ASIC on the ‘significantly less tumultuous’ AGM season

The regulator shares its appraisal and recommendations following the 2017 Annual General Meeting (AGM) season, which shone a spotlight on board diversity and director accountability through ‘against’ votes.

Lower rates of member dissent and a “significant decline in the number of first strikes on the remuneration report” (11 in 2016 to five in 2017 for the ASX 200) saw a quieter AGM season, according to an Australian Securities and Investments Commission (ASIC) report. Of the 11 companies who received a first strike in 2016, Mineral Resources Limited was the only company to receive a second, with a 41% ‘against’ vote on its 2017 remuneration report.

ASIC said the key factors accounting for the decline in second strikes were companies actively engaging with shareholders and making changes to remuneration structures like reducing complexity and withholding bonus payments. With some companies recognising non-financial targets as “drivers of company value”, ASIC encouraged companies to adopt “incentive structures designed to achieve long-term company value”.

ASIC also recommended companies avoid unnecessary complexity in their incentive structures and disclosure reports. “This should 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,” the report said.

Engaging with proxy advisers ‘proactively’

Voluntary data provided by three major proxy advisers revealed the top three resolution types attracting the highest proportion of ‘against’ recommendations for the ASX 200: director election, key management personnel remuneration and remuneration reports. However, the average ‘against’ vote was not sufficiently significant to alter the outcome of a resolution.

ASIC said, “Of the six ASX 200 companies that had strikes on their remuneration report this year, one received three ‘against’ recommendations, four received two ‘against’ recommendations and one received no ‘against’ recommendations from these proxy advisers. 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.”

The regulator emphasised proxy adviser clients “strongly represented to ASIC that they do not follow proxy advisers’ recommendations automatically, but they make their own voting decisions”. ASIC called on companies to “engage early and proactively” with proxy advisers “as an extension of companies’ ongoing active engagement with their shareholders”.

Shareholder engagement

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. 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’.

Further, shareholders exercised their rights to requisition resolutions relating to environmental, social and governance (ESG) issues in relation to eight ASX 200 companies, focusing on climate change and human rights issues. However, there was little support for these resolutions from non-requisitioning shareholders.

Commissioner John Price said in a statement, “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.”

ASIC recommends active stewardship by shareholders, as well as companies engaging proactively with shareholders throughout the year.

ACSI supports gender diversity

The report highlighted the Australian Council of Superannuation Investors recommending that members vote against the election of certain directors in companies without female representation on their boards.

The regulator said, “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 meetings

ASIC consider that companies should seek our methods to make AGMs more effective through enhanced use of technology and other mechanisms. They strongly encourage companies to adopt a poll on all resolutions as a matter of course, as good corporate governance, rather than deciding resolutions by a show of hands.