The Australian Securities and Investments Commission (ASIC) has released its report on the 2017 annual general meeting (AGM) season for S&P/ASX 200 (ASX 200) listed companies: Report 564 Annual general meeting season 2017. The report provides an overview of some of the key trends observed at AGMs held by ASX 200 listed entities between 1 October 2017 and 31 December 2017. These include: member dissent and engagement; the influence of proxy advisers; the growing concern among investors around diversity and ESG issues; and the use of technology in AGMs. The report also sets out a number of related good practice recommendations. Key points include the following.
High levels of engagement; shareholders seem increasingly willing to vote 'against' individual directors
ASIC observed a high level of shareholder engagement in the 2017 AGM season, with some shareholders actively voicing discontent on various matters, including company underperformance. However despite this, the overall voting outcomes across ASX 200 in 2017 were observed to be comparable to 2016.
ASIC observed that the overall sentiment in relation to directors was more negative with resolutions for the election of directors attracting a noticeable increase in terms of both the number of resolutions receiving material 'against' votes and the average vote 'against'. ASIC suggests that this indicates shareholders are voicing dissatisfaction with companies' performance by voting against the election of directors.
Executive remuneration remains a key shareholder concern despite fewer 'strikes'
ASIC observed that the 2017 AGM season was 'significantly less tumultuous than the 2016 season', with fewer 'strikes' on remuneration reports. More particularly, ASIC observed 'a significant decline' in the number of first strikes on the remuneration report, from 11 in 2016 to five in 2017. Only one of the 11 companies that received a first strike in 2016 received a second strike.
ASIC notes that there was however a 'strong sense of shareholder input and engagement' as evidenced by companies making changes to remuneration structures, reducing complexity and withholding bonus payments (resulting in fewer second strikes); an increase in the number of 'close calls' in relation to strikes on remuneration reports (attracting an 'against' vote of over 20%) and greater director accountability through material 'against' votes for the election of directors or withdrawal of nominations.
Commenting on executive remuneration, ASIC encourages companies to:
Adopt incentive structures designed to achieve long-term company value, which may involve the use of non-financial targets.
Ensure remuneration structures are sufficiently transparent to allow objective measurement of performance.
Avoid unnecessary complexity in the design of their incentive structures and in the disclosure made in remuneration reports to assist shareholders to understand the bases on which performance based payments are to be made (or have been made), including whether these payments are (or were) actually at risk.
Shareholder requisitioned resolutions on ESG issues received limited support from non-requisitioning shareholders
Shareholders exercised their rights to requisition resolutions relating to environmental, social and governance (ESG) issues in relation to eight ASX 200 companies (BHP Billiton Ltd; Santos Ltd; Origin Energy Ltd; Downer EDI Ltd; Commonwealth Bank of Australia; Oil Search Ltd).
These resolutions focused on climate change (BHP Billiton Ltd; Santos Ltd; Origin Energy Ltd; Downer EDI Ltd; Commonwealth Bank of Australia) and human rights issues (Oil Search Ltd). However, ASIC observed there was little support for these resolutions from non-requisitioning shareholders.
Climate change and sustainability: Commenting specifically on the increase in the number of climate related resolutions, and the fact that climate issues appear to be increasingly important to shareholders, ASIC reiterated that it expects 'all boards to proactively consider and manage all material and emerging risks relevant to their company'.
Gender diversity on the boards of ASX-listed companies: ASIC commented that gender diversity continued to be a 'topic of interest' for shareholders and commented: 'We support board diversity as a mechanism to maximise board performance and limit the prevalence of 'groupthink' in boards. We recommend that companies strive to achieve the appropriate level of board diversity to achieve optimal board performance. This extends beyond gender diversity'.
Effectiveness of AGMs: Hybrid AGMs not widely adopted in practice; ASIC has recommended companies use polls rather than a show of hands to decide resolutions
ASIC states that though companies adopted some strategies to enhance meaningful engagement, widespread structural changes to AGMs (eg hybrid AGMs) were not widely adopted in practice. ASIC expressed support for companies seeking out new methods to increasing 'meaningful engagement with shareholders including enhanced use of technology'.
ASIC expressed concern that a relatively high number of ASX 200 companies (25 companies in the ASX 200) continued to decide resolutions by a show of hands rather than by conducting a poll. ASIC commented that 'We strongly encourage companies to adopt a poll on all resolutions as a matter of course, as good corporate governance. Polls more democratically reflect the principle of 'one share one vote' and reflect the wishes of shareholders attending the meeting as well as those who have voted by proxy'.
National Director, Policy and Advocacy at the Governance Institute of Australia Catherine Maxwell commented that the 'Governance Institute considers it is good governance to decide all resolutions at AGMs by a poll. ASIC has endorsed this view in its Report on the 2017 AGM season and encourages companies 'to seek out methods to increase meaningful engagement with shareholders'.
Proxy advisers: Proxy recommendations observed to be influential but not decisive; ASIC has encouraged companies to engage with proxy advisers
ASIC observed that proxy advisers continued to actively scrutinise companies governance practices and issued a number of 'against recommendations' in 2017.
Resolutions attracting 'against' recommendations from the proxy advisers included those relating to remuneration reports, director elections and key management personnel (KMP) remuneration, with remuneration reports receiving the greatest proportion of 'against' recommendations (as a percentage of resolution type).
ASIC also observed that despite significant media and corporate commentary regarding the influence of proxy advisers, their 'against' recommendations, were not followed automatically in practice ie an 'against' recommendation was insufficient to alter the outcome of a resolution. Of the six ASX 200 companies that had strikes on their remuneration report, one received three 'against' recommendations, four received two 'against' recommendations and one received no 'against' recommendations from proxy advisers. ASIC notes that aside from these strikes, there were no other changes to the outcomes of resolutions of ASX 200 companies that received 'against' recommendations from these proxy advisers.
ASIC recommends that companies better address governance concerns that may lead to higher 'against' recommendations, and to higher 'against votes' by engaging with proxy advisers and releasing notices of meeting to the market early to ensure disclosure to the market is clear and not overly complex.
Commenting on the ASIC report, The AFR writes that it gives proxy advisers 'all clear' despite the push by business groups for stronger regulation and oversight.
Commissioner John Price commented: 'Shareholder engagement is a cornerstone of good corporate governance and annual general meetings are an important opportunity for shareholders to hold their board and, through the board, company management to account for a company's performance. Therefore ASIC actively monitors the AGM season each year and our observations become an important and ongoing resource informing our regulatory work in corporate governance'.[Sources: REP 564 Annual general meeting season 2017; 18—023MR ASIC reports on the 2017 annual general meeting season; [registration required] The Australian 30/01/2018; [registration required] The AFR 29/01/2018; LinkedIn post: 30/01/2018; [registration required] The AFR 30/01/2018]