Deep dive into 2018 AGM season for ASX 200

This article was written by Joe Muraca.

AGMs in 2018 (particularly those held during the latter half of the year) proved to be more combative than in recent years, with shareholders and those who advise them well and truly flexing their muscles. When we published our preliminary alert towards the end of last year (available here), the heat was being felt by many in the ASX 200, with a wide range of companies caught by a growing trend of shareholder disquiet.

Key observations

We have summarised below our observations on key themes during 2018 following an analysis of the data for the full year.

Theme	Observation
Combative AGM season	Overall it was a more combative AGM season than in previous years. There was a greater focus in the media, perhaps fuelled by some record voting outcomes. Fifteen ASX 200 companies received a first strike against their remuneration report. There's no single apparent reason for this. Factors appear to range across poor performance, a backlash against the structure of remuneration arrangements and remuneration outcomes, through to dissatisfaction with company performance and issues arising from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Higher 'no' votes on remuneration reports	The magnitude of 'no' votes appears to be increasing. Six companies in the ASX 200 had their remuneration reports voted down (i.e. they received more than a 50% vote against). There were also a healthy number who just missed getting a strike. 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. The days of almost universal unanimous support have disappeared. The vast majority of directors are overwhelmingly still supported but where there is a protest vote those seeking re-election (as opposed to election for the first time) are more likely to bear the brunt of the protest. The reasons for this may also mirror those that prompt a strike. This may also relate to concerns over diversity, cross-contamination from a director's actual or perceived performance on other boards or as a protest against the board's response to takeover or scheme proposals. There have also been examples of directors removing themselves as candidates before the vote is held.
More traction for ESG and other activists	Activists are now well versed in how to requisition resolutions in a way that reduces the ability of companies to reject the requisition on legal grounds. That provides them with an opportunity to pursue their agenda in a public forum. While the resolutions were not successful in garnering majority support in 2018, their support is increasing. The new dual tactic of proposing a constitutional amendment coupled with an advisory resolution is getting traction and the disclosure of proxy positions alone can be a powerful tool to agitate for change.
Trends in seeking termination benefits approval	A small number of ASX 200 companies sought termination benefits approval in 2018. Where this approval was sought it was sought on a pre-emptive basis to give companies flexibility around how they might negotiate or provide cessation arrangements in the future. While different approaches are taken when seeking this approval, the resolutions in 2018 were usually overwhelmingly supported by shareholders.

Select one of the matters related to these themes to view a detailed discussion:

A note on our dataset

Remuneration reports

Environmental, Social and Governance resolutions

Director elections and re-elections

Approval of termination benefits

Notes on our dataset

In looking at the data, we focused on AGMs held in calendar year 2018 for companies that were in the ASX 200 as at 31 October 2018. This means that fewer than 200 companies (and less than 200 AGMs) were caught in our review because of M&A activity during the year and because not all the ASX 200 companies held an AGM, and in some cases not all are required to present remuneration reports to investors (given their corporate structure). In this note, references to "companies" is inclusive of entities with other corporate structures that are listed on the ASX (e.g. stapled entities).

In the few cases where resolutions were carried on a show of hands, we have assessed voting results (where possible) on the basis of combined 'in favour' and 'open' proxy votes.

ASIC released its 2018 AGM season report on 31 January 2019. The themes identified in the ASIC report are largely consistent with the themes we've identified. However, there are differences in the respective datasets. ASIC's dataset captures AGMs of the ASX 200, but only those that were held between 1 October 2018 and 30 November 2018. ASIC's report can be accessed here.

Remuneration Reports

Increased number of strikes

15 of the ASX 200 companies received a strike in 2018. This is a significant increase on 2017. Each of these strikes was a 'first strike'. However, for Mineral Resources, this reflected a third consecutive strike which counts as a first strike after an unsuccessful spill resolution in 2017.

This represents over 8% of the remuneration reports presented to investors for a vote during the year.

