Key Issues Impacting AGM Success

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Company directors are increasingly tasked with broader responsibilities above and beyond the scope that has existed previously. They are expected to stay abreast of evolving corporate governance developments as well as new requirements in an often uncertain regulatory environment.

With the 2019 proxy season upon us, environmental, social and governance (ESG) issues are again top of mind for both companies and investors alike. Many investors now feel that better ESG and risk management leads to better company performance and long-term value creation. Investors are seeking greater disclosure than ever before and are continuing to increase the size of their stewardship teams in order to assess and vote on these matters.

Executive remuneration remains at the top of the list for proxy advisors and investors, and there was no slowing down with a record 26 companies in the ASX300 receiving a strike in 2018 (Source: ISS season review). The removal of long-term performance hurdles for variable pay was a major contributor and given the potential for a board spill, the remuneration report is still being used as a method of protest for investors. There are many other important themes that companies should also consider:

Expanding stewardship

Active and passive investors, both in Australia and overseas, consult specialist governance and investment stewardship analysts who have a big say in how their firms will vote. Companies need to ensure they continue to engage with investment analysts and portfolio managers but also communicate with these governance teams to secure support and positive outcomes.

Non-financial targets

The Australian Prudential Regulation Authority (APRA) is proposing reforms for APRA-regulated entities where 50% of variable remuneration is subject to non-financial performance measures. It is also proposing a minimum deferral period for variable awards of up to seven years plus a clawback period of up to four years after vesting.

Director accountability

Proxy advisors and investors continue to hold both individual directors and the entire board accountable for company performance and conduct, with 1 in 10 resolutions on director elections or constitutional amendments attracting a material ‘against’ vote last year. This trend will continue this season. (Source: ASIC 2019 AGM Report)

Sustainability/ESG

Companies are now expected to disclose material environmental and social risks and their efforts to mitigate these risks. This is not just important for votes at the AGM but also necessary in attracting and maintaining capital investment. Many investors won’t invest in companies they perceive as failing to adequately disclose and address risks related to the environment, human capital and cyber.

Board composition (gender, race, age, sector)

Australian Council of Superannuation Investors (ACSI) has proposed revised gender diversity targets and expects that all listed companies set a time frame within which they will achieve board gender balance being (40:40:20) meaning 40% Men, 40% Women and 20% Unallocated. To drive change, ACSI will recommend against directors at ASX200 companies who have only one woman on the board and against directors at ASX201 -300 companies where no women are on the board. Some investors will also recommend against directors on the nominations committee if there isn’t at least one racially diverse director.

Psychology in the boardroom

Australian Securities & Investment Commission (ASIC) has ordered 21 major companies to include an independent organisational psychologist to observe directors’ interactions and behaviours in the boardroom. Watch this space!

Activism

After their proposals received the highest level of support during the 2018 AGM season, shareholder activist groups including Australasian Centre for Corporate Responsibility (ACCR) and Market Forces will continue to requisition proposals at company meetings. Although non-binding without the associated constitutional amendments passing, this season may be the first time a resolution receives greater than 50% support of proxy votes.

Stakeholder Engagement

Companies are now expected to engage with their shareholders on governance and other business-related topics on an increasing basis. Shareholder engagement has expanded beyond the proxy season and has become a year-round strategic endeavour. Effective engagement programs allow issuers to develop deeper relationships with governance teams at institutional investor firms, anticipate and prepare for potential issues at the annual meeting and even potentially mitigate or avoid activism scenarios. Early and regular communication and engagement with stakeholders is the key to securing successful voting outcomes.

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