With not long to go until the season begins in earnest, what should companies prepare to answer questions on?
What is the value of the full remuneration package?
With the new Investment Association guidance, shareholders are set to study remuneration reports in detail, looking at the total remuneration package, including salaries, LTIPs and pensions.
Action: Many boards will need to broaden their focus from their 2018 approach. If there is time, key personnel such as Heads of RemCo, should be made available for investor meetings to allay any concerns about how remuneration issues could impact equity value.
How are you working towards your environmental, social and governance goals?
Beware that even where there is no climate-specific resolution, other resolutions could be used by shareholders to convey messages on climate issues. Institutional investors Legal & General and BlackRock have both come forward this year to explicitly announce the importance of seeing companies address ethical issues, and we expect that others will follow suit.
Action: Knowing how you will answer questions on this area is vital in 2019. Clear communication of forward-looking policies is an important part of engagement with shareholders. Adequate reporting on climate risk and implications is also necessary.
How have you reviewed your auditors in light of recent scandals?
We’re expecting to see a rise in focus on the independence of auditors, thanks to ongoing media interest. Boards will be asked whether they have any concerns on the effectiveness of their auditors.
Action: Be prepared to answer questions on links to auditing controversy or quality concerns at other companies.
What is the diversity of experience and backgrounds on your board?
There has been an uplift in votes against individual directors with nine companies that put forward directors for election or re-election having received less than 80% approval from shareholders, and two having been voted down*. We believe this trend may continue through the remainder of 2019 as shareholders increase their scrutiny. Questions will be asked about gender diversity and increasingly shareholders are looking to ensure diversity of skillsets to ensure protection against issues such as cyber security.
Action: Boards will need to identify the people that own that risk management responsibility, and how it is being managed.
How will you deal with calls for employee representation on the board?
Today’s political winds mean that it’s possible there will be discussion around greater employee representation at board level this AGM season.
Action: CoSecs should examine their company’s position on this point and know what their approach would be if it became mandatory – for instance, would they add to the board an individual nominated employee or a union or NED representative?
While responses to these questions can be developed over the coming weeks, boards are finding that shareholder and advisor engagement can no longer be restricted to the period before the AGM. With such complex and long-term issues to address, conversations need to be ongoing, showing progress and concrete future plans. Only then will the gap narrow between what investors want and what the board is planning, minimising the chances of shareholder activism.
* Based on Equiniti data, true as of end of February 2019