Director pay to dominate asset manager voting at AGMs

‘Corporates can no longer depend on shareholder apathy to have company business waved through once a year’

Climate change and diversity were the standout topics at last years’ annual general meetings, according to the Investment Association’s (IA) recently published Shareholder Priorities report. With ESG now a perennial theme, executive pay has also strayed firmly into shareholders’ crosshairs as a form of leverage and as the cost-of-living crisis bites.

Andrew Ninian, director for stewardship, risk and tax at the IA, says: “Investment managers want to work together with companies to see them succeed and deliver long-term value to their shareholders, which ultimately benefits pensioners and households across the UK. This is particularly important in the current economic environment given the challenges that UK companies are facing.

“Strong engagement and an open dialogue between investors and firms is crucial. The AGM season brings to the forefront the issues which investment managers have been engaging on with FTSE-listed companies during the year, with companies’ response to climate change and the diversity of their board and top leadership teams remaining a key focus due to their long-term nature and potential impact on company value.

“Executive pay will also stay firmly in the spotlight in this year’s AGM season, as the cost-of-living crisis continues to bite. Investors will look to companies to show restraint on pay for their top leadership team and ask that it reflects the wider stakeholder experience, including the lowest paid employees and vulnerable customers.”

Remuneration and climate change

Sawan Kumar, stewardship head at Evenlode Investment, highlights director-related voting and climate change as issues the firm will be keeping a keen eye on during the AGM season.

He says: “The Net Zero Asset Managers Initiative asks you to create a net zero policy, which highlights the voting, the engagement and the escalation measures that you’re going to take to ensure that your portfolio is being decarbonised over the long term – ideally getting to net zero by 2050.”

Kumar continues: “But in terms of voting, the themes from the last two years have been around remuneration policy.  More and more, we’re seeing directors not being voted against because a lack of independence on the board or lack of independence on the committees. If they are responsible for the climate strategy; then, as an escalation measure, [we can vote] against specific directors or even the CEO if it’s something which is a material risk for the business, if we don’t see any climate-related progression.

“Other than that, the numbers suggest that there are more resolutions being voted against on the social side, looking at the UN SDG alignment, to make sure that the companies are reporting against those measures.”

Director remuneration also forms a key component of Sarasin & Partners’ voting policy.

Julia Kochetygova, Sarasin ownership lead, says: “We are applying a consistent and clear policy that we will vote against those directors who we believe are accountable for serious governance flaws. Primarily, this refers to incumbent chairs of committees or the longest-tenured directors. We will vote against them where we see a lack of board independence or diversity, classified boards, etc.

“This also applies to situations when the executive remuneration policy does not meet our criteria, or where we see a lack of auditor independence and have been highlighting our concerns for two consecutive years – in which case it serves as an escalation tool. On the whole, we believe that voting against directors can have a more substantial effect than voting on other resolutions.

“We are changing our policy to reflect the new FCA diversity rule for UK companies: we expect 40% board gender diversity and a woman in a senior position. We will vote against the heads of nomination committees of board chairs when this is not the case.

“We have introduced a more robust net zero voting policy for carbon-exposed companies. We will vote against company directors, auditors and executive remuneration where we see inadequate action to align strategies and operations with a 1.5˚C pathway, and we are public where we do so to put the spotlight on poor performers.”

Meanwhile, the cost-of-living crisis will influence how Fidelity chooses to vote on issues at AGMs.

Jenn-Hui Tan, Fidelity global head of stewardship & sustainable investing, adds: “One of the most powerful ways we can bring about change is through our vote. As we look ahead to the current AGM season, our focus on strong governance amidst a cost-of-living crisis will be front of mind.

“The cost-of-living crisis will impact individuals and companies differently, and we recognise that solutions aren’t always straightforward and will depend on individual circumstances. For many companies, inflationary pressures are already acutely evident — often in both energy or labour costs — and these pressures are having significant social impacts on employees and communities that should be managed in a responsible manner.”

Retail Investors

While institutional shareholders hold the vast majority of power when it comes to shareholder voting, retail investors also have the ability to influence change. Platforms have recently increased accessibility to voting for retail investors, with II reporting a 30% uptick in individual investor participation in AGM voting in 2022.

Lee Wild, Interactive Investor head of equity strategy, says: “Having a say in how a business is run is one of the great benefits of share ownership. Whether it’s in support of strategy, or to protest at policy or specific issues, every shareholder gets a vote. More investors than ever are taking an active interest in the companies they own and proving time and again that their participation can make a big difference. We’ve seen it at multinationals like Shell, BP, and GSK, and at lots of smaller companies, where investors have voted in large numbers and demonstrated that corporates can no longer depend on shareholder apathy to have company business waved through at AGMs once a year.

“People appear more driven these days by emotive issues like the environment, working conditions, and pay, and technology has made it easier to cast your vote.

“Activity has also picked up as younger people attracted to investing over the past few years become more involved, and as action groups become more vocal. The more shareholders see that participation can have an impact, and the easier it gets to place your vote and understand the resolutions and corporate jargon, the more shareholders will get involved. There’s every reason to believe numbers will continue to rise as processes become more familiar and as shareholders see that activism can achieve results.”

Laith Khalaf, head of investment analysis at AJ Bell, says: “When customers hold shares in companies they own part of the company, so they have a right to have their say and should do so if they feel strongly about the performance of the business. Platforms can facilitate votes for them – either electronically or by proxy depending on the platform/vote in question.

“Of course, the majority of votes are held by institutional investors so retail investors are largely relying on fund groups to steer companies in the right direction, and the rise of ESG has led to more fund managers picking up the governance and stewardship baton. When it comes to direct retail investors, demand for voting remains very low and while the availability of voting is important, it doesn’t necessarily follow that there will be a huge surge in shareholders taking time out to vote on company matters.”

See also: Private investors find their voice as voting jumps 30%

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