Review of Australia’s AGM season highlights & trends to watch in 2023

Morrow Sodali is pleased to present our latest edition of the 2022 Proxy Season Review outlining the key findings from the latest proxy season in Australia.

Download your copy of the 2022 Proxy Season Review by filing in the form below.

Key findings from the report

Directors are increasingly being held accountable for their management of environmental, social and governance (ESG) factors, and sustainability-related issues continue to be a major driver of shareholder activism campaigns. These are among the key findings of our 2022 AGM Season review – Australia, which provides a snapshot of voting outcomes, trends, and sentiments, and key reasons for shareholder voting patterns, with a focus on S&P/ASX300 companies.

The findings also highlight how boards’ ability to understand geopolitical risk, operate in an inflationary environment, and deal with other issues such as skills shortages and cybersecurity have become increasingly important, while the integration of ESG by businesses into their operations and reporting continues apace. Looking ahead, reforms by the Labor Government will keep climate risk disclosure issues firmly in focus in 2023, while other issues likely to get more airplay this year include nature-related disclosure, the convergence of global ESG reporting standards, the ‘just transition’ and greenwashing.

Executive remuneration

In 2022, the ASX300 recorded 24 remuneration strikes, two less than the record number of strikes in 2021. Whilst this represents the lowest number of strikes since 2019, the ASX300 has seen no fewer than 20 strikes each year since 2018, demonstrating investors’ willingness to use the nonbinding advisory vote to demonstrate their concerns.

Remuneration decisions were increasingly influenced by rising inflationary and interest rate climates and a tight labour market, and were closely scrutinised by investors and proxy advisors for their alignment with performance against a backdrop of falling global equity markets. Proxy advisors have been particularly critical of pay outcomes that did not match the shareholder experience, inappropriate application of board discretion on remuneration outcomes, and significant one-off awards (e.g., sign-on, retention) made to executives.

The adoption of non-financial measures, including ESG, into remuneration frameworks has to date seen greater momentum in other jurisdictions than in Australia, However APRA's new CPS 511 Remuneration Standard will this year drive more Australian banking/financial services entities to assign a 'material weight' to non-financial measures, and we expect to see these requirements extend to other sectors in the coming years.

Director elections

The average level of support for directors at AGMs in 2022 was roughly on par with 2021 (96% compared to 95%). Across the ASX300 there were 745 director elections, 25 of which attracted dissent of more than 20% of votes cast compared to 22 in the previous year. An increased appetite to hold directors accountable for a wide range of issues, from their oversight of ESG factors to human capital management and cybersecurity, was evident during last year’s proxy season, and directors’ track records are increasingly impacting their elections at AGMs.

Shareholder activism is also emerging within boardrooms, with a number of high-profile contested proxy meetings/ board spills over the past year in the wake of investor concerns regarding a company’s performance, strategic direction and/or perceived material ESG failures. Investors and proxy advisors are more focused than ever on ensuring that the requisite ESG skills and expertise are represented on boards, particularly with respect to the management of climate change and human rights issues.

Gender diversity remains a topical issue. Inroads continue to be made on increasing female representation at the board level: 32% of ASX300 board directors were female versus 31% in 2021, and 56% of boards in the ASX300 had 30% or more female representation last year versus 54% in 2021.

With regard to tenure, there has been a noticeable increase in the proportion of ASX300 directors with board tenure in the ranges of nine years or less over the past year, increasing to 85% from 65.2% in 2021. The average age of ASX300 directors has remained unchanged over the last two years, and is currently 60.1 years.

Sustainability and E&S activism

Sustainability-related issues remain a key driver of shareholder activism, and shareholder activists had lodged 35 ESG-related resolutions across 14 different companies in the ASX300 by December 2022. This represents a decline from the 42 resolutions across 19 companies in 2021, which can partly be attributed to the increase in the number of management-sponsored Say on Climate resolutions that companies voluntarily put to shareholders at their 2022 AGMs. ESG-related resolutions were largely led by two civil society groups and advocacy organisations – the Australasian Centre for Corporate Responsibility, and Market Forces. However, activism is also being driven by investment managers who are no longer satisfied to only make use of passive tools.

The resolutions primarily sought a greater focus from companies on demonstrating their commitment to climate-related disclosures, setting relevant climate-related targets in line with the Paris Agreement and adopting more specific low-carbon transition pathways. They primarily targeted fossil fuel-related companies and financial institutions, however other topics covered include water security, cultural heritage protection and higher levels of involvement of traditional owners seeking their consent through an appropriate stakeholder engagement process.

Going forward

Reforms by the Labor Government will keep climate risk disclosure issues firmly in focus in 2023, while some of the other issues likely to get more airplay this year include nature-related disclosure, the convergence of global ESG reporting standards, the ‘just transition’ and greenwashing.

The Australian government is preparing to release its requirements for the disclosure of climate-related financial risks by large companies and financial institutions. This forms part of a broader set of reforms to ensure the nation can grasp the economic opportunities from more investment in cleaner, cheaper and more reliable energy, manage the financial risks that climate change presents and seize the opportunities presented by surging global momentum in sustainable finance.

Another looming disclosure obligation for companies will be the Taskforce on Nature-related Financial Disclosures, established in response to the growing need to factor nature into financial and business decisions. It is now half-way through its two-year design and development phase, and the framework and the complete recommendations are set to be published in September. The convergence of global ESG reporting standards has become a priority for institutional investors and continues to gather momentum, despite several remaining obstacles and challenges.

In Europe, the new EU Taxonomy green classification system continues to be implemented, impacting Australian companies active in the EU. In the US, pushback against the ESG policies of several of the larger fund managers and influential proxy advisors is focusing investors’ minds on the role of ESG in investment decisions, particularly in corporate America. Globally, the issues of the ‘just transition’ and greenwashing will also continue to attract close attention this year and beyond.