The 2021 AGM season again highlighted the need for early engagement with Corporate Governance teams: all countries have implemented SRD II across Europe and, for example, we saw a record number of protest votes on remuneration policies in the UK, as well as increased scrutiny on ESG topics. The most effective way of engaging on these crucial governance topics is via a Corporate Governance roadshow well ahead of the AGM with CEO/CFO and chairperson, which both issuers and shareholders value very highly indeed – once they realise the benefits, most corporates repeat the exercise every year – and feedback from investors is also very positive.
Accountability and responsiveness
Shareholders of issuers expect accountability and responsiveness. As per The Investor Forum’s “The Components of Stewardship”, shareholders want issuers to follow best governance practices, such as those found in local and international Governance Codes, that makes them stand out against peer companies and when the company doesn’t, shareholders want to understand why. Shareholders generally understand that every company’s situation is unique yet will clearly want the company to explain why certain unique decisions are taken in shareholders’ long-term interests. For this reason, regular engagement with shareholders is key.
Important to note, however, is that it is a two-way dialogue. Explaining to shareholders the rationale for your decisions is important, especially where potentially controversial vs Proxy Advisory Agencies (PAAs) and/or investor policies; however, demonstrating to shareholders that you listen to and understand their views, and address their concerns is equally important. A roadshow that is well presented – and well timed (ideally long before any shareholder concerns arise), or in some cases even just a phone call – can go a long way in ensuring that shareholders see the long-term benefit of specific company decisions.
Areas of focus for 2022 Proxy Season
It is critical for many companies to engage with shareholders to understand their perspectives in relation to AGM resolutions: e.g. election of Directors, board composition (i.e. gender diversity, board experience), Remuneration (policy & report) and Share Issuance, but there is clearly an increased awareness and pressure on ESG matters, responsibility for which frequently resides with Corporate Governance teams. Explaining your ESG strategy is a key focus of Corporate Governance meetings, e.g. ESG integration, management or board responsibility, targets and remuneration (even the majority of large US companies now include at least one ESG metric in short- and long-term incentive plans, with most European issuers ahead).
With the ever increasing pressure from shareholders for companies to be compliant to best practice, many of the largest shareholders have been heavily scrutinising ESG practices across Europe. Blackrock details its firmwide commitment to integrate ESG information into investment processes across all portfolios and this integration has made them more critical during General Meetings in recent years. In addition, the world’s most influential proxy advisor, Institutional Shareholder Services (ISS), recently updated its guidelines such that ‘ISS policies globally will explicitly note that significant risk oversight failures related to environmental and social concerns may constitute material governance failures, and as such, may trigger vote recommendations against board members’.
Speak to the right people…
The majority of IR and management interaction with investors will be with Portfolio Managers and analysts of course, but often misses the Corporate Governance teams that are growing in number and influence: Corporate Governance teams will set internal governance policies and have voting responsibility, often without the PM’s input; and Passive investors are regular, active AGM participants as voting is the only real way of influencing their investments. And, as mentioned, in the majority of cases the Corporate Governance teams will also have responsibility for ESG, yet are often missed out on usual IR roadshows. So it is crucial you see as many Corporate Governance teams at your major shareholders as possible. It is also good practice to include the key PAAs as part of the roadshow to ensure they also understand the rationale behind your decisions and corporate governance practices.
…With the right team…
Given the variety of key topics Corporate Governance teams want to discuss, our recommendation is to have both the management team and board represented in Corporate Governance roadshows – a member of the board (ideally chairperson) to address key aspects such as the AGM resolutions, board composition and management remuneration, together with the CEO or CFO to discuss overall strategy and ESG. This also helps demonstrate the level of interaction, coordination and alignment between a management team and its board, another key governance test.
…And at the right time
Trying to engage once the AGM resolutions are published or chasing shareholders to vote is way too late as Corporate Governance teams won’t have any bandwidth to engage. Investors want to engage early, at least 2-3 months ahead of the AGM, which also gives issuers time to incorporate relevant feedback from shareholders – this means September to February for a typical May or June AGM. I.e. you need to start thinking about it now!
Stop making your shareholder engagement a box ticking exercise, make sure that engagement is time well spent with a two-way flow of information with the appropriate teams to ensure shareholders support management and the direction your company wants to take. Please speak to your Investor Update contact or Proxy Solicitation team for more information.