While the pandemic still casts a long shadow over many sectors, it won’t dominate this AGM season with the same force it did when Australian companies emerged from sweeping lockdowns in 2021. Now, ESG, remuneration and hybrid AGMS rank far higher in importance. Leading peak bodies offer directors insights as to what they’re looking for.
ESG and climate change
Australia now has a new government which has new emissions reduction targets. Philip Foo, vice- president of APAC research and engagement at proxy advisers CGI Glass Lewis, believes climate change will be the “overarching theme” of this year’s AGM season.
Climate risk will remain a focus, according to Australian Council of Superannuation Investors (ACSI) CEO Louise Davidson AM GAICD, noting several boards have put forward a non-binding shareholder vote on their climate strategy in 2022, referring to “Say on Climate” (see below). “There has also been a marked increase in the number of companies committing to align their businesses on a net zero pathway,” she says. “Importantly, many are aligning climate targets to their capital allocation decisions and executive incentives.”
ESG (environmental, social and governance) is one of four key focuses for the AGM season of the Australian Shareholders’ Association (ASA). Its CEO Rachel Waterhouse expects companies to be ESG- and climate-literate, and ASA will be monitoring how efficiently companies use their resources and avoid greenwashing. It will also assess the impact of remuneration plans on driving a culture of sustainability. ASA will be watching ESG reporting and would like to see companies using a recognised standard such as Task Force on Climate-related Financial Disclosures (TCFD) or Global Reporting Initiative.
The good news, according to Davidson, is that ACSI research this year found more than half of the ASX 200 index align their disclosures, in full or in part, to the TCFD framework — five times as many as in 2017. There has been a marked upward swing in ESG performance data disclosures in recent years. “Nearly three-quarters of ASX 200 companies also now provide investors with detailed disclosure of their ESG risks,” she says. “There is definitely momentum behind disclosures now, which is very encouraging.”
Say on Climate
Foo believes Say on Climate will be an important feature of this AGM season. Launched in late 2020, the Say on Climate mechanism aims to compel listed companies to develop and implement Paris-aligned transition plans and to be held accountable for them. Its resolutions call for (at a minimum) annual disclosures of emissions, a strategy to reduce emissions and an annual vote on the plan at the AGM. The resolutions are designed to ensure that in the absence of law reform, investors still get the information they need and a say on the company’s strategy.
Company reports are based on the TCFD recommendations and the Climate Action 100+ Net Zero Company Benchmark. BHP’s vote on the Say on Climate was accepted at its 2021 AGM, while Rio, Santos and Woodside’s climate action plans got the green light at their AGMs earlier this year.
According to Foo, four other companies have committed to the Say on Climate vote at their AGMs this year, including AGL, South32 and Origin Energy. He says he’s hearing rumours of at least three more that have not yet announced their plans. These companies have been going to shareholders with their climate change plans to test their responses. In some cases, he suspects this might be an iterative process where companies get feedback and then go back and revise their plans. That said, Glass Lewis’ Policy Guidelines for 2022 raise some concerns about the Say on Climate vote:
“Generally, we believe that the setting of a company’s business strategy is a function that is best served by the board, which has a fiduciary duty to shareholders,” the guidelines state. “By allowing shareholders to weigh in on a company’s long-term climate strategy, the board may be abdicating some of this responsibility.
“Additionally, we have observed over the past year that shareholders are being asked to make informed voting decisions associated with the setting of companies’ long-term business strategy — as is the case with the establishment of net zero emissions goals to 2050 — with potentially incomplete information relating to operational changes and related costs.”
However, when companies have adopted such a vote, and are asking shareholders to weigh in on their climate-related strategies, Glass Lewis says it will evaluate companies’ climate transition plans on a case-by-case basis.
Michael Robinson, a director of Guerdon Associates, believes the remuneration issues this year are not likely to arise from falls in earnings. He says most earnings for the 2021–22 financial year are above prior earnings, given that the effects of COVID-19 had a more severe effect on prior earnings.
“Rather, the issues are most likely to be associated with subsequent falls in share prices, and hence total shareholder return (TSR), since a turn in the securities markets cycle from mid-FY22,” says Robinson. “We know from years of research that shareholder support for remuneration is highly correlated with TSR. So, this AGM season, watch out for reactions against previously high-growth companies that have disclosed major salary increases and incentive payments when their share price has dropped.”
While TSR is forward-looking and financial outcomes used for many incentives are backward- looking, Robinson says it appears that a significant proportion of voters do not recognise this. “The only way to address this is for board and remuneration committee chairs to actively engage proxy advisers and their investors, and explain the logic behind incentive payments based on good financial results, even when TSR is down. Likewise, salary increases will be disclosed when some markets are hot with labour shortages. This is particularly evident in the resources and associated industries, as well as in technology. The remedy is, again, engagement to tell the story behind the disclosure and that this is not necessarily a predictor of future remuneration.”
