Reflections on the 2020 AGM Season – Part II 16 Sep 2020
Head of RI Policy & Research
In my earlier blog reflecting on the first part of the 2020 proxy voting season, I noted the disruption caused by the shift to virtual meetings and the hurried rearrangement of many AGMs. Now as we look back over the entirety of the season we can see that by June companies had by and large acclimatised to the ‘new normal’ with virtual meetings here to stay!
Reflecting the troubled economic times for many companies we have mostly witnessed pay restraint in the UK C-Suite, with few companies opting to increase the maximum available under bonus and long-term incentive plans. We have also seen more and more companies come into line with new Investment Association guidance to reduce executive pension payments to be in line with the wider workforce.
So has there been nothing of interest to comment on beyond the obvious disruption? It’s certainly true that shareholders appear to have lost their appetite for opposition this year. Remuneration policies and reports that we at EdenTree routinely oppose have been passed with over 95% of proxies cast. However one sector that did see some ripples of opposition was the food retailers. At Tesco just 32.7% of proxies supported the take-note Remuneration Report after the company controversially amended its incentive peer group that artificially manipulated and increased performance outcomes. Morrison was also hit by a sizeable revolt against its new Remuneration Policy after failing to reduce executive pension payments which were maintained at an eye watering 24% of salary.
The second half of the voting season also saw the first flourishing of an alternative to the flagship Long Term Incentive Plan or LTIP. These have been the staple for making performance share awards in the UK for 15 years. Although flawed, they are broadly supported as a means of incentivising executives with an award of shares subject to three-year performance measurement. Our criticisms by and large are connected with the quantum, the fact that grants are always made at maximum, and the ease at which performance can be manipulated or rewarded via the metrics chosen to measure it against. In July two companies chose to dispense with this well tried model of reward by moving to Restricted Share Plans. In effect, for a significantly reduced quantum, performance will be dispensed with except for a minimum underpin. Burberry Group and BT Group introduced variations on this type of plan and were rewarded with 94% and 96% support respectively. The revised Remuneration Policies at both companies were supported by similar amounts. Does this mean shareholders are open to varying the type of incentive plan on offer and to move away from a performance test? Possibly, but with just two companies breaking ranks it remains to be seen whether this catches on and replaces the LTIP as they in turn superseded share option schemes. We remain suspicious, even with a reduced quantum, of rewarding executives without any nod at corporate performance, and we opposed both schemes.
In years to come the full effects of this year’s disruption will need to be closely watched by investors
We have continued to assert our principles on diversity and auditor rotation through our proxy voting, but remuneration continues to be the main area of action taken. So far this year we have voted on 205 pay policies and reports and opposed or abstained 57%. We continue to find few FTSE100 packages we can commend, with just six supported out of 52 voted – failing 88% of pay arrangements at our biggest companies. Whilst by and large we have seen corporate restraint in a Policy year, we did not hesitate to oppose unjustified ratcheting, for instance at UK-small-cap Trifast where both the bonus and LTIP maxima were scaled up. Here the rationale for increasing the entire package at a time of financial constraint was peculiar and alarming; the Remuneration Committee had become exercised by the ongoing poor performance that meant no bonuses had been paid for two years. The Committee stated this is untenable in the longer term and unlikely to allow the Committee to fulfil its duties in full – the proposed Policy has been constructed with that in mind. We viewed this with perplexity!
In years to come the full effects of this year’s disruption will need to be closely watched by investors. With so many depressed share prices through 2020 there is the risk of unintended windfalls being awarded to executives from long-term incentive schemes. We must remain alive to the risk of this as just one consequence of 2020 being one of the most unusual and chaotic of proxy voting seasons.