Preparing for the AGM season

With the arrival of the 2023 AGM season and companies embarking on their pre-AGM governance roadshows, two of Morrow Sodali’s experts reveal what they are expecting and how they are advising clients to prepare for it.

Aldi Djajaputra is a Senior Director of Corporate Governance at Morrow Sodali and Matt Gregorowski is Managing Director of Investor Relations at Citadel-MAGNUS, recently integrated into the Morrow Sodali Group.

For their combined client base, it means the ability to access subject matter experts in strategic IR and corporate communications alongside Morrow Sodali’s governance and sustainability advisory teams, essentially providing a one-stop-shop for listed companies.

Continuing a trend over the past few years, Djajaputra expects more scrutiny on director elections this year, as proxy advisors and investors are increasingly holding directors accountable for a wide array of environmental, social and governance (ESG) issues.

“In recent years, we’ve seen an incremental uptick in the number of ASX300 directors with dissenting votes greater than 20% against their election or re-election, which is considered significant,” he says. “The increasing voter dissent against directors is typically levelled at companies that have been subject to major ESG issues or controversies – including director over-boarding, poor remuneration practices, cyber security breaches, accounting fraud, money laundering investigations, poor customer outcomes, workplace fatalities, poor management of climate strategy, and board diversity concerns.”

Djajaputra notes that because many directors sit on multiple boards, what happens at one company under your watch can also impact your election or re-election on another board. In the Glass Lewis 2023 voting policy guidelines, the main policy update was the introduction of their approach regarding the assessment of a director’s current and past track record at other companies or boards, when providing voting recommendations on their re-elections. Various factors considered by Glass Lewis when evaluating such directors typically include: the severity of issues (based on the impact on company financial performance, share price and social license to operate), a director’s role and tenure, and the timing of issues/events when the director was in the role.

“Following a major ESG controversy, there’s a strong expectation from proxy advisors that companies are proactively embarking on a board renewal process to demonstrate accountability to right the wrongs of the past,” Djajaputra says.

It’s why communication with shareholders is so critical, a message Gregorowski highlights as the key consideration going into this AGM season. He argues that while small cap investors use the proxy advisors as a benchmark, most large institutional investors vote on their own accord, often through dedicated governance managers and stewardship teams. Furthermore, the prevalence of activist shareholders on company share registers is becoming more prominent.

“Companies should be engaging with their shareholders ahead of the AGM as a matter of course,” he says. “That’s to ensure they have a good understanding of the AGM resolutions, but also the board’s considerations in making key decisions during the year, such as board succession and setting the remuneration frameworks,” says Gregorowski.

“Companies that drive active IR programs and regularly engage with their shareholders and proxy advisors tend to find that when the AGM comes around, they are much more supportive around remuneration and any other issues because they have the right context. It should never be the case that you’re having to justify your resolutions to an uninformed investor base.

“What’s more, if you have an activist shareholder agitating for change, if you’ve got clear lines of communication, a good understanding of what you’re trying to achieve as a business, the right governance frameworks and a sustainable business model, there’s much less likelihood that your shareholder base would be sympathetic to their views.”

Djajaputra adds that proxy advisors continue to expect directors to engage with all their stakeholders, including activist shareholders or advocacy groups, such as Market Forces and the Australian Centre for Corporate Responsibility (ACCR). For example, he notes that while proxy advisors often do not support climate-related resolutions filed by activist groups at company meetings, they do expect boards to demonstrate that they are regularly engaging with these groups to understand their concerns.

This AGM season, Djajaputra expects proxy advisors and investors to heavily scrutinise the remuneration decisions of companies that have been subject to ESG controversies. “Boards are generally expected to make tough decisions on executive remuneration in the wake of a material ESG failure. Proxy advisors will be carefully analysing and comparing the extent of board remuneration decisions across different companies, relative to the shareholder experience. This includes board discretion regarding bonus outcomes, including claw back, and the nature of termination benefits paid to departing executives,” he says.

