31 October 2016 by Daniele Vitale
Quorum levels, rejected and contested resolutions, proxy recommendations and governance developments in 2016
After a notably quiet AGM season in 2015, 2016 has been markedly more contentious. Looking back on the past year, there are a few key elements that provide an insight into how the season played out, such as: quorum levels; rejected and contested resolutions; proxy advisor recommendations and corporate governance developments.
This review of the 2016 AGM season focuses on companies that held their AGMs between 1 August 2015 and 31 July 2016 and which were included in the main large-cap stock market indices (for instance the FTSE 100 index for the UK).
Levels of AGM shareholder participation (i.e. quorum levels) can depend on a number of factors, including the type and location of a company’s shareholder base. However, they can also provide a signal of how engaged shareholders are.
Additionally, low quorum levels can represent a risk for companies as they magnify the influence of determined minority shareholders and activist investors. For instance, an activist investor holding 10% will see their weight at the AGM rise to 20% if the quorum only reaches 50%.
During the 2016 AGM season the average quorum was 72.4% for the FTSE 100 and 73.2% for the FTSE 250. In comparison, the mid-cap indices in France and Germany also recorded higher quorums than the large-cap indices, yet in the Netherlands the higher average quorum was recorded for the large-cap index.
Over the past five years the average quorum levels for FTSE 100 companies have held steady at around 71%. Meanwhile, over the same period the average quorum for FTSE 250 companies has seen its first (slight) decline in 2016, from 74.1% to 73.2%.
Across the FTSE 100, two companies saw a board-proposed resolution rejected by shareholders during the 2016 AGM season: BP and Smith & Nephew (both relating to the directors’ remuneration report). In the FTSE 250, four companies, Weir Group, SVG Capital, Renewables Infrastructure Group and Paysafe Group, collectively had five board-proposed resolutions rejected by shareholders.
In comparison, there were no rejected resolutions among the companies in the Dutch and Swiss large-cap indices, one resolution was rejected among German large-cap companies (Deutsche Bank) and three resolutions were rejected among French large-cap companies (Renault, Valeo and Vivendi).
There were also several contested resolutions, which we define as receiving more than 10% oppose votes. Among the FTSE 100 companies, 67 companies saw at least one board-proposed resolution receive more than 10% shareholder opposition (compared to 52 in 2015). The total number of resolutions that received over 10% opposition amounted to 119, compared to 96 in 2015.
The most commonly contested resolutions were authorities to issue shares with and without pre-emptive rights. Authorities with pre-emptive rights are proposed as ordinary resolutions (requiring a simple majority) and authorities to issue shares without pre-emptive rights are proposed as special resolutions (requiring a 75% majority).
The second most commonly contested resolutions were the remuneration report and remuneration policy votes. The third most commonly contested resolutions were proposals to allow companies to call EGMs at 14 days’ notice, which are proposed as special resolutions.
A major area of focus of the 2016 AGM season has been executive remuneration. A total of 12 companies across the FTSE 100 sample received less than 80% support on their directors’ remuneration report (including the two rejected resolutions mentioned above).
In contrast, during the 2015 AGM season only six companies received less than 80% support. Additionally, two companies in the FTSE 100 received less than 80% support on their remuneration policy (compared to none during the 2015 AGM season).
At the BP AGM, the advisory vote on the directors’ remuneration report failed to achieve support from shareholders, with 59.29% votes against the resolution. The main concerns that had been raised by proxy advisors and investors related to the fact that executive directors received maximum bonuses for the year (reportedly the highest since 2008), while it reported a record annual loss for 2015 ($6.5 billion).
Additionally, downward discretion was applied to below board-level senior managers, but not to executive directors (due to the lower overall multiplier allowed for them). This highlighted that under the approved remuneration policy, executive directors do not need to hit all performance targets to receive maximum bonus awards.
Following the meeting the board stated: ‘We were disappointed that the advisory vote for this year’s remuneration report was not carried. We have already spoken to a number of shareholders and have a continuing dialogue. They are seeking changes to our remuneration policy for the future. We will continue that engagement and will bring a revised policy to our next AGM.’