Magnitude of the votes cast against remuneration reports

The average vote against a remuneration report was 8.6% but there are some more interesting data points when you look beyond this average. As can be seen from chart 3 below:

Most reports are still overwhelmingly approved: the majority of companies (77%), had more than 90% shareholder support in favour of their remuneration report.
At the same time, some reports not only received a strike but were voted down by a majority: some companies (6 in total) received not just a strike but had their remuneration report voted down (ie more than 50% of votes cast were against the remuneration report). Those companies were Westpac, Mineral Resources, AMP, Harvey Norman, NAB and Telstra. Votes on remuneration reports are 'non-binding' and for the most part relate to remuneration that has already been delivered or provided in the previous year, but all boards would seriously consider the future implications of a resolution that was not passed.
Near misses: There was a significant number of near misses, with an additional 14 companies within 10% of a strike. Highlighting how easily the total number of strikes could have increased, 3 of those 'near misses', were particularly close, being within 1% of a strike.

Likely Causes

Once a company has received a strike there is a technical requirement under the Corporations Act to disclose in the next remuneration report comments made at the AGM and the directors' response to those comments. There is no specific requirement to comment on comments made outside the AGM. Generally, companies who receive a strike attempt to summarise their understanding of the concerns (in so far as they are able to) raised by those who have voted against.

Before this disclosure is made, it's not always easy to discern what drives a vote against a remuneration report. It's well accepted that voting patterns are not always related to remuneration related matters. The last round of questioning at the Financial Services Royal Commission reinforced this, with CEOs and Chairs (and arguably the Commissioner himself) acknowledging that the legislative regime calling for a vote on the remuneration report is not being used for the purposes intended by Parliament.

We've extracted some of the most likely causes of this year's negative votes. This is not an exact science because the real motive behind voting behaviour is not always evident from publicly available information. Motives may become identifiable when the next remuneration report is published but even then those disclosures may not always catch intentions expressed outside the AGM itself. Also, in many cases there may not be one single or clear reason for the voting outcome, or there could be considerable overlap between the causes, or people just vote on a "tick the box" basis as directed by proxy advisors.

Theme

Observation

Company performance

There is a strong relationship between share price performance and strikes, with the majority of companies that received a strike having also experienced a share price decline in the previous 12 month period.

This relationship is the most obvious when you consider the 6 companies that received shareholder support of less than 50%. The share price for each of those companies reduced between their 2017 and 2018 AGMs, in some cases reducing significantly.

Strategy

Healthscope's strike was likely heavily impacted by perceptions around its then response to acquisition/takeover proposals where the board had denied access to due diligence in the face of two proposals. Some of those suitors also held or built pre-bid stakes that made them substantial shareholders and appear to have held sufficient voting power to materially affect the outcome of the vote on the remuneration report.

A number of different factors seemed to have contributed to Tabcorp's strike with media commentary identifying shareholder dissatisfaction with the investment in Sun Bets (and associated exit cost of approximately $71 million) and a $45 million settlement reached with Austrac. Tabcorp's Chairman's address highlighted these issues as impacting voting, stating that they were "coming to the fore in the voting on the Remuneration Report".

The Financial Services Royal Commission

ADIs in particular were strongly represented in the list of ASX 200 companies that received a strike in 2018. There are clear links to the themes arising from the Royal Commission and investors' perceptions of the suitability of remuneration outcomes and consequence management by financial services companies that have been in the firing line.

Of the big four banks, only CBA avoided a strike this year, receiving an 'in favour vote' of 94.20%. CBA's significant reduction in variable remuneration outcomes for the year stood apart from its peers and presumably was a key contributor to its relatively easier run at its AGM.

Remuneration structure

A number of companies introduced combined incentive plans in 2018 that, among other things, purport to remove the stark distinction between short term and long term incentives. Proponents of combined incentive plans argue that they simplify remuneration arrangements and increase accountability.

There appear to be mixed views among institutional investors and advisers over the structure of these plans. This was alluded to by Ken Henry at NAB's AGM in December 2018. The lack of clear consensus obviously makes it difficult for those wanting to introduce new remuneration structures. On the other hand, others see the benefits of these structures but still focus on the actual remuneration outcomes – that is, there is less focus on how variable reward is actually delivered and more on actual pay outcomes.

