-elections scored highly. Yet edging the poll slightly was executive remuneration – an issue no doubt amplified by both the cost-of-living crisis, and the fact that so many remuneration policy renewals are taking place this year.
It’s an area that Eanna Kelly, Lead Analyst for UK & Ireland at Glass Lewis, has been looking at closely. “On the salary front, it seems that remuneration committees are being sensitive to the workforce experience, and the overwhelming majority of companies are awarding higher increases to the wider workforce than to executives,” he said. “From what we've seen, the average for the workforce is around 6%, with executives closer to 4%. Where companies are giving executives higher percentage rises, using inflation as a justification, I think they will come under scrutiny – although I wouldn't anticipate many companies taking that approach.
“On the retention front, companies are generally looking to address this by increasing incentive opportunities. Based on our engagement meetings, and also what we saw in the few policies that were up in 2022, it's probable that about 25%, maybe 30%, of companies will be looking to increase either bonus or long-term incentive plan (LTIP) opportunities, or both,” added Eanna. “Of course, in many cases, companies will have grown substantially since the previous policy review and if they are proposing a fairly modest increase, I don't think it will be too controversial. But larger increases based predominantly on benchmarking, particularly if they're using US peers as part of that benchmark, may create dissent and some of those big ‘against’ votes.
“The other issue that we're paying attention to is windfall gains. These are awards that were granted in 2020, just after the general market fall in response to COVID-19, where companies awarded a kind of full-value LTIP, so a lot more shares were granted. And then subsequent market recovery has resulted potentially in quite large awards at vesting. We tracked this back to 2020 and a lot of companies at the time said that they would review vesting outcomes in three years and consider exercising discretion at that point. So we'll be interested to see how many companies take that approach and what the norm will be. It's definitely something we would expect companies to do if there has been a large windfall gain but the challenge there will be is to separate windfall gains from gains that can be attributed to company performance or executive input. And hopefully, companies will help us with that by outlining any methodology they’re using to determine how much of a gain was windfall versus how much wasn't.”
“People are our greatest assets”
Whatever happens in the next few weeks, Jaime Tham, Company Secretary at Kier Group plc, will be watching on with interest. With Kier’s year-end falling on 30 June, she’ll have the benefit of seeing how the remuneration story unfolds across the main stretch of the AGM season. And with the company’s strong commitment to inclusion, a controversial approach to director remuneration is unlikely.
“People are our greatest asset,” said Jaime. “We want to create a positive culture where people feel safe to come to work, and are supported with their mental, physical and financial health. Wellbeing is a big pillar for us this year with several new tools and apps launched to support our employees.
“The other interesting thing we're working on is a culture and behaviour programme. This is to further enhance a positive, safe, collaborative environment, where people are empowered, supported and can bring their best self to work. And obviously, diversity and inclusion are big parts of our people agenda at all levels of the business. We have a clear goal to create a workforce that represents the communities and society we operate in. For example, we have an Empower programme that we've launched recently, which people from underrepresented groups within Kier can join, and break down barriers to leadership roles. And within that we have a reverse mentoring scheme pairing up executive committee members and senior leadership with these people. The Executive Committee is learning a lot from this. Finally, board engagement with the workforce is key. They like to go out and make site visits, and gain a lot of benefits from seeing what’s going on for themselves, rather than just hearing about it in the boardroom.”
Eanna Kelly recognises this progressive approach in some of the companies he observes. “The FCA target you're probably all aware of is 40% women representation on each board, with at least one senior leader or senior board position also being a woman,” he said. “I don’t think this will necessarily feed into large changes in voting outcomes this year because the deadline comes in the middle of the AGM Season, but we're already seeing early adopters. And if you looked at the top two or three issues over the past few years, I'd say diversity is probably among those in terms of negative voting recommendations from us, and some of the significant dissenting votes.
“We haven't made any major changes to our own diversity policies this year,” he added. “We continue to expect all FTSE 350 companies to have achieved at least 33% women on the board, and for all FTSE 100 companies to have met the Parker Review target. If these aren't met, and the company hasn't provided a compelling reason as to why, then we will generally escalate to negative voting recommendations against the chair of the nomination committee.
“Board diversity is an investment issue”
An emphasis on diversity also figures very highly among the priorities of Jen Sisson, EMEA Head of Stewardship, Goldman Sachs Asset Management. “We engage with lots of companies around how they're keeping the workforce engaged,” she said. “The main voting element for us on this is around diversity in the boardroom. We have a clear position in that we expect all relevant companies in the UK to meet the Hampton Alexander and Parker Review guidance. That is important to us. Board diversity is an investment issue and a key area for us in terms of our voting.
“We also monitor all our portfolio holdings from standpoints such as UN Global Compact compliance and the OECD guiding principles on business and human rights. And if we think that companies have active violations on these global norms, our proxy policy allows us to hold directors accountable. ”
Eanna pursues a similar oversight approach. “What we're trying to do is proactively determine how social risks are being identified and managed and at what level,” he said. “We like to see board involvement here, particularly at non-executive level and, if we're not satisfied, it may lead to a negative voting recommendation. We also track companies’ workforce engagement mechanisms in our proxy paper, reporting against provision five of the Code.
“Oftentimes, the social component of ESG really comes to the fore in a particular controversy or incident,” Eanna added. “In the past couple of years, we've had to undertake in-depth reviews relating to controversies with issues around supply chain practices, building safety practices, product harm, misleading marketing, and so on. In these cases, we're forced to be a little bit more reactive. We try to determine exactly what occurred, who is ultimately responsible, and then we evaluate the company's response.”
Eanna also sees over-boarding as an issue of increasing concern. “There’s a bit less tolerance towards directors serving on a number of boards given the expectations and the demands placed on those boards,” he said.
