Around the world, governance standards are being reassessed and debated. Investors are being asked by their clients to outline how stewardship factors into their decisions, which in turn places greater scrutiny on how companies are run and governed and who is running them. As is customary at this time of year, IR Magazine has investigated the trends that resonated during this year’s proxy/AGM season, and looks ahead to next year to see what’s on the horizon.
Global governance standardization
In the last couple of years, several countries have introduced new governance frameworks that more directly address the notion of investor stewardship, including Japan, Holland, the Philippines and the UK. In Europe, the Shareholder Rights Directive will come into effect next year and bring with it many changes, such as say-on-pay votes for shareholders, more transparency on when an investor takes a position in a company, and greater scrutiny of proxy advisers’ voting guidelines.
David Chase Lopes, managing director for EMEA at DF King, writes in a recent AGM review: ‘The implementation of the Shareholders Rights Directive (SRD II) is a sea-change for companies, shareholders, custodians and proxy advisers alike. And while national governments still maintain substantial flexibility in how they transpose SRD II into national legislation, we are starting to see the impact of some of the changes.’ He cites France’s Sapin II law as an example, given that it instituted binding remuneration reports and policies.
While there is no binding corporate governance code in the US, this year did see the launch of the Investor Stewardship Group (ISG), which is backed by 34 signatories and 22 supporters. ISG published two separate principles: the first concerns investor stewardship and the second focuses on corporate governance at public companies.
Donald Cassidy, executive vice president of corporate development and strategy at Georgeson, says even the use of the word ‘stewardship’ is a marked change for US investors. ‘The word is not one you see used in the US anywhere near as much as in the UK,’ he points out. Cassidy also notes that ISG’s six principles for corporate governance are similar to the UK’s revised corporate governance code. The principles broadly encourage enhanced board performance, director independence, board accountability to shareholders, and alignment of management’s incentives with the company’s long-term strategy.
As Bob McCormick and Rob Zivnuska, both partners at CamberView Partners, wrote in a recent article, however, there are still differences between the UK and the US approach, especially when it comes to shareholder engagement. ‘One of the most significant differentiating factors between engagement styles in the UK and the US has been the role of directors,’ they write. ‘Consistent with the Corporate Governance Code, in the UK board chairs generally lead engagement efforts, often without a representative from the executive team. In the US, however, engagements are traditionally led by the executive team, nearly always including the corporate secretary, head of investor relations or equivalent business leader.’
So while this new wave of guidelines, standards and codes creates a higher watermark for corporate governance than ever before, and brings governance standards closer to standardization around the world, there are still plenty of differences from market to market, often driven by different regulatory frameworks and exchange rules. For example, Germany’s approach of having two boards – a management board and a shareholder board – makes it an outlier to quite a few corporate governance trends in Europe.
Proxy materials and statements
There are many reasons for the enhancements around proxy statements and materials in advance of a meeting. As board directors become more concerned about the threat of losing shareholder votes and activists are increasingly able to influence the voting decisions of large institutional investors, the focus on these materials is amplified. Proxy statements and meeting materials continue to evolve from legalese documents to glossy, well-designed brochures with well-thought-out graphics and plain English disclosures.
‘What’s changed is that companies now see it as a communications document,’ says Cathy Conlon, head of corporate issuer strategy and product management at Broadridge. ‘Companies are enhancing their proxies with summaries at the front and thinking about ways to
make the information more readable.’
Quite often, these materials also provide a summary of shareholder engagement throughout the year and details of how the issuer has responded to the feedback received. In many cases, that requires greater input from the investor relations team, working in tandem with the corporate secretary, as well as human resources and finance.
A more recent development is the production of digital proxy statements, which are much easier to navigate and often feature interactive components such as director video interviews. According to the Guide to Effective Proxies produced by Donnelley Financial Solutions, large institutional investors favor digital proxies and, for many issuers, the group accessing digital proxies can be responsible for voting up to 80 percent of outstanding shares.
Further to the improvements being made in the materials, companies are also exploring how to get better open rates when they send out their materials – either via email or by post. This is particularly crucial in a contested scenario, when large retail investor turnout can be a decisive factor.
Patricia Rosch, president of international investor communication solutions at Broadridge, outlines a couple of changes issuers are making. ‘With the increase in e-distribution last year, retail investor participation went up from 40 percent to 51 percent year on year,’ she says. ‘Voting is embedded in the email and it leads to a higher participation rate. We’ve also seen increased voting participation when a package goes out with company branding on it. It helps cut through the clutter and shows the importance of sending material to voters in the way they want to receive it.’
