06 March 2017 by Lorraine Young
A guide to lowering your AGM stress levels
It is time to consider what the hot topics at this year’s round of annual general meetings might be and what we can learn from last year – plus what you can do to lower your stress levels around that all-important vote. For most companies on the Main Market, 2017 will be the second occasion when the remuneration policy has to be put to a shareholder vote, so there is no escaping the fact that remuneration will be the main area of debate.
The key points from the 2016 AGM season were:
The Pensions and Lifetime Savings Association (PLSA) is unimpressed with the responses of companies and boards to defeat and dissent. It suggests that companies view a resolution being passed as a success, and that they do not take seriously the level of votes against (and withheld) and it cites statements made by companies when they announced voting results.
The UK Corporate Governance Code now provides that companies have to say what they plan to do if a significant proportion of votes have been cast against a resolution at any GM.
The Institutional Shareholder Services (ISS) voting guidelines for 2017 consider significant levels of dissent to be when around 20% to 30% of the votes are cast against or withheld. If it considers a board’s reaction to the dissent inadequate it may recommend a vote against the resolution in future years.
The public debate goes on. The Investment Association (IA) Executive Remuneration Working Group published its final report in July last year. This promoted a more flexible approach to remuneration, suggesting that companies should be able to adopt structures outside the narrow range of plans which are commonly adopted.
However, when Weir Group tried to get shareholder approval for a different approach, it was defeated on the remuneration policy vote and on a change to its long-term investment plan. It is clearly still early days in this area, so care will be needed.
“ISS voting guidelines consider significant levels of dissent to be when around 20% to 30% of the votes are cast against or withheld”
The PLSA found that 87% of respondents to a survey of its members (asset owners) considered that executive pay was too high. Just under two-thirds of those felt that this was a generic problem and not simply an issue in relation to poor performance. Around 60% felt that high pay at asset managers prevented them from exercising their stewardship responsibilities in this area.
Votes against directors’ re-election, auditors’ reappointment and fees, and share issuance authorities are not common and the institutional voting guidelines are clear on the reasons for ‘vote against’ recommendations.
For disapplication of pre-emption rights (section 571) it is wise to follow the Principles of the Pre-emption Group, which has also issued template resolutions. The typical acceptable limit is 5% of the issued share capital in any one year, with a limit of 7.5% over a rolling three-year period. This has been revised to allow an annual limit of 10% if half of the authority is to be used for an acquisition or specified capital investment.
Share buyback authority is a standard item of business for many companies – the ISS voting guidelines state that: ‘Shareholders will generally support buybacks unless they are not supported by cash flows of the underlying business or introduce excessive and unsustainable leverage.’ However, PIRC has indicated a tougher stance on this, stating that it will not support such resolutions unless there is ‘a clear, cogent and compelling case demonstrating how the authority would benefit long-term holders and that the directors are not conflicted in making the recommendation.’
This derives from concerns that executives were using share buybacks to manipulate earnings per share levels up, which helped performance targets for incentive plans to be met.
There is greater flexibility for companies below the FTSE 350 and for those on AIM. The QCA corporate governance guidelines are a useful reference point for smaller companies. Investment companies are also recognised to be different and for these companies investors refer to the Association of Investment Companies’ corporate governance code and assess compliance with that, rather than the UK Corporate Governance Code.
Taking time to review the guidelines before you start drafting the notice is worthwhile, to see if you have anything contentious on the AGM agenda. Things can change – and prevention is better than cure.
This is crucial if you have an item of business which is unusual, for example, a new share plan. It is important to find the right contact, which will vary from firm to firm. It is sometimes possible for a supportive fund manager to intervene with the governance team. In other cases, it is the governance team alone which makes the call on how to vote.
Ensure explanations of any areas of non-compliance with the UK Corporate Governance Code are clear and defensible. There is guidance on remuneration reporting from the GC100 and viability reports from the IA (see the list of advice and guidelines at the bottom). If you are aware that a proposal is likely to be contentious, provide reasons and indicate if the company has spoken to investors in advance.
You cannot keep everyone happy all of the time, but if you get the reports in advance you can at least check for factual accuracy, and if there is an ‘abstain’ or ‘against’ recommendation you are alerted to it and can provide a comment. If the recommendation is not changed, at least your comment may be included.
This remains an issue as most votes come in so late. However, you may get an early indication of shareholder discontent. You can usually access the figures whenever you wish through the registrars’ electronic portals.
Not just the registered holders, but the underlying beneficiaries. Have contact details – if you have an investor relations team liaise with them, otherwise your corporate advisor, nomad on AIM, or broker should be able to help. There is no harm in chasing up friendly votes if you feel you may have some bother. There are agencies who will proxy chase for you if you have a large shareholder register.
If the proxy figures for a resolution do not look good then you need to see who has voted and who has not. You can then consider approaching some of the larger investors.
“If the proxy figures show the vote is lost, you should have a poll at the meeting to ensure you get the correct figures and all votes are counted”
Those who have voted against might be persuaded to change their minds, and those who have not voted but who are supportive can be asked to vote. By this stage, for any corporate investor to submit or change a vote, they will need to obtain a ‘letter of rep’ (section 323) and send someone to the meeting to vote.
This can be done very quickly if you speak to the right person, so do not be put off. Although it is helpful for the document to be submitted in advance that is not a requirement and it is quite permissible for someone to turn up at the meeting with the paperwork.
If the proxy figures show the vote is lost, you should have a poll at the meeting to ensure you get the correct figures and all votes are counted. Speak with your registrars to organise this.
Main Market companies have to disclose poll figures to the market (and the proxy figures if there is no poll). As noted above, the UK Corporate Governance Code requires companies to comment about what they plan to do if there is a large amount of opposition to a resolution, so prepare a draft announcement for the board to review ahead of the meeting if this might be needed.
For AIM companies, although the result needs to be announced, the disclosure of the figures and the comment are voluntary. These are however, considered best practice, particularly for larger companies.
Investor guidelines and reviews of 2016 AGMs:
PIRC guidelines – those for 2016 cost £275. The 2017 version is expected this month.
GC100 Directors’ Remuneration Reporting Guidance 2016 (August 2016)