By Christopher Nietsche
The 2019 annual general meeting season saw an increasing number of directors being individually targeted by investors,often for issues at other companies where they sit on the board.
By the end of the first week of November, all of the targeted directors had been re-elected, but some received significant “against” votes, particularly where they had been involved in companies adversely named in the banking Royal Commission.
As always, executive pay featured prominently, but there are signs that companies are doing a better job of communicating their remuneration strategies with investors.
Another major trend was the ongoing use of shareholder resolutions to target environmental and social issues at companies, as shareholders become more adept at mobilising shareholder support.
Targeting of directors
This year’s AGM season saw more individual directors targeted, with some shareholders voting against their re-election at one company because of issues at another company, particularly if they related to the banking Royal Commission.
Close to 30 per cent of shareholders at the Telstra AGM voted against the re-election of former AMP chief executive Craig Dunn. Proxy advisory CGI Glass Lewis said Dunn bears “normative responsibility” for conduct that occurred on his watch as an executive at AMP. “To what extent does a director bear responsibility for the deeds that happened on their watch?” asks CGI Glass Lewis general manager Daniel Smith. “ There's no kind of right or wrong answer to that.”
He says there is a significant asymmetry of information between shareholders and directors about the role individual directors play in board decisions, and in that situation the role of the chair is central. “If you have a chair of one company who's basically overseeing the due diligence of director probity of all the directors on his or her board — for not just their conduct on that board, but for their conduct on other boards — that chair needs to be strong enough to move on directors whose judgment they find to have been questionable,” says Smith.
Tabcorp chair Paula Dwyer FAICD survived a protest vote at the gaming company’s AGM, with 34.6 per cent of shareholders opposed to her re-election. Tabcorp has had its own issues such as concerns about implementing its merger with Tatts Group and the imposition of a record $45 million civil penalty in 2017 for not complying with Anti-Money Laundering and Counter-Terrorism Financing regulations. But Dwyer is also a director at ANZ bank, which, like AMP, was adversely named in the banking Royal Commission.
Proxy adviser Institutional Shareholder Services recommended voting against her re-election, pointing to her long time on the board and reportedly highlighting strikes last year at ANZ, Tabcorp and Healthscope, where she was previously chair.
Ken Henry AC suffered close to 17 per cent of ASX shareholders voting against his re-election following criticism of his appearance at the Banking Royal Commission as chairman of the National Australia Bank.
Fiona Balzer, policy and advocacy manager at the Australian Shareholders’ Association, says the ASA recommended a vote against Henry because of his role at NAB, but acknowledged it can be hard for shareholders to know the role played by individual directors at each board table. “It is actually really hard to say Ken Henry at NAB is the same as Ken Henry at ASX,” she says. “But for our members, they just feel it is much easier to just go, OK, well there was poor performance in this particular area, we are going to vote against. That's a feature with these against director votes; people are opining on many other things, whether it be how a takeover has taken place, what they think of remuneration or the CEO.”
Despite this, Balzer says some boards are doing a better job of providing a more objective view of their own performance. She points out that last year, Woolworths acknowledged a skills gap in technology on the board and said this year that the appointment of online retail executive Jennifer Carr-Smith addressed the issue.
As a general rule, there is a high level of support for ASX 200 directors [in the banking sector], with the average vote in favour of their re-election running at 96 per cent, notes Ed John, executive manager of governance and engagement at the Australian Council of Superannuation Investors (ACSI). [Note this was the 2017 average. It dropped to 66 per cent in 2018.] “But there are some very notable exceptions to that rule and that’s usually where investors are concerned about board succession, board composition or board performance,” he says.
Remuneration remains a perennial issue, but it appears boards are doing a better job in communicating with shareholders, demonstrated by the lower number of shareholder “strikes” against remuneration report.
Shareholders delivered 18 strikes — a vote of 25 per cent or more — last year, but to 8 November there had been only seven in total, five at the “mini” AGM season earlier in the year and two in October, according to data from the Australian Shareholders’ Association.