Off-season governance engagement
One consistent theme that emerged during interviews for this article was the increase in off-season governance engagement, often involving board directors. Given investors’ focus on stewardship and the effectiveness of the board, there is a greater interest in
meeting investors to get a better insight into how each board thinks and functions.
Jean-Florent Rérolle, managing director of Morrow Sodali France, says that in France investor questions for board directors have typically focused on specific remuneration details or, maybe, board diversity and composition. ‘But what is really striking is that most smart investors are increasing the scope of their questions and are now more interested in how the board works and what kind of oversight it has,’ he says.
This is, naturally, an opportunity for issuers to address investor concerns on the ever-growing list of ESG topics that are emerging. ‘Companies are using the fall season to get better insight into investor policies,’ says Brigid Cremin Rosati, director of business development at Georgeson. As investors both active and passive look to integrate ESG into their decision-making and stewardship policies, this will likely become even more important.
In Spain, it’s common for issuers to add proxy advisers to their off-season targeting list, says Borja Miranda Johansson, managing director of Morrow Sodali in Spain and Portugal. ‘These roadshows cover non-financial information and companies are understanding that proxy advisers have a lot of influence on investors’ decisions,’ he says.
Proxy trends around the world
The scrutiny in the US continues to focus on ESG issues. The 2017 proxy season was notable for three companies losing shareholder votes on 2ºC climate scenario proposals. While that didn’t happen on the same scale in 2018, there was sustained interest from investors in both climate change scenarios and improved sustainability disclosures. Political lobbying, which has been a popular shareholder proposal for several years, remained popular, while several gun control shareholder proposals were also introduced.
This year saw the launch of ISS’ E&S Quality-Score and the release of the Sustainability Accounting Standards Board’s new reporting standards for environmental risk. ‘Some of the large institutional investors have changed their voting guidelines to become more open-minded when it comes to making voting decisions on environmental issues,’ says Donald Cassidy, executive vice president of corporate development and strategy at Georgeson. ‘Those institutions may have previously thought this was a subject best left to management but that is no longer the case.
In Canada, the biggest potential change will be delivered when Bill C-25 is enacted. The bill will change the way directors are elected, emphasize diversity in the boardroom and require greater proxy access and disclosures around meetings. But Bill C-25 is still under review and it is unclear when it will actually come into effect. ‘There’s going to be a change where investors can vote against a director, which means plurality voting will no longer be in use in Canada,’ says Patricia Rosch, president of international investor communication solutions at Broadridge. ‘It will move us to majority voting where a vote against would remove them.’
In Germany there will likely be enhanced focus on governance once the implementation of the Shareholder Rights Directive is established and the Corporate Governance Kodex is published, which is due to happen next year.
In addition, members of the supervisory board in Germany are elected every five years. A number of DAX 30 companies – including adidas, BASF, Continental, MunichRe and SAP – will have their entire board up for re-election. In the past this has been relatively routine, but the increased focus on governance and board oversight may pose some challenges, says Andrea Bischoff, managing director of Morrow Sodali Germany. ‘There will be challenges around these issues and some larger companies may face difficulties,’ she notes. Indeed, the chair of Norma Group’s supervisory board, Dr Stefan Wolf, was not re-elected this year.
In France, the investment community is rapidly embracing ESG and integrating its theses, but the same is not true for issuers, says
Jean-Florent Rérolle, managing director of Morrow Sodali France. ‘What strikes me is that the progress of investors over the past two or three years has been unbelievable: they have worked a lot on how to integrate ESG into their decision-making,’ he observes. ‘But on the company side it is very slow, which is natural. Governance doesn’t change overnight, but companies do need to accelerate the integration.’
In addition, Rérolle says executive compensation remains a big topic and the scrutiny that Sapin II will bring places a greater burden on public companies to improve their disclosures.
Linking pay to performance is what’s on the minds of investors in Spain and Portugal, according to Borja Miranda Johansson, managing director of Morrow Sodali in Spain and Portugal. ‘Over the past few years investors have been pushing for more transparency around remuneration practices,’ he says. ‘Once the market is happy with that, investors are going to look for more alignment of pay to performance and pay relative to peers.’
This article was published in the winter 2018 issue of IR Magazine – the 30th anniversary issue of IR Magazine