At the same time, concerns are still raised around the appropriateness of hurdles, reductions in performance targets, 'at risk' periods, and extra benefits including transaction bonuses and expat arrangements.

Environmental, Social and Governance resolutions

Who are the main players?

The Australasian Centre for Corporate Responsibility (ACCR) and Market Forces were the main players active in ESG-related activity at AGMs during 2018.

Their toolkit is transparent and predictable – a combination of pre-AGM engagement and targeted and co-ordinated questioning at AGMs, escalating to requisitioning of resolutions at meetings.

The resolutions requisitioned in 2018 related to:

climate change, with a number asking for a review of membership of industry groups on the grounds of climate change policy (seeking to avoid listed companies agitating against climate change related initiatives via 'back door' industry body lobby groups); and
human rights, with resolutions relating to free, prior informed consent for fracking activities (Origin), deportation and transportation of asylum seekers (Qantas), and human and labour rights in fresh food supply chains (Woolworths).

What's their toolkit?

In the past there have been questions around the validity of activist resolutions on legal grounds, enabling companies to refuse to add them to AGM agendas. In 2016, the Full Federal Court considered the scope of shareholders' ability to requisition resolutions at CBA's AGM. The Court in that case confirmed activist shareholders have a limited part to play in the exercise of the Board's power in the management of a company and therefore confirmed the limits on the nature and scope of resolutions that can be legally requisitioned. At the same time, the path through the legal restriction is now relatively clear through the gateway of a constitutional amendment which, provided the amendment is properly prescribed, is a matter rightly within the scope of shareholders' consideration. Accordingly, each of the requisitioned resolutions in 2018 involved a 2 stage formula that:

first, puts forward a resolution to amend the company's constitution to permit the passage of advisory resolutions; and
secondly, puts forward associated advisory resolutions (contingent on the passage of the constitutional amendment resolution).

These activists' tactics are transparent. When commenting on the resolutions it requisitioned of Woolworths (discussed below) the ACCR stated in a media release that "[i]t is our belief that these negotiations between Woolworths and NUW would not have proceeded without the filing of the second resolution and external shareholder pressure."

What's the success rate?

None of the resolutions to amend a company's constitution gained much traction in 2018, with an average vote in favour of 6.89% and a highest vote in favour of 10.66% (Rio Tinto). However, as shown in chart 4 below, some shareholders responded much more favourably to the contingent advisory resolutions with shareholder support (based on disclosed proxies) at just over 46% (Origin) for a climate change proposed resolution and just over 40% (Whitehaven Coal) for a similar resolution.

Obviously, unless the first resolution to amend the company's constitution is passed, the company does not need to hold a vote on the contingent advisory resolution. However, disclosure of the proxy position arguably achieves the activists' goals by demonstrating the 'will' of shareholders to some extent.

At the same time, it's not uncommon for companies to negotiate a solution with ESG activists in response to receiving a requisition in the hope that the requisition will be withdrawn or to otherwise respond favourably to the requisition even when it is voted down. Examples include:

Westpac, which received a requisition from the ACCR calling for it to review its membership of industry lobby groups, such as the Business Council of Australia, in light of the council's position on climate change. In response, and before its AGM, Westpac agreed to set out principles for engagement with industry associations (including the BCA), and agreed to undertake a review of industry association memberships, with a focus on how their climate change lobbying/advocacy aligns with Westpac's policy interests. In response to Westpac's decision, the ACCR withdrew its resolution.
BHP, which in response to a 2017 ESG resolution regarding membership of lobby groups (which received less than 10% support) withdrew from the World Coal Association and undertook a public review of its $1.8 million a year membership of the Minerals Council of Australia.

