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Dec 15, 2017

What to expect from annual meetings next year

Will issuers improve their sustainability disclosures to meet investor demands? Where might activists be more active in 2018?

At a glance

Regulatory changes
Whether it’s CEO pay-ratio disclosure in the US, Sapin II in France or the Bank Act in Canada, regulatory changes will impact the way issuers and investors interact around the world in the forthcoming annual meeting season.

ESG disclosures
With passive investing on the rise, issuers and IR teams should be aware of institutions’ and proxy advisers’ positions on everything from sustainability and board diversity to executive compensation and overboarding issues.

Activists use new techniques
Shareholder activists are growing increasingly bolder in taking on company management and are using new digital tools, such as social media and video communications, to spread their message to other investors.


As assets continue to flow from active to passive funds globally, investors are looking deeper than before into ESG performance as a potentially material indicator of long-term growth. The conversation around the environment is the most obvious ESG issue to mature in 2017. Investors are getting much better at positioning shareholder proposals on the environment as risk-management issues rather than social ones, according to Rivel Research. Three US companies – ExxonMobil, Occidental and PPL Corporation – lost proxy fights on sustainability in 2017 and large institutions like BlackRock showed they were willing to vote against companies with inadequate disclosures.

Issuers around the world are increasingly being pushed to consider consistent disclosure, with the guidelines issued by the Global Reporting Initiative and the Sustainability Accounting Standards Board being two favored approaches. ‘Boards should expect questions from shareholders on how companies are considering climate risk in their strategy and operations,’ notes the Broadridge and PwC ProxyPulse report.

Executive pay will always be a contentious issue with certain shareholders. The CEO pay ratio will pose new challenges in the US and continued challenges in the UK, voluntary say-on-pay disclosures are increasing in Canada and being mandated by Sapin II in France, and elsewhere in Europe it remains to be seen whether investors will soften on time-based incentive plans.

Board diversity, composition and effectiveness are further issues that continue to evolve, with institutions like BlackRock and State Street advocating for more diverse boards and better disclosures. But there’s a push and pull between the long and short investors: when an activist takes a position in a company, the slate of board candidates becomes less diverse, according to research from ISS and the Investor Responsibility Research Center Institute.

Activists go digital

The countries with the greatest threat of activism, according to data from Activist Insight and FTI Consulting, are Australia, the US, Canada, the UK and Japan. The first half of 2017 also saw a surge of activity in Israel. As activist investors gain track records and, in some cases, credibility, they’re becoming bolder and more willing to take on CEOs at the ballot. This has happened at Volkswagen, Buffalo Wild Wings, Arconic and Teva Pharmaceutical Industries in the last year.

Activists are also trying new communication tools, as Charlie Koons of Morrow Sodali notes: ‘Activists such as Pershing Square and Trian have used videos and webcasts to make their case directly to shareholders. We have even seen Elliott send individual video players to retail shareholders. Targeting investors via Facebook and Twitter has also become increasingly common.’

Virtual meetings prove contentious

Virtual meetings are still contentious among the investment community. In the US alone between January and June 2017, 163 companies hosted virtual-only meetings, according to Broadridge and PwC. But one third (36 percent) of investors surveyed by ISS are against having virtual-only meetings. Proponents argue that it will lead to greater attendance, while critics say face-to-face interactions are invaluable.

Peter Kimball, executive director and head of advisory and client services at ISS Corporate Solutions, says issuers should consider a hybrid approach. ‘If you have a hybrid, you will probably get higher turnout and allow for direct contact,’ he explains.


At a glance: Canada

Kimball predicts that two big recent US proxy season topics – voluntary say on pay and proxy access – could define the season in Canada next year. In 2016 and 2017 there were record numbers of companies opting to place voluntary say on pay on their ballots, which has led to increased scrutiny on executive compensation from shareholders.

This year also saw the first two proxy access proposals, with one succeeding and one narrowly failing. The Bank Act grants proxy access for shareholders with more than 5 percent of shares but it’s very rarely used, according to law firm Osler Hoskin and Harcourt. This year’s proposals sought to lower the threshold to 3 percent and were put forward by a retail investor. ‘Right off the bat there was very robust support for proxy access,’ Kimball says. ‘It’s too early to say there will be a proliferation but it’s certainly something we’ll be watching.’

