28 June 2019

Trends in ASX 200 AGMs held in early 2019

This article was written by Joseph Muraca.

The 2019 AGM season for the first 6 months of calendar year 2019 has just ended with 39 ASX 200 companies having held AGMs so far in 2019. The results from those meetings suggest that AGMs this year may be just as combative as in 2018.

KWM will continue to monitor AGM results in the second half of 2019 and intends to publish a further report early in the new year.

Key observations

Our observations on key themes during 2019 so far for ASX 200 companies are summarised below:

Cause

Discussion

Steady proportion of companies receiving strikes 

Three of the 36 ASX 200 companies that put forward remuneration reports so far this year (8%) received a first strike, matching the strike rate in 2018.

This suggests that the voting trends in 2018 that saw a spike in the number of strikes might continue throughout the whole of 2019.

While there are (as always) a number of possible explanations for this outcome, the underlying trend seems to be a continued willingness to use votes on the remuneration report not only to express dissatisfaction with remuneration arrangements, but also to send a signal on other matters, including company performance.

Strikes recorded by slimmer margins 

The magnitude of votes cast against remuneration reports so far this year is lower than it was in 2018.

In 2018, some companies received more than 50% of votes against their remuneration reports (i.e. the remuneration was voted down). So far this year, the highest vote recorded against a remuneration report sits at 34%.

No second strikes

We are yet to see a company receive a second strike in 2019.

Those companies that received a first strike in 2018, including AMP and QBE, successfully responded to shareholder concerns and avoided another strike this year.

Continuing trend in director elections

The proportion of directors receiving ‘against’ votes is on the rise since 2018, although only marginally, with 81% being elected or re-elected in 2019 with votes in favour above 95% (compared to 84% in 2018).

Similarly to 2018, those facing re-election (as opposed to election for the first time) have demonstrably higher votes against their candidature.

Despite this, every candidate so far has successfully secured or retained a seat and all candidates have been board-endorsed.

ESG resolutions continue to flow in with little success 

Activists continue to use shareholder-requisitioned resolutions to pursue their agendas on environmental, social and governance issues, with a clear focus on climate change so far in 2019.

However, the significant level of support which some activists garnered in 2018 is yet to be repeated in 2019. So far, no ESG resolution has received more than 2.5% of votes in favour.


Our dataset

This report considers the results of the AGMs that were held in the first half of 2019 for companies that were in the ASX 200 as at 1 June 2019.  The review only captures 39 of the ASX 200 companies. For those companies that need to hold AGMs, most will do so in the latter half of the year.  In this report, references to “companies” are inclusive of entities with other corporate structures that are listed on the ASX (eg stapled entities).

In the one case where resolutions were carried on a show of hands, we assessed voting resolutions on the basis of ‘for’ and ‘against’ proxy votes.  We have also excluded three companies from our assessment of the voting on remuneration reports because their corporate structure does not require them to have one.

Where figures from 2018 AGM results are relied upon, these are drawn from KWM’s ‘Deep dive into the 2018 AGM season for ASX 200’, which can be accessed here.

Remuneration reports

High incidence of strikes continues into 2019

Three ASX 200 companies received a first strike in the first half of 2019. These companies represent approximately 8% of those that have presented remuneration reports to shareholders during this time.

As can be seen from Chart 1 below, the proportion of companies receiving strikes is unchanged from 2018, which was an unprecedented year of shareholder disquiet amongst the ASX 200 in recent history. If this trend continues for the rest of the year, we may see another record number of companies receiving strikes in 2019.

Magnitude of votes cast against remuneration reports

The average vote against remuneration reports has been 7.8%, slightly down from 8.6% in 2018. The spread of results can be seen in Chart 2 below.  Some interesting points to note include:

  • Most reports are still overwhelmingly approved: 25 companies (70% of our sample that were required to prepare remuneration reports) received greater than 90% approval of their remuneration reports.
  • Fewer dramatic results compared to 2018: 2018 saw 6 ASX 200 companies have their remuneration reports voted down (ie more than 50% of votes cast were against the remuneration report).  In contrast, where companies have received strikes so far in 2019, the proportion of votes cast against the report has been relatively modest.  No company has received a vote against its remuneration report above 35% so far this year.

What might be driving shareholders to vote against remuneration reports?

Discontent over remuneration structures and bonuses has been a significant contributor to high votes against remuneration reports so far in 2019.  However, as discussed below, shareholders appear to be continuing to use votes against the remuneration report as a means of expressing their views on company strategy and performance that are unrelated to how executives and directors are paid.  Voting against remuneration reports appears to be driven by four main causes:

Theme

Observation

Remuneration structure

  • In 2018, a number of shareholders used their votes to express concerns about the implementation of combined Executive Incentive Plans (EIPs), which merge short-term incentive (STI) and long-term incentive (LTI) elements into a single plan.

  • QBE and AMP both received strikes last year after introducing combined EIPs.  In their respective annual reports, they acknowledged that shareholder concern over the combined EIPs contributed to this outcome.  Both companies reformed their arrangements in 2019 and avoided a strike.

