On 29 January 2018, ASIC released Report 564: Annual General Meeting Season 2017, which reflects on recent trends and issues around company AGMs and company meetings generally. In this article, we reflect on key themes and issues raised by the Report in brief.
Hybrid and virtual AGMs
Although hybrid and virtual AGMs are becoming more popular as a way to encourage shareholder participation, they do come with certain legal concerns.
In the Report, ASIC noted that widespread adoption of hybrid AGMs was not observed but that "constitutional changes to facilitate hybrid AGMs in the future indicated a potential trend towards this path." ASIC supports the use of technology to allow for companies to more meaningfully connect with their shareholders.
Despite ASIC's support, we see two key roadblocks to the increased use of technology at AGMs to increase shareholder participation. The first of these is that a technological issue arises with respect to institutional shares, which are commonly held by various custodians whose participation is required to exercise voting rights. Accordingly, the voting technology used by companies will need to allow for live participation and casting of votes by multiple custodians at one time, on behalf of multiple clients, which may present difficulties.
Secondly, a key advantage of the proxy voting process which occurs prior to the AGM is that boards of companies are aware of the likely result of the resolutions proposed for the meeting at least 48 hours prior to the commencement of the meeting, given the usual practice of shareholders to vote by proxy form rather than by attending the meeting in person. As a result, company boards may be reluctant to adopt online voting processes which take place at the time of meetings as it may leave them open to unexpected outcomes.
ASIC reports that there has been an overall increase in the number of "for" votes on remuneration reports over the course of 2016 and 2017. The reasons attributed to this increase include the active engagement (of directors) with shareholders and changes being made to remuneration structures, reducing complexity and withholding bonus payments. Unsurprisingly, excessive quantum of pay (when assessed against performance), pay structure and lack of transparency, continue to be key factors contributing to companies receiving votes against remuneration reports.
In light of this, to improve shareholder participation and increase votes in favour of remuneration reports, ASIC recommends that companies adopt long-term incentive structures, including non-financial targets, and avoid complexity in the design of their incentive structures.
Election of directors
Interestingly, despite ASIC's observation of the "buoyant state of the market" in 2017, the overall sentiment towards directors was found to be more negative, with resolutions for the election of directors receiving a higher number of "against" votes than in 2016. ASIC found this was an indication of shareholders expressing their dissatisfaction with company performance by voting against the election of directors. This additionally reflects the greater focus and scrutiny by shareholders on the extent to which board members have the appropriate qualifications and industry experience to lead their companies.
However, material "against" votes (ie. resolutions that received a vote of 10% or more against the resolution) generally decreased since 2016 in respect of other resolutions such as those relating to KMP remuneration and constitutional change.
Despite the ongoing debate in corporate Australia around the role of proxy advisers (particularly in relation to their ability to influence outcomes of meetings and attract significant media attention), ASIC appears to be in favour of proxy advisers and their beneficial involvement in company meetings and governance issues. ASIC states:
"We recognise the important role proxy advisers play in the market by assisting shareholders in making voting decisions and promoting focus on corporate governance issues."
In 2017, proxy advisers were active in scrutinising companies' governance practices and were found to have issued "against" recommendations for 148 of a total of 1,125 proposed resolutions. These were mainly for resolutions relating to director election, KMP remuneration and remuneration reports, highlighting their role in increasing transparency for the benefit of shareholders. We note that the analysis on proxy advisers does not include shareholder-requisitioned resolutions.
The Report notes that resolutions which attracted "against" recommendations from proxy advisers received a lower average "for" vote and resolutions that attracted no "against" recommendations received higher average "for" votes, evidencing the influence of proxy advisers over company outcomes and voting processes. Nonetheless, the Report points out that the average "against" vote for all resolutions attracting at least one "against" recommendation of a proxy adviser was not sufficiently significant to alter the outcome of the resolution.
The analysis on proxy advisers was conducted on the basis of data voluntarily provided to ASIC by three major proxy advisers, suggesting the positive relationship between ASIC and major proxy advisers and ASIC's favourable view towards proxy advisers and their role in corporate governance. Furthermore, ASIC recommends that companies engage early and proactively with proxy advisers, as an extension of companies' ongoing engagement with shareholders, and that companies release notices of meeting to the market early and ensure disclosure to the market is clear and not overly complex.
Environmental, Social and Governance (ESG) issues
On the topic of shareholder engagement, ASIC made a number of observations and recommendations on the steps taken by shareholders to enact policies which respond to ESG-related issues. ASIC observed that there was little support for such resolutions from non-requisitioning shareholders.
Notably, shareholders of seven ASX 200 companies (predominantly mining and exploration companies) requisitioned ESG-related resolutions in the 2017 AGM season. Fewer than 10% of shareholders supported resolutions in favour of climate change and human rights issues for the following companies: BHP Billiton Limited, Santos Limited, Origin Energy Limited, Downer EDI Limited, Commonwealth Bank of Australia, and Oil Search Limited. We note that although ESG-related resolutions were requisitioned by shareholders, they were ultimately unsuccessful.
Nonetheless, ASIC has noted the increasing trend for shareholders to requisition ESG-related resolutions and recommends that boards carefully consider and manage "all material and emerging risks relevant to their company", including those related to ESG outcomes. ASIC made reference to a report it prepared on corporate finance regulation in August 2017, ASIC noted that "companies and their boards should proactively consider reporting on climate risk as part of their annual reports." In the same report, ASIC also warned listed entities of their disclosure obligations relating to future financial years in accordance with Section 299A of the Corporations Act.
In an open letter to chief executive officers, Larry Fink, the chairman and CEO of BlackRock, Inc., noted a growing trend in society turning to the private sector to address broader social issues as a result of governments failing to do so. Furthermore, the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) has also made a number of recommendations in relation to broadening the disclosure obligations of companies to ensure that shareholders are made aware of the financial impact of climate change.
Growing societal demand for companies to take proactive steps to manage ESG-related issues raises further questions in relation to governance issues and directors' duties. Larry Fink has adopted a sustainability focused approach which maintains that companies exist to benefit all stakeholders, therefore qualifying the shareholder primacy principles.
Although this does not technically fall within any legal obligation of directors, this nonetheless serves as a reminder to boards of the need to be aware of the risks involved in failing to adopt proactive policies to tackling increasing ESG-related shareholder demands.