Where promises are made by a company in response to a requisitioned resolution, these activists will still police those promises. In 2017, the ACCR requisitioned resolutions calling on Woolworths to report annually to shareholders on its due diligence process for identifying, analysing and addressing potential and actual adverse human rights impacts throughout Woolworths' operations and supply chains. Woolworths committed to working collaboratively with the relevant parties and the resolutions were withdrawn.

In 2018, ACCR requisitioned additional resolutions, with a stated objective of ensuring "Woolworths fulfils the commitments the company made in 2017". Woolworths' experience, at least from the outside looking in, suggests that companies need to be serious about meeting the commitments they agree to with shareholder activists, because if they're not, activist shareholder groups will follow up with subsequent resolutions in an attempt to hold the company to its previously stated commitments.

Which ASX 200 companies faced requisitioned resolutions in 2018?

The ESG resolutions requisitioned against ASX 200 companies in 2018 are shown in chart 4 below. Targets included Origin Energy, Qantas, Woolworths, Rio Tinto, QBE, Santos, Whitehaven Coal and Westpac.

The results of the conditional advisory resolutions refers to the instructions given to validly appointed proxies prior to the related AGM as disclosed to the ASX. As flagged above, none of these resolutions were required to be put to a vote as the initial threshold resolutions to amend the companies' constitutions failed to obtain the requisite majority.

Director Elections and Re-elections

Directors are still overwhelmingly supported but is there a shifting trend?

As can be seen in chart 5 below, the vast majority of directors are still heavily supported at levels above 95%. At the same time, there is a growing number of directors, mainly those seeking re-election, whose election outcome was below 90% in favour and some materially below that.

Digging a little deeper, a significant number of appointments received votes in favour of above 99% (just above 50% of re-elections and just above 72% of elections). The average voting result for elections was 98.60% and for re-elections was just above 95%. There are of course some outliers which is also shown in chart 5 below.

The data shows that the position can be different for those directors seeking election for the first time and those seeking re-election. As shown in chart 5 above and charts 6 and 7 below:

45 out of 47 of the voting outcomes in favour that were below 90% were for re-elections; and
almost 20% of directors seeking re-election received votes in favour that were below 95%.

What might be driving these voting outcomes?

Just as was the case with remuneration report voting, it can be difficult to deduce the reasons behind voting outcomes for director elections and re-elections. Some of these reasons are clearly the same as those that prompted votes against remuneration reports but others relate to perceived or actual concerns on diversity, 'overboarding' and other matters.

Our assessment of some of the causes of these voting outcomes is summarised below.

