Boards are likely to face intense scrutiny from shareholders during the upcoming AGM season. Jennifer Stafford discusses what’s in store for directors and how they can be better prepared.
Preparing for the AGM
How to survive the AGM season
- Expect more scrutiny
- Prepare well in advance
- Identify what the issues will be
- Prepare simple, clear, comprehensive explanations
- Aim for transparency
- Engage stakeholders in advance
- Know where to obtain further guidance
The 2009 annual general meeting (AGM) season is expected to be challenging. After 15 to 20 years of uninterrupted growth, the global financial crisis over the last year has shaken investor confidence and re-defined the terms of business. The full effect on Australian companies is emerging during 2009 and boards are likely to face intense scrutiny from their shareholders, who will be looking to them for strong leadership and guidance on prospects. Board performance from boom to bust will be judged with 20/20 hindsight, despite the fact that no one predicted the speed and intensity of the crash, even in its early stages.
Possible areas of shareholder interest in 2009
The AGM is a formal process governed by company law, ASX listing rules and company constitutions. The chairman of the board manages the AGM on behalf of the company and shareholders. Shareholders have an opportunity to engage the board, vote on the election of directors and significant matters of policy, and hold their elected representatives accountable.
Boards are advised to consider the areas of shareholder interest in 2009, and the likely effect on their companies, well in advance of the AGM. The extent of shareholder participation will depend on the circumstances. However, for a number of companies it is expected that shareholders will be more active in 2009 than in recent years. It is also possible they will assess and compare the performance of some boards by how effectively they respond to the challenges of the global downturn.
Possible issues for shareholders include:
- Voting on the remuneration report for directors and executives, explanations of bonus payments in previous years and employee job security.
- Electing new directors and director re-appointments.
- Dividend policies – are payments lower in 2009 and if so, why?
- How informative is the company’s financial reporting in explaining its position to shareholders?
- How is the company managing risks and the balance sheet?
- Has the company advised shareholders timeously as required by continuous disclosure rules?
- Green issues – carbon trading emissions scheme, corporate social responsibility.
Shareholder voting on the remuneration report and bonus payments
Australia has relatively high standards of corporate governance and the highly publicised remuneration practices in the US have not been prevalent here. Voting on the remuneration report is one way in which Australian shareholders hold boards accountable for their policies.
In this economic environment, shareholders are more vocal about remuneration. Payments to directors, CEOs and senior executives are being scrutinised and boards need to consider how to respond to shareholder expectations about executive remuneration. Here are some pointers:
- Aim for transparency in communications, with simple, clear, comprehensive explanations of the board’s approach to executive remuneration. Has the structure of remuneration delivered a result that shareholders would consider reasonable for rapidly changing conditions?
- Shareholders are interested in reviewing risk-related incentives and increasing retention incentives for longer-term company performance. They are also looking at the alignment between director and executive remuneration and the returns to shareholders.
- Institutional investors and fund managers tend to be more interested in the structure of remuneration packages than the quantum. They look for packages that are transparent and defensible, with appropriate incentives.
- Published information about executive remuneration may not reflect the actual benefits received by executives. Boards may find it useful to explain the difference between what is received and what must be included in statutory reports. Explain that the accounting treatment of such matters often requires the identification of expenses that are not in fact paid.
- Have discretions in the structure of executive remuneration been fully exercised – for example, to adjust bonuses for the changed conditions? Consider how bonus payments to executives in previous years will be explained, indicating what was reported and what was actually paid. Address why those bonus payments were appropriate for the company’s performance over the last five to 10 years.
- Remuneration reporting for the AGM season is retrospective and it is important to inform shareholders about any changes to remuneration that will not be reported until 2010 and beyond. For example, AICD’s guidelines suggest boards think about whether to have a discretionary bonus rather than one that the board is contractually obliged to approve regardless of changed circumstances.
Election of directors
Shareholders expect very high standards of integrity and prudence concerning appointments to boards and the selection process. The financial crisis has focused attention on the judgment, experience and skills required for non-executive directors on boards, particularly of listed companies.
Shareholders are questioning whether they have the right people on their boards for the challenges ahead. They are more likely than before to review the skills and experience of the whole board when considering the qualities of individual directors seeking appointment.
Comprehensive information can assist in making the case for the election and re-election of directors who have the board’s endorsement. Boards can also assist shareholders in understanding the process for nominating and selecting directors. This could involve:
- Being explicit about the skills and expertise the board is seeking and showing heightened awareness of systemic risk. How widely has the board searched for appropriate candidates?
- Communicating the board’s rationale for director nominations. What skills will nominees bring to the board? Why has the board chosen a director with a proven track record on other boards? If the nominees’ industry knowledge means they are not technically independent (according to the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations), explain their value to the board.
- Build shareholder confidence in the effectiveness and suitability of the board’s candidates through a rigorous appointment process. Boards could conduct a performance appraisal for each director seeking re-election and communicate this to shareholders as part of the information provided in support of the election process.
- Early communication between boards and institutional shareholders is advisable. Talk to major investors, shareholder representatives and proxy or governance advisers about the strength of the board team and their skills for leading the company through difficult times.
- Aim to give comprehensive written information about the candidates for election in the notice of meeting, in the annual report and in briefings for institutional investors.
Self-funded retirees are likely to hold strong expectations of companies with which they have shared a history of reliable, consistent dividend payments. Retirees attending AGMs in 2009 will want to know what dividend payments they can expect in future.
Declining company profits and the need to retain greater capital are affecting dividend policies as many companies work to reduce leverage, build a financial buffer against the downturn and in anticipation of new investment opportunities. For companies where dividends are not common practice, the fall in equity values has similarly created concern among shareholders and reduced their assets.
