Insight,

2018 AGM season hots up

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Authored by Joseph Muraca and Diana Nicholson.

Almost all ASX 200 entities required to hold an AGM in calendar 2018 have now held their meeting.  There are some big meetings still to come for this group. We've summarised some trends that we've seen for meetings held before 14 December.

We'll publish a more detailed note in early 2019 with our analysis and our data for the full year.

Trend

Key points

More strikes than in recent years

13 entities have received strikes so far this year.  This number could increase before year-end and is a significant increase on 2017. 

There's no one single apparent reason for this year's results.  Factors appear to range across poor company or share price performance, backlash against the structure of remuneration arrangements or simply the quantum of remuneration paid, dissatisfaction with company strategy or the Financial Services Royal Commission.  There are often different factors outside the ASX 200.  At the same time, superannuation funds and advisers, including the Australian Council of Superannuation Investors, have recently expressed firm positions against executive remuneration in the financial services sector.  This is likely to result in more strikes.

It's already been clear for some time that this vote isn't always about remuneration.  The last round of questioning at the Royal Commission reinforced this, with CEOs and Chairs (and arguably the Commissioner himself) acknowledging this tool is not being used for the purpose intended by Parliament.  
Higher 'no' votes on remuneration reports

The magnitude of 'no' votes appears to be increasing.  5 companies in the ASX 200 had their remuneration report voted down (Mineral Resources, AMP, Telstra, Harvey Norman and Westpac) and each of QBE, Goodman Group and Tabcorp just got over the line.  Again, this number could increase before year-end.

There were also a healthy number of 'near misses' this year with APA, Ramsay, MYOB, Challenger, JB Hi-Fi, Afterpay and some others receiving votes in the 70s and a number of others in the 80s. Statistics show that a close vote in one year often (but not always) leads to a strike in the next year.

Director elections and re-elections may no longer be so clear cut

There's an emerging trend of protest votes on director elections and re-elections.  There was a time when anything other than almost unanimous support was seen as a disappointing result.

While the vast majority of directors are still supported with votes in favour sitting above 95%, 10 (out of 137) directors seeking election for the first time sat below this threshold.  The numbers are more stark for those seeking re-election, with 69 (out of 367) sitting below 95% and 44 of those below 90%.

The reasons for this may be the same as those prompting no votes on remuneration reports but in some cases reflected concerns around length of tenure or board diversity.  We're also seeing a growing propensity for directors facing 'cross contamination' issues, with their actual or perceived performance on other boards affecting their vote across other companies in their NED portfolio.

There have also been examples of directors removing themselves as candidates either before the notice of meeting is issued or after that time but before the vote is held.  The statistics grow when these are taken into account.

A new weapon in the toolkit for ESG and other activists

In 2016 the Full Federal Court considered the scope of shareholders' ability to requisition resolutions at CBA's AGM.  In that case, the Court confirmed that activist shareholders have a very limited part to play in the exercise of a board's power in the management of a company which limits the nature and scope of resolutions they can legally requisition.

Activists have learnt from this setback and now have their toolkit sorted.  ESG resolutions put before Origin, Qantas, Woolworths, Rio Tinto and others (8 ASX 200 entities in all) were all framed in terms of constitutional amendments with follow-on advisory resolutions.  None of the constitution amendments received much more than 10% approval but the subsequent resolutions resonated with shareholders at Origin and Whitehaven Coal with votes in favour sitting at around 40% based on proxies disclosed.  While these resolutions didn't need to be put because the constitutional amendments were defeated, disclosure of the proxy position arguably achieved the activists' goals.  Surely they will be emboldened by these results.

Entities targeted by ESG activists now extend beyond those in the resources and extraction industries (and the banks who fund them) to investment-linked business (including insurers) where boards are grilled at AGMs on their approach to ESG related matters.  The singular focus of questions raised by ESG activists at some AGMs has been noteworthy, on several occasions targeting alleged company and board affiliations with certain industry associations.  Not only are ESG activists employing new tactics at AGMs, but they have widened their targets. 

For many years now, questions have been raised about the need for, and utility of, AGMs.  If you believe the press, new life has been breathed into them through the perfect storm of the Financial Services Royal Commission, a general down turn in performance by some former share market stalwarts and greater traction on ESG matters.  That hasn't necessarily resulted in greater numbers turning up to attend meetings but the institutional investors who were once sleeping giants are now starting to flex their muscles meaning votes and AGM campaigns may no longer be as clear cut as they once were.



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