AGM preparations should begin now

After the festive break many listed company boards will soon reconvene with some facing the heightened possibility of difficult pre-AGM shareholder discussions…

Olly Scott

After the festive break many listed company boards will soon reconvene with some facing the heightened possibility of difficult pre-AGM shareholder discussions, embarrassing voting results and damaged reputations.

Conflict with shareholders at or in the run up to the AGM is an unedifying spectacle from which few emerge completely unscathed. From our conversations with investors and their advisers, it seems clear companies will face renewed pressure on remuneration, value and conduct in 2020.

On remuneration, shareholders are under increasing pressure to be seen flexing their muscles and stamping out what are regarded as the more egregious schemes and practices. LTIPs are under pressure, pension arrangements are centre stage and overly complex or opaque performance measurement faces ever greater scrutiny. Remco chairs need to be particularly active/vigilant at this time of the year to ensure investors and the company are not at cross-purposes or failing to address looming issues. Work on the drafting of the remuneration report and policies should already be underway in our view.

On conduct, Environmental Social and Governance, (ESG) will consume most of the debate. Despite minimum standards existing for the ‘E’ and ‘G,’ NGOs will expect companies to establish, meet and exceed best practice as regards a host of issues including climate change and to show awareness of the issues, intentionality and directionality. Most challenging for boards is the lack of an accepted set of principles and metrics amongst investors and third parties. Progress relies on clarity of communication between companies and their investors in setting and responding to the standards they expect to follow and the targets and measurement they are putting in place. Will 2020 be the year a single ‘gold standard’ ESG approach emerges?

Turning to directors themselves, shareholders’ discomfort about executives accepting third party board appointments will extend to non-executives. The overboarding threshold/tolerance is likely to diminish as shareholders demand more assiduous oversight from their non-executive directors.

On value, boards face a stiffer and potentially more aggressive challenge as activist shareholders target companies where divestments can create value – a theme that is already evident across the financial, healthcare and industrial sectors. More will follow.

Faced with these issues, boards should pre-empt potential challenges with a granular understanding of shareholder views. The near-term objective is simple: an 80% vote for General Meeting resolutions. Longer term, the benefits of better shareholder relations are obvious.

Companies should already understand shareholders’ investment policies and check for updates as the ESG debate continues to evolve. Understanding how investors assess the company now and in the future helps management planning and prioritises investor engagement.

The board’s secret weapon for this kind of exercise is the senior independent director. Shareholders may not be completely forthcoming with management and under certain circumstances deploying a chairman in this scenario could result in tactical impasse.

The SID can be the honest broker with the credibility to get valuable unattributable disclosure and report that to the board. Their work should cover company strategy, audit, operations and corporate governance, (as part of the wider ESG piece).

Creating this platform for dialogue enables the company to clearly understand the views of shareholders on a rolling basis, helping to defuse potential conflicts well ahead of an AGM. It’s also especially useful when dealing with an aggressive activist who claims to speak for other shareholders.

The Company should engage with proxy advisers, particularly if some shareholders simply refuse to talk and are known to automatically vote as advised. Proxy solicitors are invaluable here, giving insight into voting intentions, with the 80% target firmly in mind.

Under the revised UK Corporate Governance Code, falling below 80% at an AGM vote obliges the company to explain its action plan on the issue; provide an update within six months; and include it in its annual report. Worse still, the company will find itself on the Investment Association’s Public Register of companies that receive a high vote against an AGM resolution.

Failure to engage risks heightened scrutiny, invites negative media coverage and damages the reputations of companies and their boards as obdurate shareholders take the debate into a public forum.

After the uncertainty driven by Britain’s prolonged political stalemate, it’s time for companies to move forward. Doing so with shareholder support will enable boards to make the most of the opportunities ahead.

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