AGM Season Points To ESG Trends To Watch in 2023

The breadth of skills on company boards, as well as directors’ track records, have come under close scrutiny during Australia’s 2022 proxy season as investors and other stakeholders signal their intention to hold directors more accountable on a broader range of issues than ever.

This is among the key takeaways from this year’s main annual general meeting season that will inform companies’ decisions as they prepare for 2023, says Aldi Djajaputra, Director - Corporate Governance APAC at Morrow Sodali.

“Shareholders and proxy advisors now expect boards to demonstrate expertise and experience in areas beyond the typical industry, technical or leadership skills, to areas ranging from sustainability, community engagement, human capital management, digital/technology, regulatory and public policy,” says Djajaputra.

“The range of capabilities a board currently has or is looking to achieve has been a much-discussed topic this year, and it’s becoming increasingly challenging for a listed company to tick all the different boxes. Investors and proxy advisors expect boards to demonstrate that the company has an ongoing process to review ongoing succession, which includes consideration of independence, skills, diversity and time commitment.”

“Traditionally boards have been dominated with former lawyers or accountants, however, this is no longer sufficient to justify a board seat these days, as stakeholders increasingly focus on the ability of directors to provide oversight of environmental, social and governance (ESG) risks and opportunities.”

After 2021 saw the highest number of remunerations ‘strikes’ (26) across the ASX300 since the ‘two-strikes rule’ was introduced in 2011, executive pay remained in close focus this year against a backdrop of falling equity markets, economic and geopolitical uncertainties, and the ongoing impact of COVID-19. The introduction of ESG metrics into remuneration structures has sparked an interesting debate over the past year, which is likely to continue going forward.

“There’s clearly a place for linking ESG to pay, but the market is looking for objective targets, full transparency and clear alignment to strategy. The expectations from investors and proxy advisors are that executives’ bonuses should be a reward for true outperformance, not for simply doing their ‘day job’. The general view of the cynics of ESG measures in pay is that it may be resulting in more pay but not necessarily more progress on ESG. The challenge for companies is balancing the need to reward and incentivise executives to deliver on critical ESG initiatives, whilst being able to demonstrate to the market that they are drivers of shareholder value," says Djajaputra

Whilst climate change expectations and reporting requirements have and will continue to be the dominant ESG topic, social issues were increasingly brought to the fore in 2022, sparked by global events such as the COVID-19 pandemic, the war in Ukraine, as well as the human rights controversies surrounding the 2022 World Cup in Qatar.

Companies’ approach to due diligence and management of modern slavery and human rights risks in their business operations and supply chains has been a key engagement priority for global investors. In 2022, the Australian Government completed its review of compliance against the Modern Slavery Act since it came into effect in 2019, which may result in potential stricter measures introduced into the legislation next year.

“Companies that are particularly exposed to modern slavery risks, such as manufacturing and construction, or others with large footprints in countries with weak labour rights or vulnerable communities, are facing more questions around what they have done to assess and combat modern slavery and how they are looking to improve their practices and disclosures going forward.”

Diversity, equity and inclusion in Australia has often focused on improving gender diversity on boards and the broader workforce, however, diversity beyond gender is increasingly becoming a focus in line with global standards.

“While we have seen improvements in gender diversity on ASX boards over the past decade, global investors are starting to look more closely at what companies are doing to increase diversity of underrepresented groups, such as racial or ethnic minorities and LGBTQI.”

“Globally, social movements like Black Lives Matter have raised awareness of this topic, and we have now seen major investors such as BlackRock and State Street introducing racial and ethnic diversity requirements into voting guidelines for US and UK markets, as well as the NASDAQ stock exchange’s introduction of diversity disclosure requirements and quotas. This drive is starting to flow through conversations between investors and Australian companies, which is likely to increase over time.”

In Australia, there has been a growing focus on business impacts to Indigenous people’ rights and companies improving their engagement with traditional landowners and other Indigenous groups, particularly in the wake of major events such as the Juukan Gorge incident in 2020.

These matters will remain in focus in 2023, as a working group of First Nations Leaders continues to work with the Albanese Government towards a referendum to enshrine a First Nations Voice in the Australian Constitution, says Djajaputra.

Shareholder activism is expected to continue in 2023, following the increasing trend in environmental and social (E&S) shareholder resolutions requisitioned at company meetings in recent years. Beyond E&S shareholder resolutions, activism is emerging within boardrooms, with a number of high-profile contested proxy meetings over the past year in the wake of investor concerns regarding a company’s performance, strategic direction and/or perceived material ESG failures – including the well-publicised board proxy contest between AGL and major shareholder Grok Ventures.

“We may see more instances of major investors seeking to replace incumbent board members with nominee directors in order to address perceived skills and/or governance deficiencies in the current board. However, proxy advisors will expect a compelling rationale from dissident investors to alleviate any potential concerns that they may be seeking effective control of the company without paying an adequate premium to all shareholders.”