Boards under fire

Tony Featherstone provides a snapshot of eight key issues for boards to consider as they prepare for this year’s AGM season.

On a scale of fiery annual general meeting (AGM) seasons, this year’s is expected to have moderate heat compared to the boilovers after the global financial crisis (GFC). Corporate profits and dividends are rising, the sharemarket is up and better shareholder engagement is resolving many issues before
the AGM.

But any complacency would be a mistake. The 2014 main AGM season, predominantly in November for listed companies with a June 30 year-end, has a different, possibly more dangerous, hue.

Shareholder activism and greater focus on the board itself will keep directors on their toes.

The mainstay of AGM anger – executive pay – may even take a backseat this year to emerging issues such as board reviews, composition and tenure – at least for S&P/ASX 200 companies.

Shareholders, it seems, are digging deeper than ever into the board’s role in organisation performance and they want answers.

“I doubt we will see a huge attack on executive pay this year,” says Bill Bartlett FAICD.

“That storm has gone out to sea for more companies, so proxy advisers are focusing more on board reviews and performance.”

Bartlett is a non-executive director of Suncorp Group, GWA International, Abacus Property Group and Reinsurance Group of America Inc.

He says companies that pay lip-service to board reviews could be challenged at their AGM this year.

“Some boards have a long history of conducting board and director performance reviews and they put great effort into it. Others may have a ‘tick-the-box’ mentality. I suspect there will be greater pressure on boards to demonstrate their review process and provide more information on its outcomes.”

Bartlett says directors should expect more performance-related questions about the board and those that cannot elaborate on the answers will be criticised.

Dr Ulysses Chioatto MAICD, an executive director of proxy adviser Institutional Shareholder Services (ISS), says shareholder activism will be more evident in this year’s AGM season.

“We had eight board spills announced in Australia in January this year, a record number. This follows a surge in activist activity last year, with ‘public actions’ launched at more than 230 companies,” he says.

“As in the US, Australia is likely to see campaigns move to larger companies.”

That does not mean this year’s AGM season will be highly confrontational for the majority of listed companies.

Many AGMs are foregone conclusions as boards of ASX 200 companies engage more with shareholders and lobby support from key investors around contentious issues.

Some activists, of course, will use the AGM as a public forum to attack boards they believe have a “tin ear” and will get their message to a retail audience via the mainstream media.

And, activists from non-government organisations are becoming more sophisticated in presenting arguments and questions about boards’ due diligence on risk management, concerning environmental and social issues.

Company Director has compiled a snapshot of eight key issues for boards to consider as they prepare for AGMs. 

1. Board composition 

Michael Robinson MAICD, executive director of remuneration adviser Guerdon Associates, believes investors will pay more attention to board composition after changes to the wording of Recommendation 2.2 in the recently revised ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.

The guideline now recommends that listed entities should have, and disclose, a board skills matrix that sets out the mix of skills and diversity the board has or wants to achieve.

“This is a very significant change,” Robinson says.

“Boards are being asked to formalise their director evaluation process with the disclosure of a comprehensive skills matrix. Some companies have already undertaken the work to provide this information, but it is fair to say many others have had a much softer process so they are unable to disclose board skills in this form to stakeholders.”

Robinson believes disclosure of skills matrices will provide an opportunity for institutional investors and proxy advisers to query board composition.
“They are using the opportunity when engaging with the board on remuneration to quiz the chairman about the composition of the board and its sub-committees and to give their views on whether the make-up of the board is appropriate,” he says. “This trend has surprised some chairmen, who have not realised the remuneration engagement session has evolved to consider issues well beyond executive pay and performance.”

2. Board performance

Robinson says institutional investors and proxy advisers will also seek more information on board reviews during the next AGM season.

He believes more listed companies are following the Australian Prudential Regulation Authority’s (APRA’s) guidance on board assessments and reviews, under Prudential Standard CPS510 on governance.

APRA’s standard says the board of a local incorporated APRA-regulated institution must have procedures for assessing the board’s performance, relative to its objectives, and have a procedure for assessing the performance of individual directors. Both assessments should be done at least annually.

In contrast, Recommendation 1.6 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations says listed entities should disclose a process for “periodically” evaluating the performance of the board, its committees and individual directors.

Robinson says the increasing adoption of APRA’s standard on board assessment by non-financial companies is seeing more boards engage external advisers to review board and director performance.

“Companies have been able to tick a box about board and director performance assessments and at least 60 per cent of these reviews are still done in-house.

“This practice has to change as boards get more rigorous with the periodic use of external advisers to independently review performance and respond to investor demands in this area.”

Robinson believes “basic, motherhood statements” about the board review in the remuneration report will become more sophisticated, in turn providing information for investors and proxy advisers to assess board and director performance.

“Investors will want more detail on the outcome of that board review than they currently receive from many companies,” he says.

“The board review disclosure will, in time, become more expansive, just as the remuneration report has.”

3. Director elections and tenure

As companies disclose more information on skills matrices and board reviews, it follows that investors will query the re-election of directors if there are performance concerns.

Martin Lawrence, research director at proxy adviser Ownership Matters, says institutional investors are showing greater interest at AGMs in the issue of basic director competence.

“This trend has been building since the GFC and investors are more openly questioning whether boards are good at what they do,” he says.

“Investors are asking: How does this person’s background qualify them to be on the board?”

Lawrence says this trend is unlikely to translate into a sharply higher number of “no” votes against director re-elections or the election of new directors that the board nominates – at least in the short-term.