“We talk a lot about being a responsible business”
Then there is climate change – clearly a critical issue, and one that Kier finds itself on the frontline with. “We are a construction, infrastructure services and property development company, and a strategic supplier to the UK Government,” said Jaime Tham. “So a lot of our work in the ESG area needs to align with the Government's sustainability priorities. Also, we work with other clients to support their net-zero ambitions. We talk a lot about being a responsible business and we have a target to achieve net-zero carbon emissions by 2045. The board monitors progress through KPIs and link to this is alignment with executive remuneration which we are working on. Of course, we cannot do this on our own. So, we collaborate with our supply chain partners in finding ways, new initiatives and technology to help us achieve our targets.”
But how about the perspective of the asset manager? “There are two main things we think about,” said Jen Sisson. “The first is voting on specific climate-related proposals. And of course, as investors, we don't necessarily know where they're going to crop up, so we have to address them on a case-by-case basis and look at the specifics of the climate plan or of the proposal and make a determination about whether we think it's in shareholders’ best interest to support that.
“Then there's our approach to holding boards accountable on climate change, which is very much linked to our engagement strategy. We have a long-standing climate-related engagement programme focused around getting companies to disclose material greenhouse gas emissions data, setting good targets, and executing on those strategies as well. And so for companies where, after several years of engagement, we're still not seeing material disclosures, we may seek to vote against directors to hold them accountable.”
For Eanna Kelly, the focus of attention is also mainly on votes. “Last year, I think there were only 17 FTSE 350 companies that had a management-sponsored vote on climate,” he said. “And based on the discussions that we've been having, we wouldn't anticipate that number to be much higher this year, so it's still something of an evolving area. The proposal requests that we're seeing aren't uniform either. Some companies are looking for approval of their entire climate strategy, others are looking for approval of a climate report or climate-related disclosures. So our approach would differ depending on the specific request. But in all cases, we have a dedicated ESG team that reviews those proposals, evaluating company practices and disclosures relative to peers and to best practice. We then provide an overview and an analysis of those points in our proxy paper.
“In terms of our voting position, we've generally supported these proposals when they've been put forward. We did recommend against two last year though, mainly based on concerns around the governance of the vote. If we’re not satisfied with issues such as the company's engagement efforts prior to putting forward the proposal, disclosure around that engagement, how the board intends to interpret the vote, and what ongoing role the board will have in overseeing climate-related issues more generally, we will potentially recommend that shareholders abstain or vote against the proposal.
“For those companies that haven't put forward a climate vote, we generally turn the focus onto our election of directors analysis and board oversight perspective,” Eanna added. “We look at what role the board has in environmental and social issues, which would naturally encompass climate. And one of our policies is to recommend against the chair, the board, or the chair of the governance committee if we can't properly identify the board's role in overseeing these issues.”
“The world is changing”
But how about the perspective of the share registrar? We asked Lisa Graham, Head of Meeting Management at EQ how to increase your chances of delivering successful AGM votes. “There’s not a great deal that really changes on this front,” she said. “It is going to come down to engagement with your investors and proxy advisors, and the timeliness of that engagement. Engagement needs to be a year-round process. I can't stress enough some of the conversations that I get brought into around ‘we haven't had time to consider this or that’.
“Also, the voting chain can be very complex,” she added. “It's not as simple as XYZ owns the shares, and XYZ votes. There may be several intermediaries in between, and as a result the voting chain can be quite lengthy, and you're not always going to be aware of the different timelines that apply to linking parts of that chain. From the registrar's, and from the issuer’s perspective, the deadline that we work towards is in the details of the notice of the meeting, so that’s typically 48 working hours prior to the AGM. However, when you start to work down the chain, and depending on the length and the complexity of that chain, some of those deadlines could be a week or two earlier to get the votes through the pipeline to meet the end deadline. That's something you've got to be very mindful of when you're considering engagement.
“And be wary of complacency. Voting is increasingly used more as a voice for expressing dissatisfaction and although some of your resolutions (maybe most of them) may in the past have received approval with votes well in excess of 90%, it doesn't mean that they will continue to. The world is changing.”
One piece of advice for ensuring your AGM runs as smoothly as possible?
Jen: “Be as transparent as you can, and reach out with specific concerns.”
Eanna: “We often have companies that come to us when we're in our blackout period – from the middle of February onwards – when we really don't have the time to engage. So getting the engagement done in advance, ideally from November into January, would be my advice.”
Jaime: “Plan, plan and plan. Also if you're expecting some challenges in your vote, I would connect with your IR team, your comms team and your advisors and work together closely as early as you can.”
Lisa: “I don't think any of us can emphasise enough the importance of engagement, but also the importance of engaging with the right people – the ones who are making that voting decision.”
Concluding comments from CGPro Network Chair, Anne-Marie Clarke
As we all focus on our respective roles supporting corporate governance and wider ESG, we look forward to continuing the discussion at future events, next time reflecting on what we predicted and what has unfolded during 2023. The themes discussed here are certainly what we are discussing with our clients on a weekly basis, so my over-riding comment to everyone is “You’re not alone!”. We, in the corporate governance team, often say that there is very little that we haven’t seen or experienced.
We hope everyone who attended took away at least one thing that was of interest and help. What some of us will take for granted as knowledge and experience we have gained over the years, for others will be new and will provide a greater understanding of the many dynamics at play within the field of corporate governance and AGM voting.
A few responses to our question “What was your single biggest takeaway?”
“The complexity of the competing issues a corporate has to undertake and then how those actions are viewed from stakeholders and other interested parties”
“Growing importance of ESG from an investor standpoint.”
“Communicate”