At the Smith & Nephew AGM, the advisory vote on the directors’ remuneration report failed to achieve support from shareholders, with 53.01% votes against the resolution. The main concern that had been raised by proxy advisors and investors related to the fact that during the year the remuneration committee exercised its discretion to override the normal performance outcome under the company’s long-term incentive plan (LTIP).
The committee chose to allow the relative total shareholder return (TSR) portion of the 2013 awards to vest at threshold levels, despite TSR performance being below threshold (i.e. below the median of the selected peer group).
Following the meeting the board stated: ‘Looking ahead, as mentioned in our 2015 Annual Report, the remuneration committee is undertaking a thorough review of remuneration arrangements during 2016, ahead of putting a revised remuneration policy to shareholder vote in 2017. Over the summer, they will consult with a broad range of shareholders to solicit their views on how best to align executive reward with shareholder interests.’
A secondary area of focus during the 2016 AGM season has been share issuance authorities, which exclude pre-emption rights. The influential Pre-Emption Group Statement of Principles used to require that annual authorities to disapply pre-emption rights should be limited to a maximum in any one year of 5% of fully diluted share capital, with a further restriction limiting such issues to 7.5% in any rolling three-year period.
In March 2015, the Pre-Emption Group published an updated Statement of Principles. This allows for an additional annual 5% to be authorised to undertake a non-pre-emptive issuance of equity securities in connection with acquisitions and specified capital investments – while clarifying that the statement applies to all issues of equity securities that are undertaken to raise cash for the issuer or its subsidiaries, irrespective of the legal form of the transaction.
Across the FTSE 100 this new flexibility has been adopted by a majority of companies, but a substantial minority continues to limit authorisation requests to 5%. Since January 2016, 52 FTSE 100 companies have proposed a 10% authority and 37 have proposed a 5% authority only.
It should be noted that although most proxy advisors (ISS, Glass Lewis and IVIS) have adopted the new pre-emption group statement of principles, proxy advisory firm PIRC has stated that it will continue to consider 5% to be the acceptable maximum.
In May 2016, the Pre-Emption Group released a monitoring report looking at implementation of the Statement of Principles and published a template resolution outlining good practice in requests for disapplication. The template recommends companies propose two separate resolutions to cover the disapplications envisaged by the Statement of Principles.
The first resolution requests a 5% disapplication to be used on an unrestricted basis. The second resolution, to be put forward by companies when appropriate, requests authority to disapply in cases where boards consider the use to be for the purposes of an acquisition or specified capital investment in accordance with the Statement of Principles. The Pre-Emption Group states that it would expect companies to use this template for meetings held from 1 August 2016.
Another area where increased debate has taken place is the issue of share buybacks. In March 2016, PIRC published its UK shareowner voting guidelines as well as a policy paper introducing its new policy on share buybacks. It explained that, unlike in previous years, it will not support share buyback authorities unless the board has made a clear, cogent and compelling case demonstrating how the authority would benefit long-term shareholders and that the directors are not conflicted in recommending the authority.
PIRC underlined that it is not necessarily opposed to share buybacks in themselves, but it recognises the dangers they pose to good governance and shareholder value and expect company boards to justify their use with reference to overall capital strategy.
Many institutional investors rely on proxy advisory firms for meeting agenda analysis and vote recommendations to inform their voting decisions. A negative recommendation from a proxy advisor can have an adverse impact on the vote outcome of a given resolution.
During the 2016 AGM season, 25 FTSE 100 companies received at least one against or abstain recommendation from ISS (compared to 18 in 2015), for a total of 33 resolutions (compared to 23 in 2015). Additionally, 85 FTSE 100 companies received at least one against or abstain recommendation from Glass Lewis (same in 2015), for a total of 140 resolutions (compared to 120 in 2015).
It should be noted that the bulk of the negative Glass Lewis recommendations depend on the fact that they routinely recommend against short notice periods for EGMs, which are proposed by most FTSE 100 companies.
In line with our findings on the rejected and contested resolutions, it appears that among the main European markets, French companies have received a high number of negative recommendations from proxy advisors. Among the 35 CAC40 companies surveyed, 27 companies received at least one negative recommendation from ISS and 24 companies received at least one negative recommendation from Glass Lewis.