Voting at company general meetings is a shareholder’s key formal ownership right and it can be considered the bedrock of stewardship. With this year’s voting season already in full swing, we have witnessed certain trends emerging for institutional investors.
The topic dominating the US voting season in 2015 is proxy access, the right of shareholders to nominate candidates for the board. Led by the New York City Public Pension Funds, over 100 proxy access proposals have been filed by shareholders.
Before the start of the voting season, some companies put forward alternative proposals in an attempt to prevent the discussion of shareholder proposals on this issue. But encouragingly a number of companies have embraced the concept and are moving to implement proxy access close to or at the so-called 3/3/25 rule recommended by the US Securities and Exchange Commission, which we support. The rule allows shareholders owning a minimum of 3% of shares for at least three years to nominate up to 25% of directors.
Proposals calling for the introduction of clawback clauses – to revoke and limit bonuses at times of underperformance – have also been gaining ground.
Significantly, an increasing number of shareholder proposals – 76 as of 31 March – have been filed on climate change, with energy companies receiving the most.
Oil and gas companies in the UK have also come under pressure from shareholders. As part of the Aiming for A investor coalition – which we support – shareholder resolutions on climate resilience were filed at BP, Shell and most recently at Statoil. This requires boards to focus on the long-term challenge to their business models. We welcome this overdue emphasis, an example of which was at the BP AGM where an hour of the three-hour proceedings was taken up by a combination of management comments and questions from shareholders on climate change.
We voted against board-proposed resolutions at a number of companies where they failed to commit to disclosing targets for executive incentive schemes either prospectively or retrospectively, making it impossible to appraise whether awards are proportionate to performance. Some companies lacked independent representation due to candidates being proposed as shareholder representatives or being connected to companies with which they have a significant commercial relationship. We opposed the recommendations of management in these instances.
In neighbouring France, the Florange Act has come into effect, which seeks to reward long-term investment by granting double-voting rights to shareholders registered for a continuous 24-month period. This provision will apply from April 2016, unless companies opt out by amending their articles of association. The Act also gives boards the ability to thwart takeover attempts by using any means necessary without the permission of shareholders.
We believe equal voting rights should be attached to shares regardless of characteristics of an investor. Therefore, we have urged French companies to maintain their current application of one-share, one-vote and the principle of board neutrality by exercising the opt-out clause.
The French government also undertook to increase its holdings in Renault to block other shareholders from supporting the proposal to maintain an equal shareholding structure. In response to this, we recommended that our clients avoid lending their shares in Renault, GDF Suez and Air France which are partly owned by the government.
Other issues at French companies that have caused us to oppose resolutions related to a lack of sufficient independence on boards, short performance periods for equity-based awards and a lack of disclosure on performance criteria.
Like France, Italy introduced legislation on loyalty shares in 2014, meaning Italian listed companies can grant up to a maximum of two votes per share to shareholders who have held their shares for at least two years. Hermes EOS voted against such proposals at AGMs in 2014 and this year, we co-signed a letter sent to various listed Italian companies to maintain the principle of one-share one-vote.
Pressure from institutional investors and non-executive directors at major Italian companies has recently led to Italy’s government announcing that it would not make it easier for such measures to be adopted.
In Belgium, we opposed management where we found a lack of disclosure on performance criteria in incentive plans and too much focus on short-term performance periods. We also voted against non-independent board members at companies where fewer than 30% of board directors are independent.
Earlier this year, the Dutch Senate adopted the Act on Remuneration Policies in Financial Institutions. It limits variable compensation to 20% of fixed remuneration for employees based in the Netherlands, to 100% of fixed compensation for employees otherwise based in the European Economic Area (EEA) and to 200% of fixed compensation for employees based outside of the EEA, subject to shareholder approval. This makes the Netherlands one of the toughest among EU member states in terms of regulations on executive compensation.
Some German companies have asked shareholders to authorise their not disclosing individual remuneration of management board members. We voted against these proposals, as they go against market practices, as well as the best practice recommendations set out in the German Corporate Governance Code. Elsewhere, we opposed the re-election of non-independent board members where boards were insufficiently independent. We have also seen a few requests from shareholders for special audits, for example at RWE and Deutsche Bank.
In Switzerland the ordinance implementing the Minder initiative has created the most stringent framework for executive remuneration in Europe. On top of a binding vote on pay, which came into force in 2015, a number of practices, such as severance pay have been banned. Other rules, such as loans to executives and the maximum number of mandates board members can hold, have to be included in the articles of association.
We voted against management where the performance criteria for variable compensation was not clearly defined, where guaranteed bonuses are granted or stock-options vest earlier than three years and where non-executive board members were set to receive retirement benefits or performance-based equity compensation. In addition, we opposed resolutions on board structure where companies failed to establish a majority-independent board and where directors held an excessive number of board mandates.
In late 2014, Spain overhauled its corporate regulation by revising its Companies Law and publishing a new Corporate Governance Code. The code contains additional recommendations for the remuneration of directors, the notion of corporate social responsibility and the board of directors – which should be at least half independent and by 2020 comprise a minimum of 30% female directors. While we remain concerned about the widespread combination of chair and CEO roles and the lack of disclosure on succession planning, significant progress has been made on governance structures to ensure effective oversight of executive management. Spanish utility Iberdrola, for example, has significantly strengthened the powers of its lead independent director. Elsewhere, we voted against management recommendations on the re-election of combined chair/CEOs, especially where we deemed the board insufficiently independent.
In Japan, we expect more requests from companies for dialogue with shareholders ahead of the AGM season in June due to the introduction of the Corporate Governance Code.
In other Asian markets, a lack of disclosure on matters such as director elections, business transactions, remuneration and performance metrics were common reasons for us opposing resolutions. We also voted against some share option plans for executives and the issuance of shares without pre-emptive rights due to concerns that they would dilute the interest of existing shareholders, as well as unjustified significant increases in directors’ pay and a lack of board independence.
Across Latin America, we continue to see a lack of disclosure ahead of AGMs, in particular with regard to the names of director candidates and details of executive remuneration. In addition, the composition of boards can be an issue. Due to the number of shareholder representatives and related parties on the board, the level of independence can be insufficiently low.
In Australia, we continued to vote against remuneration reports where companies failed to disclose targets for bonus frameworks and where long-term incentive structures are based on measures such as absolute total shareholder return. Nevertheless, Australian companies are improving as a whole and as a result we are more supportive at annual general meetings than in previous years.
The intelligent implementation of our clients’ votes is an important part of our service and our voting recommendations complement and support our engagement programme. We also engage on voting issues and seek to use the vote as a lever for improvement, encouraging companies that are committed to positive change by supporting the recommendations of their management.
Moving on up