Insights / February 15th, 2018

AGM Season – what is the forecast?

On 29 January 2018, the Australian Securities & Investments Commission (ASIC) published its report on the 2017 Annual General Meeting season for ASX 200 listed companies. In the report, ASIC observed the ways in which and to what extent companies use AGMs to meaningfully engage with their members. Emerging trends and corporate governance issues were identified, leading ASIC to provide good governance recommendations.

Overall, 2017 voting patterns on remuneration reports were largely consistent with the 2016 season, though first strikes and material[1] votes against remuneration reports were down. All companies which recorded a first strike in 2016 recorded a reduction in votes against the remuneration report in 2017. There was a solitary second strike passed, which did not lead to passage of a resolution spilling the board.

ASIC refers to commentary that the reduction in strikes was a result of companies actively engaging with shareholders and simplifying proposed changes. Likewise, those companies with excessive remuneration or lacked transparency attracted a greater number of votes against remuneration reports.

On the one hand, a positive outlook is that the two strikes rule is working to drive better corporate governance in that the threat of a spill is encouraging boards’ to pre-empt shareholder discontent and take early action, especially around transparency and structuring of executive pay. Alternatively, the fall in votes against remuneration reports may feed fuel to questions about the efficacy of the rule, especially where other voting data could indicate that shareholders are no less concerned about board performance than they were a year ago, with material votes against election of directors increasing on 2016.

Shareholder activism is also being used as a vehicle to drive change to corporate governance and culture. While requisitioned resolutions on environmental, social and governance (ESG) issues failed to gain traction amongst shareholders generally, these issues will continue to appear on the agenda and ASIC is encouraging companies to be proactive on ESG issues. Particularly, gender diversity was a driver of an increase in the percentage of votes against election of directors for a number of companies with no female directors. This is a strategy adopted by the Australian Council of Superannuation Investors, which has previously recommended that its members vote against electing certain directors to all-male boards. ASIC is keen on companies diversifying the makeup of their boards, linking diversified boardrooms with board performance, and shareholder activism in this space will no doubt continue to gain momentum.

ASIC also gathered information from proxy advisers, which were subject to some regulatory discussion in 2017. ASIC was ultimately of the view that new best practice guidance for proxy advisers would not be worthwhile at this point in spite of concerns around proxy advisers’ engagement practices[1]. Proxy advisers were observed to recommend ‘against’ votes in relation to remuneration reports, director elections, and key management personnel remuneration. ASIC says that generally, where an ‘against’ recommendation was made, the votes against the resolution in question were not sufficient to change the outcome of the resolution. ASIC encourages companies to engage early and proactively with proxy advisers in the same way they would with their shareholders.

Some companies were reported to have restructured their AGM process with new technology, but broad use of direct or hybrid voting was not observed, with 25 companies continuing to decide resolutions by a show of hands. ASIC continues to recommend using polls as a matter of course and good governance to ensure an effective and democratic result on a “one share, one vote” basis.

What does this mean?

Although the 2017 AGM season was calmer overall than 2016 by comparison, increases in material votes against director elections and growing shareholder interest in ESG issues should be taken seriously. The voting results indicate ongoing shareholder engagement and activism, and that the sense of underwhelming board performance has not completely dissipated.

Fundamentally, ASIC observed and emphasised the need for companies to actively encourage shareholder engagement and activism to facilitate good corporate governance. In order to satisfy a restive shareholder community and ASIC’s expectations, there is more work to do.

[1] An against vote of 10% or more is considered to be material

[2] REP 539 ASIC regulation of corporate finance: January to June 2017

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