Mike Schnitzel explores the issues that arose due to Covid-19 during this proxy season and looks at which issues will be paramount as we approach the new annual meeting season
On a global basis, the Covid-19 pandemic has been by far the biggest issue faced by companies during proxy season. The pandemic shut down office buildings and businesses across the globe and forced people to shift to remote working, staying inside their homes with limits on physical interaction with the outside world – and heralded the introduction of the virtual AGM.
Virtual meetings become the standard Robert Marese, president at MacKenzie Partners, says virtual meetings have emerged as standard practice during the pandemic and will likely continue at least into 2021, and perhaps beyond.
‘I think [companies] realize there is broadly a cost saving and a convenience to holding a meeting virtually,’ he says. ‘It protects your directors and senior management as well as shareholders that may attend the meeting. As to whether it survives past 2021, I suspect it will.’
As executives and investors began to get used to virtual AGMs, they found the lack of needing to sit across from each other at a table liberating, Marese says. ‘No one was missing getting on an airplane, running around visiting shareholders and staying in hotels,’ he says. ‘It allowed for fulsome engagement and, as the season moved on, I think everyone became more comfortable with, and accepting of, not needing to travel. It’s far easier to sit in your office and have a conversation with a shareholder over Zoom or the phone. There is a growing appreciation of the lack of a need to travel.’
When the pandemic is over, however, not everyone expects virtual AGMs to continue as the normal course of business. Rob Walker, global co-head of asset stewardship at State Street Global Advisors (SSGA), says companies should resume physical meetings once it is safe to do so. He says there were some concerns that SSGA’s rights as shareholders would be impacted by the shift to virtual meetings, but that did not end up being the case.
Many firms feared virtual meetings would not run smoothly, but this concern proved unfounded, according to Marese. ‘We were relieved the virtual meetings worked as seamlessly as they did and we were surprised that there were generally very few questions presented at virtual AGMs,’ he says.
‘In March and April when we first needed to hold AGMs in a virtual environment, one of the concerns was that it would provide internet troll access to the meeting. People would be more inclined to attend and ask questions, and it would be uncomfortable because it would be difficult to control the content of what was being asked. That didn’t happen.’
A focus on human capital management and diversity The pandemic has shone a bright spotlight on managing human capital.
‘You need to safeguard the business, the health of the workforce and [the health of] the proxyholders,’ Walker says. ‘We’ve engaged with 150 firms during proxy season on Covid-19 matters. A lot of conversations we’ve had have been around employee health and safety and supply chains: the realization was that a highly centralized supply chain doesn’t necessarily work during a pandemic.’
Recent events across the globe underscored the importance of racial equity and diversity more generally, according to Ben Colton, global co-head of asset stewardship at SSGA. Issues such as headline or reputational risks have emerged, and this means boards need to have oversight of diversity. He says better disclosure of workplace diversity and ethnic and gender makeup is needed.
‘It is growing in importance and there is an academic case for diversity, so we’re looking for a strategy and targets from companies,’ Colton says. ‘The EE0-1 Survey – we want to see that publicly disclosed. We’re seeing that firms have been very receptive to this and I feel there will be a critical mass of companies disclosing this information in the next six to 12 months.’
There is an understanding that companies won’t hit their diversity targets immediately; nevertheless, Colton emphasizes that it’s important for investors to understand what those targets are and how corporate boards plan to hit them.
Marese says investors are going to want to know how companies are preparing for another Covid-like event more broadly, and to find out what they
learned from the pandemic. Questions on human capital policy and how they were changed by the pandemic are going to be front and center next proxy season, he says. Investors will want to know how businesses are considering their employees – and how they are protecting them.
‘It’s a liability issue if corporations aren’t protecting their employees,’ Marese points out. ‘Aside from the social aspect of it, there is the liability aspect and the moral cost of not taking care of employees.’
It is expected that executive pay will be a contentious issue for the coming proxy season, according to the authors of ISS Insights. Many companies were hit hard by the pandemic, and executive pay has been restructured and reduced at companies where it is closely tied to performance. There are businesses that were able to weather the pandemic with profits intact, and those companies are expected to continue paying high bonuses.
There has been an increasing volume of capital-raising by Australian companies since March as part of a response to the pandemic. Investors have responded to this positively, as they have realized the pandemic created a situation where capital-raising was necessary to deal with Covid-related setbacks.
A renewed focus on ESG issues from investors is expected for the coming proxy season, according to the authors of ISS Insights. There was a high level of support for ESG measures at the AGMs of mining and energy companies including Rio Tinto, Santos and Woodside.
The most notable element of the proxy season was a pause in aggressive shareholder activism for several months, according to Walied Soliman, chair of Norton Rose Fulbright Canada. ‘You were a very special person if you wanted to launch a proxy fight in the early days of the pandemic,’ he says.
Moving into the summer, activism in Canada went into overdrive. Several companies tried to use the pandemic as an excuse to delay contentious AGMs, and these moves ‘backfired spectacularly,’ Soliman says. ‘The only thing worse than launching a proxy fight is using the pandemic to entrench and enrich yourself.’
