As expected, the recent AGM season proved to be another eventful period for corporate Australia. There were fewer strikes compared to 2018 which suggests companies are listening, engaging and responding to investor feedback. However, companies are having to navigate an ever-expanding landscape of investors, proxy advisors, ESG researchers, regulators, commentators and of course, the court of public opinion. These are some of our observations:
Remuneration continues to be a topic of contention for investors with, at the time of writing, 17 strikes recorded against companies in the ASX300 during the 2019 AGM season. This is down on last year’s 21 strikes. While each situation is unique, companies are being rebuked for any disconnect between pay and performance or pay structures which are seen to be too generous.
Non-financial measures and their impact on variable remuneration outcomes
Transparency is a big issue for investors and their proxy advisors. The push for non-financial measures to be included in pay outcomes has been prosecuted by APRA and other market participants. As investors assess the suitability of these measures, opaque disclosure of the metrics and performance against each measure has resulted in some companies receiving a strike. Companies who seek to implement non-financial measures need to ensure investors can objectively assess an executive’s performance.
Director accountability and performance
The recent AGM season has also seen individual directors being held to account for perceived failures of oversight. Where dissent of more than 5% was once considered exceptional, directors are now regularly seeing more than 20% of votes cast against their re-election. This is often driven by issues at unrelated companies which shows how personal accountability for some of Australia’s recent controversies is being assigned to our corporate leaders.
As part of the campaign for greater accountability, annual director elections are being sought by ACSI and State Street Global Advisors, one of the three global index funds. Already the norm for the US and UK, this would see directors face the ballot box at each AGM versus the usual three-year term. Proponents for annual elections say this promotes greater accountability including ensuring chairs of nomination and remuneration committees can be held to account, for example, for a lack of diversity or misaligned pay outcomes. Detractors say directors could be punished for short term "failures" which may prove successful over the medium to long-term.
Some won’t be waiting. An ASX50 company, that isn’t dual-listed, implemented annual elections for all directors during the recent AGM season.
Shareholder activism — proposals from ACCR and Market Forces
The Australasian Centre for Corporate Responsibility (ACCR) and Market Forces have escalated their efforts this year by filing numerous shareholder proposals at some of Australia’s largest companies. Their areas of focus are climate change, human rights and workers rights. ACCR has also attracted institutional investors to support its filings. The total number of shareholder proposals submitted to ASX200 companies has increased from 17 in 2018 to 22 this year (source: ACCR), demonstrating that shareholder activism isn’t slowing down anytime soon.
The table below shows some shareholder proposals and the level of support:
|Company||Category||Votes in favour|
|AGL Energy||Climate Change||30.71%|
|Origin Energy||Climate Change||7.90%|
Veto of APRA in the boardroom
Treasurer Josh Frydenberg recently rejected a proposal from APRA which would have allowed the regulator into the boardroom. Mr Frydenberg argued that regulators being present at the table would prevent directors engaging in the frank discussions required during the ordinary course of business. Despite this, APRA will continue to seek improvements in governance, culture, risk and accountability at the entities it regulates. APRA’s request followed ASIC embedding an organisational psychologist into the boardrooms of many top Australian companies earlier this year.
Where to from here?
Remuneration, board structure and director accountability are all hot buttons for investors that won’t be going anywhere. The money flowing into passive funds and the rapid growth of ESG-focused funds means that companies, now more than ever, must ensure they are addressing the issues that matter most to these investors. With AGM season behind us, now is the perfect time to understand how investors voted and why and continue the conversation with investors and proxy advisors. Engaging early means you’ll understand the governance issues of your investors, giving you more time to address them, through both public disclosure and dialogue, and put you in a better position for 2020.