“Companies are engaging more and putting a lot of effort into both their reports, their schemes and meeting with people to discuss them,” says Balzer, although pointing out that this year’s rising share market made for more forgiving investors.
In fact, it wasn’t until October that the first strike of the AGM season was delivered to investors, when more than 30 per cent of shareholders voted against engineering group Worley’s remuneration report. They were concerned that an executive payment regime — which delivered $680,000 in special cash bonuses to two top executives for completing the $4.6 billion takeover of Jacobs Engineering Group's energy, resources and chemicals business — left Worley shareholders worse off.
Soon after, auto classifieds website Carsales received a first strike at its annual general meeting held in Melbourne, with 32 per cent of shareholders voting against the remuneration report and more than a half voting against CEO Cameron McIntyre's long-term incentives (LTI) package. Proxy firms Institutional Shareholder Services (ISS), the ASA and CGI Glass Lewis all recommended voting against McIntyre's LTI grant for the 2020 financial year on the grounds targets had not been clearly disclosed.
ACSI’s John notes investors are concerned about the use of normalised earnings or underlying profits in incentive schemes. “We still see schemes where people use an earnings minus the bad stuff to set performance hurdles,” he says. Shareholders are also concerned by what John refers to as “bonus persistence” and the fact that on average, 70 per cent of the maximum bonus is paid to ASX 100 executives, a level it has been stuck at for several years. “How variable ‘variable pay is’ is still a huge question,” says John.
The use of non-financial metrics in bonus schemes — as recommended by Royal Commissioner Kenneth Hayne AC in the report from the banking Royal Commission — is an issue for some investors. However, Smith says CGI Glass Lewis doesn’t have an issue with them, but only if they are structured properly, with rigorous targets and metrics linked to the business strategy — and so ultimately connected to the financial performance of the company.
Once again, activist shareholders put proposals on the meeting agendas to meet social or environmental objectives. Activist groups such as ACCR and Market Forces are becoming increasingly sophisticated in their ability to put together shareholders resolutions, says Smith. Additionally, they have become highly effective at mobilising superannuation members to put pressures of their funds to support these resolutions, and some large investment houses are starting to support some of the motions.
Vision Super was co-filer with the Church of England Pensions Board of a proposal at the BHP meeting calling on the company to resign its membership of any industry associations whose advocacy is “inconsistent” with the Paris climate change agreement, such as the Minerals Council of Australia and Coal21. Additionally, one of BHP's biggest shareholders, Aberdeen Standard Investments, said ahead of the meeting it would vote in favour of the resolution after its research found lobby groups were the biggest single obstacle to progress. The resolution failed, but nonetheless garnered slightly more than 22 per cent of the shareholder proxy vote ahead of the Australian AGM, with another seven per cent abstaining.
The BHP resolution was one of several put up by activist shareholders. Power generator Origin had shareholder resolutions call it for it to exit fossil fuels and abandon fracking. Qantas faced a resolution from the Australian Centre for Corporate Responsibility that called on Qantas to review the "reputational, financial and legal" risks involved in the Department of Home Affairs transporting or deporting asylum seekers on its flights. Qantas chair Richard Goyder AO FAICD has told human rights activists to stop using the airline as a proxy to attack the government's immigration policies. Close to a quarter of proxy votes supported the resolution, but only a handful supported changing the airline’s constitution, which needed to pass for the resolution calling for the review to be considered at the AGM.
CGI Glass Lewis’ Smith notes even if shareholders don’t support these resolutions, it doesn’t mean they don’t care about the issues. “Investors, domestic investors in particular, are highly sensitive of managing climate risk in their portfolios and do find these resolutions a tool, if not to support, at least to facilitate robust conversations with their investee companies,” he says.
The ASA has shareholders with a range of views, from supports of climate action to climate deniers, so finding a unified position on resolutions by activist shareholders presents a challenge. Nonetheless, Balzer says companies can often meet all shareholders’ needs by being clear about the risks posed to their companies and how they are addressing them.