Theme	Observation
Overboarding	Overboarding is the concern that a director is serving on too many boards. Overboarding has been a focus of the Australian Shareholders' Association for some time. While not necessarily applying a qualitative assessment of the nature and scope of different NED roles, the ASA's stated policy is that it limits its support to a director sitting on 5 separate boards and it considers a chair role to be the equivalent of sitting on two boards. An example of ASA applying this policy in 2018 was Tim Poole's re-election to the Aurizon board (which received an 83% vote in favour). At the Aurizon AGM, the ASA representative commented on the number of directorships held by Mr Poole (equating to 7 under the ASA's policy given Chair roles are double counted by the ASA), expressing concern as to his ability to respond to the needs of the different companies if a catastrophic event occurred at two of these companies at the same time.
Gender Diversity	Proxy advisors Glass Lewis and ACSI have made it clear in their public guidelines that they will focus on boards with poor gender diversity by targeting individual director appointments. While the number of boards with no women is reducing examples remain in the ASX 200. TPG and ARB Corporation continue to have no women on their boards, potentially contributing to: the 32% vote against John Forsyth and the 18% vote against Roger Brown (both re-elected to the ARB Corporation board); and the just under 15% vote against Robert Millner and the 12% vote against Shane Teoh (both re-elected to the TPG board).
The Financial Services Royal Commission	Directors of companies in the ASX 200 that were the subject of the Royal Commission experienced mixed results. For re-election, some directors experienced a demonstrable reduction in support, with lower re-election results at ANZ, Westpac and Bendigo and Adelaide Bank. In each case, only one director was presented for re-election with in favour results ranging from 64.4% to just over 77%. At the same time, for these companies the Royal Commission did not appear to impact directors seeking election for the first time, although AMP was the outlier. Ultimately, only 1 AMP director was presented for election (no votes were held for re-elections). Mr Harmos was elected to the AMP board with a 62% vote in favour which was significantly lower than the average 2017 AMP election/re-election in favour vote of 99% across 6 elections and re-elections. While Mr Harmos was only appointed to the board of AMP in June 2017, he had been heavily involved with AMP over an extended period (including directorships with important AMP subsidiaries since 2013) and at the time of AMP's AGM in May 2018 AMP was under heavy scrutiny at the Royal Commission.
Cross-contamination	'Cross-contamination' refers to the situation where an individual director's perceived or actual performance on another board affects their vote across other companies in their NED portfolio. One example in 2018 was Craig Dunn's re-election to the board of Westpac where the shareholders registered a protest vote against of just over 35%. Cross-contamination is likely one of the factors that contributed to this result, with multiple proxy advisors referencing Mr Dunn's history with AMP. Prior to joining the board of Westpac, Mr Dunn had a long history with AMP, including as CEO from 2008 to 2013.
Tenure	The issue of tenure likely contributed to a number of votes against directors' re-election during the 2018 AGM season. Proxy advisors vary on what tenure they consider leads to a director being non-independent (or when they consider it necessary to review a director's independence). However, the most common proxy advisor positions are 12 years (ISS and ASA) and 15 years (Glass Lewis). The ASX Corporate Governance Principles and Recommendations do not prescribe non-independence beyond a certain timeframe, although in commentary they suggest independence should be regularly assessed for directors who have served more than 10 years. In 2018, a number of long serving directors received low support including directors from Harvey Norman, APA, and McMillan Shakespeare. The periods served by those directors ranged from 14 to 31 years with the votes against ranging from 17% to almost 28%.
Company performance/strategy	Navitas' chairman Tracey Horton was re-elected with just over 50% of votes cast being in favour of her re-election. The result almost certainly followed the then decision by the Navitas board to rebuff the scheme proposal from a BGH Capital-led consortium. A consortium member and major shareholder flexed its muscle in voting against Ms Horton's candidature.Another consortium member and major shareholder (AustralianSuper) reportedly abstained from voting. Steven Gregg, a director of Tabcorp, similarly felt the ire of shareholders, receiving a 40% vote against his re-election. Tabcorp's Chairman's address referenced the $45 million Austrac settlement and the approximately $71 million exit from Tabcorp's failed investment in Sun Bets as issues that had an impact on this result.

What types of approval do companies seek?

For those companies that seek shareholder approval of termination benefits, they generally take one of the following 2 approaches. In both cases, approval is typically sought for benefits that may be provided at some stage in the future – the idea is to seek pre-approval that essentially provides flexibility to allow for a range of outcomes on cessation of employment or office. It is rare that a specific and defined termination benefit proposal that has already been agreed with an employee or officer is presented to shareholders of ASX 200 companies for approval.

(Blanket approval) blanket approval is sought for a range of termination benefits across a cohort of affected employees for any and all termination benefits that may be provided to them at some point in the future. These resolutions, when sought in 2018, attracted substantial support, with an average in favour vote of just under 92%. Once the outlier result for Speedcast (just over 50% in favour) is excluded, the average result increases to 97%.
(Individual approval) approval is sought for one named person only – usually the CEO and usually at the same time as seeking approval for the grant of equity to the CEO as part of a bundled resolution. It becomes more difficult to analyse shareholder sentiment regarding individual approval of termination benefits as these results are tied in with the granting of CEO equity which means voting patterns may not directly relate to the potential termination benefits. However, the majority of these resolutions still received over 90%. Unsurprisingly, the companies that received the most votes against these resolutions were the same companies that also received strikes against their remuneration reports (Goodman Group, Westpac, Emeco Holdings, Mineral Resources and Automotive Holdings Group). However, it was only Goodman Group that was close to having these resolutions voted down (the average result for the Goodman Group resolutions that included individual approval of termination benefits was just over 53%).