In 2021, management teams will be hit by a wave of activism on issues including performance and compensation. Soliman says he has not seen any CEOs taking pay cuts, nor has he seen activism around that, but he expects pay to be a big issue for the 2021 season. ‘There is a special type of arrogance executives have when employees have suffered and stakeholders have suffered and they find fit to raise their salaries or maintain them at an exorbitant level that was appropriate when their companies were doing well,’ he says.
In France, the quorum level slightly increased, according to Stanislas de Laporte, director of France at Morrow Sodali. ‘We saw a difference between companies as the structure of shareholders changed,’ he says. ‘The big institutions, which are used to voting all their holdings, moved to companies with less risk, while smaller investors moved to companies with more risk.’
He says it was a quiet season in terms of board actions: the major issue at AGMs was executive pay, which has been the case for many years. ‘It is interesting to see that, within the CAC 40, there were only seven remuneration policy resolutions that were not flagged or did not receive an ‘against’ recommendation from ISS,’ he says, noting that investors were more flexible this year because 2019 was quite a good year for them, and because of Covid-19. It was not good timing for investors to vote against remuneration, he adds.
Another point linked to remuneration is that the French state asked companies that received state aid to cancel their dividends and manager remuneration. Dividends were clearly cut, but there’s uncertainty about whether compensation was.
‘There was a big announcement about cuts, but it was not very precise,’ de Laporte says. ‘Some companies said they would cut remuneration during the crisis, but next year we will see the extent of those cuts and for how long firms cut salaries. Will it be all of 2020, or just the time during which they received help from the state? How will they cut variable remuneration, and over what period? What percentages will they cut? The major issues for 2021 will be around remuneration.’
The proxy season was relatively stable in 2020. Overall, not much changed and participation levels as well as support levels remained almost the same, says Andrea Bischoff, managing director for Germany at Morrow Sodali. But the Covid-19 pandemic had its impact in other ways. ‘It altered how shareholders participated because they could no longer physically attend the AGMs, but it didn’t affect participation levels,’ she says.
Vote results on compensation items improved and some German companies this year began putting up their remuneration policies, Bischoff says. These companies were, from a German perspective, early implementers of the European Shareholder Rights Directive II, which sets similar standards in all EU countries.
‘Opposition this year was much less than we’ve seen historically,’ Bischoff adds. ‘[In future], investors may take a closer look at disclosure levels, in particular when it comes to targets and achievement [in that area] as well as the incorporation of safeguards, pension arrangements and extraordinary adjustments.’
Virtual meetings will continue in the 2021 proxy season, and the legislation in Germany giving companies the ability to hold virtual AGMs has been extended. This has restricted – and is likely to continue to restrict – shareholders’ ability to ask questions live at the AGM, Bischoff says. ‘Some local investors and shareholder associations are pushing for an improvement in the set-up for when in-person meetings are not possible, and may reflect their disagreement in their vote on director’s discharge.’
Directors’ accountability has been under more scrutiny and will continue to be. ’In times of crisis like this, investors and proxy advisers will reflect on what happened last year and how the company positions itself for the year ahead,’ Bischoff says. ‘Companies strongly affected by Covid-19 need to explain how and why they may have adjusted compensation targets for executives that led to management being paid at similar levels as last year, and why they put employees on leave or shareholders lost out on their returns at the same time.’
Participation in UK AGMs was relatively consistent this year – at around 75 percent, on average – compared with prior years, according to Kiran Vasantham, director of investor engagement for Morrow Sodali. ‘Even with moving toward virtual meetings, we have seen a lot of institutional participation and voting electronically,’ he says.
Remuneration is always a hot topic, he explains. Many NGOs are enthusiastic about influencing institutional investors and putting pressure on boards considering remuneration. Most FTSE 100 companies’ remuneration packages were up for renewal, and nearly all passed with comfortable support, although ‘a number of companies’ had 20 percent negative support, Vasantham says.
Issues flagged by investors at AGMs included pension arrangements, which have been a hot topic over the past 12-18 months. Investors have demanded more alignment between executive pensions and the rest of the workforce but, overall, remuneration policies received positive feedback, Vasantham says. ‘On average, we have broadly seen the same kind of support and in 2021 we expect increased scrutiny on remuneration, as the pandemic will have had an impact,' he notes. 'Investors will look at adjustments and discretionary impacts, upwards and downwards.’
In terms of director elections, he thinks there has been leniency because of the crisis, as investors don’t want to see too many changes right now. Reappointment numbers have been pretty consistent: in 2019, it was about 70 percent and in 2020 it was 67 percent.
‘If we think about the impact of Covid-19, it has been around liquidity, capital-raising and cash preservation,’ Vasantham says. ‘Investors have adopted a lenient approach in most cases. There were some key regulatory bodies that asked companies to preserve cash and there were requests to suspend dividends.
‘In most cases, [investors] understood dividend suspensions and shareholder buybacks. They expected it, but will look closely at how quickly companies will resume those payments and how companies disclose their strategies around dividends and buybacks for 2021.’
