Overcoming Extraordinary Circumstances

At a time of coronavirus, visibility and proactive shareholder engagement is even more important for quelling investor dissent and getting your company on the front foot for the AGM season.

Corporate governance has been deeply engrained in the business agenda for over the last decade, and environmental and social issues are now also rightly moving up in importance in the boardroom and in daily business life. The media spotlight on the impact of business on society and the environment has sharpened, with this focus expected to remain in the fallout of the coronavirus pandemic and the spread of the Black Lives Matter movement. Perennial boardroom issues such as executive remuneration, director overboarding and diversity & inclusion will also continue to be central amidst an uncertain macroeconomic climate.

However, changes in UK company law and the UK Corporate Governance Code have now empowered dissatisfied shareholders more than ever before. Resolutions which receive more than 20% of votes against require the company to explain what actions it will take to engage shareholders to comprehend the reasons behind the negative reaction. It also necessitates an update on shareholder feedback and further actions taken within six months and final summary in the annual report.

Investors therefore can cause concrete change through their voting, forcing companies into action over issues that they may be dragging their heels on. The balance of power has shifted and companies must react accordingly to maintain the highest standards of corporate governance and avoid damaging disputes with their own shareholders.

Overcoming extraordinary circumstances

With 2020 being such an extraordinary year, the Boudicca from Equiniti (EQ) team took to assessing progress of institutional shareholders’ and vote influencers’ behaviours over the AGM season.

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General observations

During the 2020 voting period of 1 February to 7 June, there were 131 fewer AGMs to consider Annual Reports and other regular proposals compared to 601 such meetings held at UK companies across the indices over the same period in 2019 – which is indicative of companies postponing their AGMs following the outbreak of the pandemic.

While the larger companies often have finely tuned AGM processes, as well as long-established Annual Report printing schedules, it was the smaller companies that more frequently took advantage of the available leeway in reporting and AGM timelines, as offered by the regulators. While across all indices, the reduction of AGMs in 2020 was 21.8%, the drop at FTSE 350 companies was less pronounced with only 5.7% fewer companies holding their AGM in that period.

There has been no noticeable change in the average percentage of votes cast FOR across all resolutions since 2019 – this has remained steady at 97.52%.

In both periods, the lowest level of shareholder support was achieved on shareholder-proposed resolutions; with 3.08% of FOR votes registered on the requisitioned resolution regarding the Midland Bank defined benefit pension scheme at the 2020 AGM of HSBC Holdings plc, and a mere 0.73% of FOR votes lodged on the shareholder proposal regarding a Shareholder Committee at the 2019 AGM of Royal Bank of Scotland Group plc (majority UK-Government owned).

Some differences become apparent when considering separate resolution types. Our findings on a number of routine AGM proposals appear to suggest a level of temporary ‘softening’ of investor sentiment over the 2020 season, but with ‘hardened’ views expected to return in 2021 as the economy enters recovery.

Company recommendations

Shareholder engagement is not a “box-ticking” exercise, nor is it a process that can be left comfortably to the last minute. Investment managers and corporate governance and stewardship teams are working more closely together than ever before.

It is crucial that companies prepare suitably for their AGM, a process that must start long before the meeting to avoid last-minute firefighting. Visibility and proactive shareholder engagement will be the key to quelling any investor dissent and getting the company on the front foot.

On the basis of this conclusion, we offer these recommendations to UK companies in the run-up to the 2021 AGM season:

• Companies should conduct a year-round process of corporate governance engagement with shareholders, aligned to the financial calendar and investor relations programmes;
• Proxy advisers, namely ISS, Glass Lewis, the Investment Association and PIRC, remain a vital constituent within corporate governance engagement. Companies should be aware of the recommendation frameworks employed by the key advisers in the same way that their policies are aligned to the strategies used by key shareholders;
• Good and improving ESG performance should be highlighted throughout the financial calendar, arguably placed within a demonstrable framework that sets out key policies and benchmarks;
• Engagement should be conducted by key non-executive members of the board and committees. Proactive shareholder engagement should be a component part of the job description of these members rather than an optional extra;
• Diversity & inclusion and employee representation are rightly increasing in focus for shareholders d. Resolutions and policy relevant to these matters should be carefully considered and particular attention should be given to the experience and job descriptions of the nominees;
• Non-executive director nominations should be supported by detailed biographies, highlighting the relevant expertise now required by the Stewardship Code and which are aligned to a transparent skills matrix;

In the event of likely shareholder dissent at 20% or more for a resolution, UK businesses should not only engage quickly and actively with shareholders but prepare for the potential to be placed on the Public Register—specifically to align the reporting process with the financial calendar.

Shareholder dissent is no longer an exception, it is the new normal, and so against an increasingly volatile equity capital market, poor corporate governance could impact shareholder value as much as weak financial results.

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Interview by Ninder Johal DL, CEO of The Business Influencer (https://thebusinessinfluencer.co.uk/), The Signature Awards (https://nachural.co.uk/the-signature-awards-birmingham/) and The Nachural Group (https://nachural.co.uk/).

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