Approving termination benefits

How many companies seek shareholder approval?

The more restrictive termination benefits regime has been in place for some time. The changes introduced in 2009 reduced the value of benefits that can be provided before shareholders need to approve those benefits. There were also consequential changes that expanded the scope of benefits and the company officers caught by the regime.

The vast majority of companies in the ASX 200 (just under 87%) did not seek termination benefits approval in 2018. That may understate the true position because some seek approval on a rolling 3 year basis and may already have a 'live' approval from a previous year on foot.

What types of approval do companies seek

(Blanket approval) blanket approval is sought for a range of termination benefits across a cohort of affected employees for any and all termination benefits that may be provided to them at some point in the future. These resolutions, when sought in 2018, attracted substantial support, with an average in favour vote of just under 92%. Once the outlier result for Speedcast (just over 50% in favour) is excluded, the average result increases to 97%.
(Individual approval) approval is sought for one named person only – usually the CEO and usually at the same time as seeking approval for the grant of equity to the CEO as part of a bundled resolution. It becomes more difficult to analyse shareholder sentiment regarding individual approval of termination benefits as these results are tied in with the granting of CEO equity which means voting patterns may not directly relate to the potential termination benefits. However, the majority of these resolutions still received over 90%. Unsurprisingly, the companies that received the most votes against these resolutions were the same companies that also received strikes against their remuneration reports (Goodman Group, Westpac, Emeco Holdings, Mineral Resources and Automotive Holdings Group). However, it was only Goodman Group that was close to having these resolutions voted down (the average result for the Goodman Group resolutions that included individual approval of termination benefits was just over 53%).

Theme	Observation
Company performance	There is a strong relationship between share price performance and strikes, with the majority of companies that received a strike having also experienced a share price decline in the previous 12 month period. This relationship is the most obvious when you consider the 6 companies that received shareholder support of less than 50%. The share price for each of those companies reduced between their 2017 and 2018 AGMs, in some cases reducing significantly.
Strategy	Healthscope's strike was likely heavily impacted by perceptions around its then response to acquisition/takeover proposals where the board had denied access to due diligence in the face of two proposals. Some of those suitors also held or built pre-bid stakes that made them substantial shareholders and appear to have held sufficient voting power to materially affect the outcome of the vote on the remuneration report. A number of different factors seemed to have contributed to Tabcorp's strike with media commentary identifying shareholder dissatisfaction with the investment in Sun Bets (and associated exit cost of approximately $71 million) and a $45 million settlement reached with Austrac. Tabcorp's Chairman's address highlighted these issues as impacting voting, stating that they were "coming to the fore in the voting on the Remuneration Report".
The Financial Services Royal Commission	ADIs in particular were strongly represented in the list of ASX 200 companies that received a strike in 2018. There are clear links to the themes arising from the Royal Commission and investors' perceptions of the suitability of remuneration outcomes and consequence management by financial services companies that have been in the firing line. Of the big four banks, only CBA avoided a strike this year, receiving an 'in favour vote' of 94.20%. CBA's significant reduction in variable remuneration outcomes for the year stood apart from its peers and presumably was a key contributor to its relatively easier run at its AGM.
Remuneration structure	A number of companies introduced combined incentive plans in 2018 that, among other things, purport to remove the stark distinction between short term and long term incentives. Proponents of combined incentive plans argue that they simplify remuneration arrangements and increase accountability. There appear to be mixed views among institutional investors and advisers over the structure of these plans. This was alluded to by Ken Henry at NAB's AGM in December 2018. The lack of clear consensus obviously makes it difficult for those wanting to introduce new remuneration structures. On the other hand, others see the benefits of these structures but still focus on the actual remuneration outcomes – that is, there is less focus on how variable reward is actually delivered and more on actual pay outcomes. At the same time, concerns are still raised around the appropriateness of hurdles, reductions in performance targets, 'at risk' periods, and extra benefits including transaction bonuses and expat arrangements.