Djajaputra believes we could see an increase in the number of remuneration “strikes” this AGM season, as investors increase their pressure on underperforming companies. With a slowing economy impacting the bottom line and the shareholder returns of many companies in FY23, investors and proxy advisors will be increasingly critical of companies that are perceived to be poorly executing their business strategy, including M&A, capital management decisions and climate strategy.

“We could see more investors adopt a more activist-like mindset this year and providing a ‘protest’ vote against the remuneration report to voice their discontent with a company’s underperformance. Pay-for-performance will continue to be a strong focus area for proxy advisors this year, including scrutiny on the robustness of performance targets in a low growth environment, the use of underlying or nonstatutory financial measures, and the prevalence of ad hoc retention-based awards,” Djajaputra says.

Gregorowski agrees, noting that in FY24 there is going to be an unusually strong focus on company performance because the impacts of this inflationary cycle are only beginning to be felt, and that companies should be using their AGM to keep the market abreast of how they are faring.

“The recent FY23 reporting season showed that consumerfacing companies have weathered the impact of inflation and subdued consumer spending better than was expected. But the flow-on effects of inflation are more likely to become evident in FY24, so the market will be acutely focused on companies’ performance updates throughout the year,” he warns.

He says many companies use the AGM as a natural point in the corporate calendar to provide commentary on their performance, and that this year the market will be keenly assessing which pockets of corporate Australia end up feeling more of the pain. Also, those companies that can demonstrate their business models are proving to be resilient will reap the rewards.

“There is going to be a lot more reallocation across small cap portfolios in FY24 as investors are increasingly being assessed on their own quarterly performance,” he says. “So, if your business is adapting well, whether that be via improved cost efficiencies or sustainable pricing increases, it pays to keep investors up to date. Non-disclosure in this environment can often lead to misaligned or negative expectations.”

Communication is one of the ways in which companies that do face a remuneration “strike” can help to assuage their investors ahead of next year’s meeting, alongside disclosing what they are doing to address key governance risks.

Another prominent ESG issue that is likely to feature this AGM season – although certainly not new – is gender diversity. In May 2023, the Australian Council of Superannuation Investors (ACSI) released a new voting policy to further enhance accountability on ASX300 companies with poor board gender diversity. This AGM season, ACSI will consider recommending its members vote against directors of ASX300 companies if the board has less than 30% female representation. While ACSI is likely to target male directors in the first instance, the policy will focus on opposing individual directors most accountable for board succession and composition (male or female), for example, the board chair or nominations committee chair.

For companies with poor gender diversity, Djajaputra says it will be critical that companies clearly articulate (both in disclosures and engagements) their commitments and initiatives to improve diversity throughout the organisation, as well as their board succession plans, as this will be a key consideration in ACSI’s voting recommendations.

Ahead of any proxy advisor engagement, it’s crucial for a board to be across the proxy advisor’s voting policies and any concerns they may have raised in the past. More importantly, getting a deep understanding of a company’s share register, including the proxy advisors that influence their investors, is a critical component of a targeted and effective shareholder engagement strategy. This is a key focus of Morrow Sodali’s shareholder voting power and intelligence services.

“In light of their voting guidelines, proxy advisors can certainly be prescriptive at times when evaluating companies, and similarly, some investors may be driven by singular issues that may not be in the best interests of all shareholders,” says Gregorowski.

“However, where a company decides not to address a particular issue or approach and sticks to its guns, it should be prepared to acknowledge those concerns and provide a cogent explanation for why certain concerns haven’t been addressed. There may be a perfect reason why a particular policy approach may not be appropriate for a company’s unique circumstances, so the onus is on the company to be on the front foot in communicating this with stakeholders. Otherwise, how can you expect their support?”

Gregorowski and Djajaputra are in fierce agreement that timely communication and disclosure are key with all stakeholders. This is why it makes so much sense that they now sit across from each other in Morrow Sodali’s new openplan offices, a stone’s throw away from many of the investors they seek to influence every day.