At a glance: US

From early 2018 the SEC will require companies to disclose their CEO pay ratio compared with median employee pay, which is ‘the issue top of mind for just about every company I speak with right now,’ says Kimball. Only 16 percent of investors say they do not intend to use pay ratio information at all next year, according to data from ISS.

‘You can argue that pay ratio is a window into the effectiveness of the board, but not in the way you think,’ Kimball says. ‘It’s much more interesting to use pay ratio to examine the company’s labor-sourcing strategy, business profile and business mix relative to competitors. These factors relate not to how high pay is, but how well the board has oversight of the company’s operations.’

At a glance: Brazil

Brazil continues to be concerned with improving corporate governance standards and increasing engagement between issuers and investors. Amec, Brazil’s association of institutional investors, recently issued its first Investor Stewardship Code and is actively hosting training courses on corporate governance, while 2017 marked the first year where select public companies had to allow investors the opportunity to vote on shareholder proposals remotely, rather than in person or by proxy.

Next year will see the implementation of a new rule requiring clearer and earlier disclosure of board nominees. ‘Brazilian companies, and their boards, should be prepared for the increased requests for investor engagement that are likely to result from the more active participation of institutional investors in the voting process,’ says Borja Miranda Johansson, director of Spanish and Latin American mandates at Morrow Sodali.

At a glance: UK

The season will likely be defined by the two ongoing trends of CEO pay and improving ESG disclosure. On executive pay, remuneration committees are likely to come under further scrutiny as talks continue around pay ratios and the effectiveness of long-term incentive plans. Climate change will also continue to be an issue, according to Reza Eftekhari, director for UK at Morrow Sodali, due to more money flowing into green funds.

But Eftekhari says cyber-security could also be an issue investors want to know more about in 2018, in light of recent high-profile corporate and governmental breaches. Next year marks the implementation of the General Data Protection Regulation, the EU’s data privacy rule, which will impose much more stringent regulations on data storage. This will ‘increase pressure on the board chairs to provide more color on how companies will address potential risks,’ Eftekhari says. 

At a glance: France

The Florange Act of 2014 threatens to be a contentious issue once again during the 2018 season, according to Stephan Costa, executive director and head of EMEA advisory with ISS Corporate Solutions. The law grants double-voting rights to investors that have held the stock for longer than two years, in an effort to reward long-termism. ‘You see longer-term shareholders being awarded with greater voting rights and higher dividends, which goes against a lot of investors’ idea of the one share, one vote principle,’ Costa says.

Double-voting rights have been adopted by Renault, AccorHotels and Engie, among others, but critics include French proxy advisory firm Proxinvest and Paris-based investment firm PhiTrust.

At a glance: Israel

Twelve Israeli companies have been targeted by activists in the last 18 months, the same number as in all of the three years prior, according to Activist Insight. The situation at Teva Pharmaceutical Industries, involving activist Benny Landa, has particularly raised questions about CEO succession, conflicts of interest and screening of potential candidates.

Michael Verrechia, managing director of activist and contested situations advisory at Morrow Sodali, says the uptick in activism will likely lead to an increase in shareholder engagement.

‘We’ve represented a number of Israeli issuers in activist situations and the common response has been to implement a regular engagement strategy with shareholders,’ he says. ‘Speaking with shareholders throughout the year can put you ahead of potential issues at the AGM, and Israeli issuers seem committed to strengthening those lines of communication.’

At a glance: Australia

Overboarding and executive compensation will likely be the two defining topics in the 2017/2018 season. ISS and CGI Glass Lewis have similar guidelines on overboarding, with the former looking for directors to sit on no more than five boards and the latter observing a maximum of six boards.

For executive compensation, Morrow Sodali’s governance director for Australia, Michael Chandler, says companies are considering a hybrid of short-term and long-term incentive plans, which the three main proxy advisers will review on a case-by-case basis. ‘Companies that are considering adopting this remuneration structure should make sure the details of the plan are transparent and clearly defined, including why such a structure would be regarded as ‘fit for purpose’ in context of the long-term strategy, the current operating environment and a company’s stage of growth,’ Chandler writes in his AGM season preview.


This article originally appeared in the winter 2017 issue of IR Magazine.

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...