  • Iluka Resources, on the other hand, received strong support last year for its remuneration report, which detailed the company’s proposed combined EIP.  However this year, Iluka received a first strike against its remuneration report, which was attributed to the new combined EIP by its Chairman, Greg Martin, in his opening address at the company’s AGM.

  • Proxy advisors CGI Glass Lewis and Morrow Sodali have warned that combined EIPs could encourage directors to prioritise short-term focus to the detriment of long-term value.

Excessive bonuses and/or termination payments 

  • The $8.4 million retirement payment that Adelaide Brighton made to its CEO was reported to be the main cause of the company’s strike this year.  In advance of the AGM, proxy advisor Ownership Matters released a report querying whether the payment complied with the termination benefits payment regime under the Corporations Act.  Adelaide Brighton publicly defended the legality of the payment.

  • Sigma Healthcare received an 18% protest vote against its remuneration report.  This followed criticism by Ownership Matters about the level of bonuses paid to certain executives.

  • These results reflect a global trend of highlighting perceived unreasonable executive pay.  Earlier this year, the UK House of Commons expressed concern with the heavy reliance amongst FTSE 100 companies on overly generous, incentive-based pay and the weakness of remuneration committees which design complicated, opaque pay packages in its report on the matter: Executive Rewards: Paying for Success

Company performance

  • There appears to be a clear correlation between company performance and remuneration report voting.  Each of the three ASX 200 companies that have received strikes so far in 2019 experienced significant share price falls over the previous 12 months.  This trend was also noted throughout the 2018 AGM season.

  • This seems to indicate that shareholders are using the two strikes regime as an outlet to vent their frustrations with poor company performance, in addition to holding boards accountable for remuneration outcomes and promoting remuneration policies.  For example, Gabriel Radzyminski, founder and managing director of activist investment fund Sandon Capital, recently stated that voting against remuneration reports “[is] our way of expressing displeasure about things the company has been doing.”

Continuing trend in director elections

The proportion of directors receiving ‘against’ votes is on the rise since 2018, although only marginally, with 81% being elected or re-elected in 2019 with votes in favour above 95% (compared to 84% in 2018).

Similarly to 2018, those facing re-election (as opposed to election for the first time) have demonstrably higher votes against their candidature.

Despite this, every candidate so far has successfully secured or retained a seat and all candidates have been board-endorsed.

Strategy

  • Companies were also punished for perceived poor strategic decisions by high votes against the remuneration report.  For example, the 18% protest vote received by Graincorp was reportedly driven by the company’s handling of a takeover bid it received in December 2018.


Director elections and re-elections

Increasing difficulties to obtain and hold board seats

103 director elections and re-elections have been held at AGMs for ASX 200 companies so far in 2019.  All candidates were supported by the board and succeeded in securing or retaining a seat.  Most candidates did so with the overwhelming majority of shareholder support.

However, there has been a slight increase from 2018 in the proportion of elections/re-elections that received below 95% shareholder support.

The breakdown of election and re-election results in 2019 is summarised in Chart 3 below.  Overall, the average ‘for’ vote in 2019 so far has been 97.77% for elections and 95.44% for re-elections — which is broadly consistent with 2018.  However, as can be seen from the results, there are some outliers.

As can be seen in Chart 4 below, 19% of director elections and re-elections held so far in 2019 have recorded a ‘for’ vote of less than 95%.  This is around 3% more than 2018.  As was the case last year, these protest votes are more likely to be recorded by directors facing re-election (22%) rather than election for the first time (12%).

More female directors nominated for elections

Voting outcomes were more or less the same for male and female candidates, with no significant difference in the proportion of votes in favour of election or re-election.

However, the proportion of female candidates nominated for elections (ie new additions to the board) has been noticeably higher than the proportion of female candidates nominated for re-elections.  This can be seen in Charts 5 and 6 below:

Although these results are based on a limited sample size, they suggest that companies may be taking steps to rejuvenate their boards with more female candidates.

Environmental, social and governance resolutions

Summary of ESG resolutions

Activist investors have continued to use AGMs to put forward resolutions on environmental, social and governance (ESG) issues.

Two ASX 200 companies — Rio Tinto and QBE — faced ESG resolutions at their 2019 AGMs.  Both of these resolutions were requisitioned by activist investor group Market Forces and neither received greater than 2.5% shareholder support.

The Australasian Centre for Corporate Responsibility (ACCR) also requisitioned ESG resolutions at the AGMs of Santos and Woodside Petroleum.  However, both Santos and Woodside announced that these resolutions would not be considered at their respective AGMs because they did not comply with the requirements of the Corporations Act.

Subject matter of resolutions

All of the requisitioned resolutions (including the resolutions which were not considered) concerned climate change activity. The requisitions to Rio Tinto and QBE followed a two-step formula which has become the standard approach in recent years:

  • passing a first resolution to amend the company’s constitution to permit the passage of advisory resolutions; and
  • passing a second resolution advisory in nature, contingent on the passage of the first resolution.

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