Robinson believes the most contentious issues during this AGM season will probably be around CEO equity grants. “With inflation impacting earnings, supply chain disruptions continuing, tempering consumer demand, lower business investment and the costs of capital rising, earnings growth may be tepid at best and negative for many companies,” he says. “As a result, CEO equity grants may have lower performance thresholds for vesting. This will not be welcomed by many investors.”
Another issue, according to Robinson, will be the extent that non-financial measures are finding their way into incentive frameworks. This has two drivers. “One is the Australian Prudential Regulation Authority’s regulation of financial services companies that require a ‘material’ proportion of variable remuneration to be subject to non-financial performance,” he says. “The other is the requirement from many ESG-focused investors for better ESG performance. This will be particularly evident in the resources sectors, as well as financial services. We expect the way these non-financial measures are factored into incentive systems will not be supported by a significant proportion of investors, whereas the absence of non-financial [measures] will upset other groups of investors. It is guaranteed that some investors will not be pleased with CEO remuneration frameworks this season.”
He notes that the salary cuts and director fee reductions we saw at the beginning of COVID-19 have been reversed. “Be aware that some increases are not increases at all, but reversion to what was on-foot in the past,” says Robinson. “Directors should not take understanding as a given and should clearly explain this when applicable.”
In investors’ sights
Davidson notes that there was a huge rebound in the incentives awarded by ASX 300 boards in 2021 as markets improved. This year, she says remuneration outcomes will be judged against the backdrop of difficult financial markets and an uncertain economic outlook. “The link between remuneration and long-term performance remains important. There will be close scrutiny of incentives this AGM season, particularly of the justification for any retention awards.”
Similarly, Foo says, CGI Glass Lewis has its eye on some retention arrangements and some one-off awards. It will also be watching companies that have had a share price slump and have underwater award structures. Its focus will be on what remedial action they have taken to retain staff in these situations.
Remuneration is another of ASA’s four key focuses for this year’s AGM season. It believes that a company’s remuneration report should be readable, transparent and understandable for retail investors and that there should be a logical relationship between rewards, financial performance and corporate governance. ASA says it will refer to benchmarks to assess whether the amount and structure are reasonable compared to similar companies.
For Waterhouse, remuneration is always a concern because directors determine the size of remuneration of the executives with whom they have a close relationship. “We need reports that show directors asked themselves how much is too much,” she says. “We see excesses from time to time, and we call them out.”
Hybrid or virtual AGMs?
This year’s AGM season will be the first test of changes this year to the Corporations Act 2001 (Cth), which now allow companies to hold hybrid and virtual AGMs. These changes made permanent the temporary relief measures introduced during the pandemic. However, virtual meetings can only be held if they are permitted by the company’s constitution, or if at least 75 per cent of shareholders agree to amend the constitution.
However, some experts expect opposition to any proposed constitutional amendments at this year’s AGM season. That’s because the introduction of virtual-only AGMs has worried groups such as ACSI and ASA, both of which advocate for hybrid meetings. Both groups have expressed concern that virtual-only meetings might well reduce the transparency and engagement of AGMs.
“Improvements to virtual meetings to give shareholders a reasonable opportunity to participate and speak verbally or in writing during meetings are expected to curb some poorer practices that developed in the 2020 AGM season,” noted ACSI in an October 2021 statement.
“These included filtering or censoring questions provided in writing, and preventing shareholders from speaking in real-time.”
ASA says it will only support the holding of totally virtual AGMs when that technology and practice give shareholders a reasonable opportunity to participate. That, it believes, is a long way off.
According to the 2022 AGM Intelligence Report from stock transfer company Computershare, 29 companies across the ASX 300 proposed changes to their constitution that would enable them to hold virtual meetings in 2021 — that is before the changes to the Corporations Act. Overall, the average support received was 81 per cent, exceeding the approval threshold of 75 per cent. In addition, four proposals were withdrawn and one received a majority of votes against.
With this in mind, Computershare says key feedback from the past two AGM seasons is around shareholder concerns that virtual meetings can potentially undermine meaningful exchanges between directors and shareholders. And that companies must remain vigilant in managing Q&A sessions in an online environment to ensure all shareholders are accurately represented.
Looking ahead to this year’s AGM season, Waterhouse says ASA doesn’t want to see face-to-face meetings with a webcast.
“Webcasts don’t allow retail shareholders to engage directly with the board. The choice of a face-to-face AGM in a location where there are limited retail shareholders with a webcast does not allow appropriate engagement.”
Noting hybrid meetings give investors the opportunity to attend various AGMs from the comfort of their homes or workplaces, and this facilitates attending multiple AGMs in the peak of the season, Waterhouse adds this caution. “We will be monitoring notices of meeting to see if more companies try to change constitutions to allow virtual-only security holder meetings.”
Practice resources — supporting good governance
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