Declining dividends can represent substantial changes in living standards for retirees whose income is largely dependent on dividends, especially when taken together with falls in equity stock prices. Some retirees are unlikely ever to sell their shareholdings in blue chip stocks. For this group of shareholders, the yield on their stock is much more important than the asset value.
Long-term shareholders are important to companies and it is advisable for boards to acknowledge that loyalty in difficult and uncertain times. How can this be communicated?
- It is suggested that chairmen communicate with shareholders about the company’s broad strategy and how the downturn is being dealt with. This would assist shareholders in understanding the pressures companies are facing and the need for dividend reductions.
- Letters from the chairman in the annual report, and separately, can be effective in communicating the board’s message to shareholders.
- It is important to send early public signals of policy changes that may cause financial difficulties for some shareholders.
The financial downturn may be evident in some company results for the first time in the 2009 reporting season. Companies affected are advised to address the downturn in their reports, indicating its effect on the company and how it has responded. Offer clear messages, written in simple English, to assist shareholders in understanding the complex environment. An important consideration for shareholders is how the company has done since the end of the reporting period.
- Consider sending letters to shareholders before the AGM with advice about sources of information the company provides to assist them in tracking its performance. Keep company websites up-to-date with relevant information and advice.
- Supplement the statutory reports with additional explanation to keep investors informed about company performance. Respond to the demand for consistent underlying profit reporting in addition to statutory profit reporting and reconcile the two. Consider presenting the underlying profit and accompanying explanation in the directors’ report or analysis of the profit result.
- Boards assess the company’s ability to continue as a going concern in the half-yearly and annual financial reports. In 2009, boards will deal with increasing write-downs and the challenge of maintaining consistency while asset values fluctuate. Boards will face pressures to give early reports of profit downgrades that will be judged with 20/20 hindsight.
- Podcasts of briefings for analysts and institutional investors can be offered to all shareholders, consistent with continuous disclosure obligations.
Company prospects – Information for the AGM
The performance of many companies will be uncertain and difficult to predict for the next few years. Shareholders will be looking to their directors for a guide to performance through the downturn and beyond the recession.
Shareholder questions are likely to range widely from global economic prospects to the effect of government interventions in the economy, changes in the competitive landscape and the likelihood of redundancies. How can boards prepare for this?
- It is suggested that companies review their response to the downturn. What range of economic scenarios should be contemplated? What management action is required in each scenario? Aim to agree and articulate the “triggers” or lead indicators to management action.
- Try to look beyond the recession when planning the company’s strategy. Consider how the industry structure and competitors might change, how costs and prices will be affected and what the winning formula is likely to be.
- Consider the financial strategy, particularly levels of leverage and likely capital needs that could affect them. Financial settings that are different from in previous years may be needed after the recession.
- New regulation and government stimulus will change the business landscape in ways that may not be anticipated at the outset – for example, rising inflation in later years; sustained restrictions on the availability of debt capital; or changes in comparative advantage with the emissions trading scheme.
- Aim to give appropriate weight to the positives and opportunities for the company. Downturns are not all downside. Some companies will find advantage now and in future. Planning for recovery will help shareholders to see a way forward to what may be substantial opportunities in the longer term.
- Outlook statements will need very careful consideration and historical patterns may not be useful predictors. Continuing market volatility and economic uncertainty will present major challenges for boards seeking to frame the future. Alerting shareholders to sources of updated information about the company, such as the company website, may be one approach.
Preparing for the AGM
The way in which the AGM is managed by the chairman has a significant bearing on public perceptions of the board and its competence, particularly in light of the circumstances in 2009. A well-prepared consultation process in the lead-up to the AGM can assist in laying the foundations for the meeting. It is advisable to put the briefing materials for such meetings on the company website for the benefit of all shareholders, consistent with continuous disclosure obligations.
- The notice-of-meeting document is an important part of the process. A well-structured document written in simple language, with clear and comprehensive explanations, can assist in informing shareholders ahead of voting and discussion at the AGM. It may be helpful to seek questions in advance when the notice of meeting is distributed to shareholders. This assists chairmen in responding effectively to shareholder priorities at the meeting.
- Where major shareholders can be identified, consider explaining significant policy changes to them well before the AGM. Board chairmen could consider directly consulting major institutional shareholders, in addition to speaking to the fund managers investing assets on their behalf.
- Consider speaking to proxy and governance advisers about major policies that are subject to a vote at the AGM. RiskMetrics, CGI/Glass Lewis, Regnan and the Australian Council of Superannuation Investors (ACSI) provide influential voting recommendations to the major institutional shareholders, and fund managers review the advisers’ recommendations before casting a vote.
- By engaging proxy or governance advisers well in advance of the AGM, chairmen can explain the facts from the company’s perspective and seek assurances that voting recommendations to their clients are based on accurate information.
- Focus groups can help assist boards to understand the views of small shareholders. The Australian Shareholders’ Association is another avenue of inquiry for the views of retail shareholders.
- It may be helpful to involve the auditor in planning for the AGM to assist in developing explanations to shareholders about accounting standards and underlying performance.
Finally, the key objectives for the AGM are to instil trust and confidence in the minds of shareholders about their board and directors, and to provide accountability and transparency in reporting and information flows. The chairman’s approach to the meeting seeks to promote shareholder confidence in the integrity of the process. The manner in which the meeting is conducted, the way in which shareholders are given opportunities to speak and the way in which voting is managed all reflect on the integrity of the chairman, the board and the company’s reputation.
These issues of integrity, reputation and board leadership will be a particular focus in 2009 as shareholders come to terms with a changed financial environment and its potentially longer-term implications for their investments.
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