The intelligent implementation of our clients’ voting policies is an important part of our stewardship services complementing our year-round engagement. In particular when coupled with engagement on material issues, voting at AGMs can send a powerful message to companies. This was no different in the 2016 voting season.
The significant progress on proxy access, which started last year, continued to feature prominently during the US voting season in 2016. Notably, many companies settled resolutions or otherwise voluntarily moved to facilitate implementation of this fundamental shareholder right during the year. According to ISS’ Quickscore database, more than 36% of S&P 500 companies have adopted proxy access – compared to just over 20% adopting proxy access at year-end 2015 – and more than 200 proxy access shareholder proposals have been submitted. One of the most significant votes for proxy access came at ExxonMobil. Having narrowly avoided a majority vote in favour of a shareholder proposal on the issue in 2015, when 49% of shareholders backed the resolution, a majority of 56% supported the proxy access proposal this year. The high vote was inspired by the board’s failure to implement proxy access after the 2015 AGM and the linking of greater shareholder rights to the perceived failure of the board to respond to the risks of climate change to its business.
Shareholder proposals on climate change became more mainstream this year. Resolutions seeking companies to develop scenario plans for a world in which climate change is limited to 2°C gained 38% support at ExxonMobil and 41% at Chevron, where we co-filed. In addition, in our speech at the AGM of Chevron we appealed directly to the board. But the support for the shareholder proposals at these companies, albeit historically high, was much lower than the almost unanimous votes on similar proposals at Shell and BP in 2015, and calls into question why many asset managers appear to have voted in line with management at the US companies against the resolutions. We are sure that one effect of this US voting season will be asset owners seeking to find out how their asset managers voted and why, if applicable, they opposed such important risk management steps.
In the UK, climate change-related shareholder proposals continued to play a significant role with the resolutions prepared by the Aiming for A investor coalition and supported by Hermes EOS receiving overwhelming support at diversified mining companies Anglo American, Glencore and Rio Tinto. Other corporate governance issues that were notable in this year's voting season included votes against chairs for failure to achieve sufficient board diversity and votes against audit committee chairs over concerns about the re-tender of auditors within the last 10 years and the independence of committee members.
But overall, the UK voting season was dominated by opposition to pay packages – so much that it was dubbed the second shareholder spring. A number of high profile companies including Smith & Nephew, BP and Weir Group received majority votes against their remuneration proposals, while a longer list of companies incurred significant minority votes against. The main reasons for opposition to pay packages were a lack of alignment between executive remuneration and investor experience and/or average or even poor performance, absent or unjustified use of discretion, as well as a concern that overall quantum has become too high. The latter was a particular concern at multinational advertising company WPP, where, as part of our engagement, we called for action at its AGM. We are now working with a small group of asset owners in the UK to re-launch the Hermes Remuneration Principles in time to influence the revised remuneration policy proposals of company boards ahead of the 2017 voting season.
We also saw material votes against three UK asset managers: Schroders on the proposed elevation of the former CEO to the chair role, Aberdeen Asset Management over the non-disclosure of its performance metrics and Standard Life over the size of the compensation package of its CEO.
The most controversial voting items in Germany related to executive remuneration, election of non-independent board members and capital issuance requests. Even though German companies are legally not required to put their executive remuneration policy to a vote, several companies asked shareholders for approval of their remuneration practices on an advisory basis. We opposed several of these advisory proposals due to concerns about the pay structure and the discretion granted to the supervisory board to amend the level and composition of executive pay. Prominent cases where we recommended voting against remuneration proposals included Deutsche Bank, whose AGM we spoke at as part of our engagement, Deutsche Börse and SAP.
In instances where boards were insufficiently independent, we voted against the (re-)election of non-independent board members with the aim of ensuring an adequate number of independent shareholder representatives on the board.
German companies also asked shareholders to authorise the issuance of additional capital, for example to conduct a takeover. In cases where these authorisation requests may have led to excessive dilution of the ownership positions of existing shareholders, we recommended voting against. For the first time in France, shareholders rejected the CEO compensation packages at Renault and Alstom. Poor responses from the companies fuelled a fierce debate on say-on-pay at a time when the parliament was debating the Loi Sapin II law, which could lead to binding vote on remuneration. Climate changed also featured in many discussions at AGMs. Most prominent was the announcement of a robust climate strategy by oil major Total in response to investor concerns, in which we played a leading role. We publicly highlighted Total’s work at its AGM.
In the Netherlands, shareholders rejected proposals to grant special bonuses to executives, such as transaction and retention bonuses – or in the case of retailer Ahold a recognition award – and opposed changes to remuneration policies where these were inadequately explained. Two large cap companies cancelled anti-takeover mechanisms. ING Group abolished its depositary-receipts structure and Boskalis put an end to the voluntary application of the so-called structure regime. An increasing number of companies listed in the Netherlands provided investors with information about their tax policy and level of the effective tax rate. However, many do not yet wish to provide public information on the payments they make to the governments of the countries in which they have operations. Encouragingly, the number of listed companies that published an integrated annual report, which gives investors better insight into their long-term value creation model and accompanying risks, tripled from six in 2015 to 18 this year.
Meanwhile, in Denmark, we recommended voting against the excessive payment of non-audit fees to auditors, as this could compromise their independence. We raised our concerns with the companies that submitted such proposals to shareholders and will monitor progress.
In Japan, we witnessed a sharp rise in the number of companies appointing multiple independent directors for the second year in a row – 78% of companies listed in the first section of Tokyo Stock Exchange now have more than one independent director, compared to 48% in 2015 and 22% in 2014. This increase follows the introduction of the country’s Corporate Governance Code in 2015, which requires companies to appoint at least two independent directors. However, we continued to have disagreements with companies about the definition of independence and opposed candidates whose independence was questionable due to their relationship with major shareholders or business partners of the companies. Overall, a larger number of investors voted against the management of companies where governance issues were identified. This is believed to be a result of the Stewardship Code which encourages engagement between investors and companies.
In China and Hong Kong, general share issuance mandates continued to seek maximum flexibility. We urged companies to self-impose issuance limits and to disclose the maximum discount. We voted by exception in a few circumstances where related party transactions involved financial services arrangements and financial guarantees. Due to a lack of disclosure of the risk management mechanisms in place protecting the interests of shareholders, we opposed most of them, but those that we supported shared detailed plans of oversight by management, as well as internal and third party audits. As detailed information may be available only in Chinese, we encouraged companies to produce at least two complete sets of AGM documents, in Chinese and in English.
In Taiwan, many items put to a shareholder vote, such as shareholder nominees to supervisory boards failed to disclose sufficient, if any, information about the candidates. Furthermore, companies also sought approval of private placements and the issuance of warrants and convertibles without appropriate disclosure.
We saw a notable increase in bundled votes for board directors in South Korea, which we had no choice but to oppose, even if we had concern about only one candidate. We suggested that in future companies have separate election items for each director.
In response to the recommendations of the ASX Corporate Governance Principles, Australian companies made progress on board diversity. However, against a challenging economic backdrop for, particularly commodities-exposed, companies, executive remuneration appeared misaligned with outcomes for shareholders in numerous cases where we opposed management.
In Brazil, we were disappointed about the lack of disclosure on executive compensation by companies, which falls short of the requirements of the market regulator. With a few exceptions, Brazilian boards also lacked a core of independent directors.
Untangling tight knots – Cross-shareholdings in Japan