AGM season is fast approaching. With more than half of the FTSE 350 (ex Investment Trusts) having a December year end, April and May will see a significant proportion of UK plc putting itself at the mercy of shareholders. While the majority of AGMs will pass smoothly and well below the radar, it remains an important time to stay alert given the reputational implications of a shareholder revolt for companies and Board members alike.
The best form of defence is, of course, to avoid a meaningful vote against in the first place. This is achieved through early and comprehensive engagement with shareholders and, where possible, the main proxy advisors (although this is becoming increasingly challenging), to explain the rationale for a particular course of action. In some cases, however, investor dissent cannot be avoided. Even so, with sufficient warning and the right preparation, the reputational impact of such an outcome can be mitigated.
Against the backdrop of a challenging macro-economic backdrop and a cost-of-living crisis, we look at the issues that are most likely to rear their heads in 2023 and how companies can best prepare for this year’s AGM.
REMUNERATION CONTINUES TO DOMINATE THE PICTURE
It will come as no surprise that executive pay has consistently been the lightning rod for shareholder displeasure. This peaked in 2021, with any company seen to be overpaying its management teams against the backdrop of a global pandemic receiving short shrift. The Public Register, which is maintained by the Investment Association and tracks all instances of a resolution receiving more than a 20% vote against, shows 58 companies exceeded this level of dissent on their remuneration report in 2021 – a near 60% increase on the previous year (2020: 37).
Votes against the remuneration policy were similarly elevated through the pandemic, up from 12 companies on the Public Register in 2019 to 27 in 2020 and 23 in 2021 (as a binding vote, lower levels of shareholder dissent are typically seen on remuneration policies than on remuneration reports, where the vote is only advisory and can therefore be deployed more safely as a “protest”). For both reports and policies, votes against returned to more ‘normal’ levels in 2022, with 45 and 14 companies respectively above the 20% level.
Remuneration concerns will also typically translate into concerns about individual Non-Executive Directors, particularly those who Chair either the Remuneration Committee or the Board as a whole. In 2022, more than 35 UK-listed companies (excluding Investment Trusts) saw one or more of their directors receive a more than 20% vote against their reappointment. Around a third of these instances related to Group remuneration. The majority of the remainder related either to concerns of ‘over-boarding’, or the failure of a company to meet Board gender diversity requirements (as originally set out by the Hampton Alexander Review, and now updated as part of the FTSE Women Leaders Review).
Last of all, it is worth noting the emergence of “Say on Climate” resolutions. Since 2020, the Say on Climate initiative, supported by the Children’s Investment Fund Foundation, has encouraged listed companies to submit a climate transition action plan to an advisory vote by shareholders. So far, these have mostly been put forward by companies that have a significant impact on the climate and by financial institutions. In 2022, there were 17 such resolutions proposed by companies (up from 10 in 2021), all of which were passed. Four received a vote of more than 20% against.
COST-OF-LIVING CRISIS TO INTENSIFY FOCUS ON PAY
Looking ahead to the upcoming AGM season, it seems highly likely that the impact of inflation on a squeezed workforce will only serve to intensify the focus on executive pay, not least as LTIPs granted at depressed share prices in 2020 may now be showing ‘windfall’ gains. We can certainly expect media coverage of this year’s season to set any contentious remuneration policies or reports in this context. Recent coverage of the pay awarded to Bernard Looney, CEO of BP plc, is illustrative of the point, with the substantial increase in his remuneration being set against the background of the war in Ukraine and rocketing energy prices. That BP’s remuneration committee “exercised its discretion” to reduce Mr Looney’s annual bonus and long-term share award by £0.75m provided little succour.
With this in mind, it is noteworthy that the Investment Association, whose 250 members control more than £10 trillion on behalf of their clients, wrote to its members in November last year to say that, “in a period of significantly higher inflation, we consider that additional restraint should be shown for executive director salary increases.” They went on to conclude that, “If salary increases are needed, IA members encourage Committees to consider increases below the rate of salary increases given to all employees.”
Similarly, ISS has revised its approach to remuneration reports as part of its 2023 Benchmark Policy Changes. It now says that, “Annual increases in salary are expected to be low and ideally lower proportionally than general increases across the broader workforce.” ISS remains a highly influential proxy advisory firm, with some 80% of FTSE 100 companies that received an “against” recommendation by ISS experiencing a vote of more than 20% against their remuneration report in 2022 (Source: Deloitte).
While remaining far less significant in number, we would also expect Directors of businesses that are seen by investors to be failing on issues such as remuneration or diversity, or who are considered to be able to dedicate insufficient time to the company, to continue to come under pressure.
PREPARING FOR A SHAREHOLDER REVOLT
Given this backdrop, and with AGM season fast approaching, it is inevitable that some companies will be in the unfortunate position of needing to manage the fallout from a material vote against a resolution.
While this will always be a challenging situation, our experience shows us that there are steps a company can take to help limit the reputational impact.
- Don’t equate investor silence with investor approval – No news is not always good news. We often hear that a remuneration report or new policy contains “nothing contentious”, and that investors have not raised any concerns. This should not be taken as a sign that they are content. Investors – and their stewardship teams in particular – are inundated at this time of the year. If you have any concerns, we recommend proactively contacting your largest shareholders to check their position.
- Understand the scale of the problem – if you believe you are going to receive a meaningful vote against a resolution, there are steps you can take to determine the extent of the problem. These range from mapping your share register against the proxy advisory firms they use, to tracking shareholder votes on a day-to-day basis as they are logged. Doing so will enable you to prepare better for media scrutiny and other stakeholder enquiries.
- Ensure you have sight of proxy advisor reports – while many large institutions claim to make their own voting decisions, reports from the likes of ISS and the IVIS (part of the Investment Association) remain highly influential. Accessing these reports can require a subscription or login and are not always shared with the companies to which they relate as a matter of course. Ensuring that you can access them – or that your remuneration advisors can and will share them with you in short order – is key to getting ahead of media enquiries.
- Keep internal lines of communication open – shareholder engagement with regards to the AGM will typically be led by the Company Secretariat, in conjunction with relevant Board members (such as the Chair of the RemCom). The task of dealing with any subsequent scrutiny will, however, likely fall to Investor Relations and Corporate Communications/Corporate Affairs. As such, it is important that these teams stay in regular contact and share intelligence throughout.
- Develop a media response plan – if a vote against is likely to attract meaningful media attention, a response plan should be developed ahead of time. This may range from a simple ‘no comment’, through to background briefings or an on-the-record statement. In the event that there is interaction with the media, it is crucial that companies lay out the context for the contentious resolution, particularly when it comes to remuneration. Remuneration is typically a complex subject, and building understanding about how it supports the strategy of the business will give the best chance of a fair hearing.