The average non-executive incumbent director enjoys 96 per cent of the vote for their re-election, down from 98 per cent a few years ago, according to Ownership Matters.

“A higher ‘no’ vote is more about sending the board a message that investors have concerns about a particular director’s re-appointment.” says Lawrence.

“Investors will choose their targets carefully at AGMs and vote against director re-elections where the company has performed poorly or if the board is perceived to have not listened to shareholder concerns in private meetings. Receiving a higher ‘no’ vote against a director’s re-election – or the appointment of a new director – can, in itself, embarrass boards.”

Lawrence adds: “Boards will have to work harder at AGMs to explain why long-serving directors should be re-elected or why a new director should join the board.”

Chioatto adds that director independence will be a bigger issue at this year’s AGMs.

"More investors will focus on board independence, particularly where directors will have served on the board for more than nine years,” says Chioatto.

“But you could not say there is a groundswell of activity against long-serving directors at this stage. For many investors, it is still a case of better the devil you know.”

4. Shareholder activism

Chioatto believes corporate Australia faces a wave of US-style shareholder activism, some of which will be played out during this year’s AGM season. 

An ISS paper, Shareholder Activism in Australia, observes: “Historically, activism in Australia took the route of behind-the-scenes private discussions [between investors and the board], but recently there has been an uptick in public battles.

“Australia still has little exposure to the more aggressive displays of shareholder activism in the US, in part because some of the means of developing a mandate for change are unavailable to shareholders in Australian firms. Instead, activists propose changes almost solely through the board spill process. While these proposals have been a phenomenon at smaller firms, they are beginning to turn up at larger companies as well.”

The recent spike in merger and acquisition activity is compounding the threat of shareholder activism for boards. In some hostile takeover bids, shareholders embraced activism to drive board change at underperforming companies or to force up the bid price.

More sophisticated shareholder activists are emerging. Notable activists in Australia include Allan Gray Australia managing director Simon Marais; prominent investor and corporate adviser Mark Carnegie; and Matt Williams, head of equities at Perpetual Investments.

The joint shareholder activist campaign by Perpetual and Mark Carnegie against Washington H. Soul Pattinson and Brickworks last year, to break up the cross-shareholding between the two companies, could be a sign of things to come in Australian shareholder activism.

Chioatto says the tactics of shareholder activists are changing.

“As investors become sophisticated, social media plays a bigger role in campaigns and a low-growth environment means investors don’t have other attractive places to park their money.

“Approaches range from accumulating stock in target companies, privately agitating for change with management, raising ideas with analysts and in the media, going public, initiating a board spill or co-ordinating a full-blown activist campaign, also known in banking circles as a ‘wolf pack’.

“The argument in favour of activism means boards must work management and balance sheets harder to keep the wolves at bay.”

Activists who decide to go public with their campaign – and who want support from retail investors – find that a high-profile AGM provides a convenient forum to spread their message in the mainstream media and through social media.

5. Environmental and social activism

Boards could easily overlook the threat of environmental and social activists at AGMs, as the media focuses on profit-driven activists.

However, directors should not underestimate the growing sophistication of environmental activists and their ability to present arguments in terms of risk management and the board’s due diligence in governing material risks.

The Wilderness Society’s campaign against Santos’s coal-seam gas projects this year in New South Wales is an example. Predictably, the Santos AGM in May attracted several protesters with “no fracking” signs that urged Santos to withdraw its $1-billion-plus coal-seam gas investment.

But it was the sophistication of the Wilderness Society’s campaign – it found 161 Santos shareholders so it could put its resolution against the Narrabri gas project on the Santos AGM agenda – that caught the eye of governance observers.

Although the motion received less than one per cent of shareholder support, it attracted significant media attention before and after the AGM.

It arguably set a new benchmark as to how non-government organisations engage with large companies at AGMs, and how companies, such as Santos, respond.

Chioatto says boards should spend more time engaging with key non-government organisations in the lead-up to the AGM and be prepared for better-organised campaigns and more challenging questions.

“[Stakeholders] are using more sophisticated language in their resolutions, such as risk-based arguments in their supporting statements,” he says.

6. Capital management

Heavily diluted placements and other equity capital raisings were a contentious topic at some AGMs after Australian companies raised more than $100 billion during the GFC. There were concerns that institutional investors had received favourable allocations at the expense of retail investors.

Those concerns persist but are unlikely to be prominent during this year’s AGM season.

More likely is investors quizzing boards about dividend policies and whether enough profits are being distributed back to shareholders.

Record low interest rates are increasing demand for higher-yielding investments and, in turn, require boards to better defend their capital-management initiatives at the AGM.

Watch for more criticism of boards of companies that have healthy balance sheets, but which for whatever reason decide to retain more cash or engage in other capital-management activities, such as share buybacks.

The onus will be on boards to better explain their dividend policy to investors at the AGM.

7. Investor relations

Ian Matheson FAICD, CEO of the Australasian Investor Relations Association, says boards of ASX 200 companies are spending more time with key stakeholders before the AGM.

“To a large extent, the message that chairmen and chairs of sub-committees need to get out and engage with shareholders through governance roadshows has largely got through in the big end of town.”

Matheson adds: “The feedback I hear from proxy advisers and major fund managers is that the number of meetings chairmen are having with investors has noticeably increased in the past 12 months.

“In some cases it has more than tripled as boards seek to engage more before the AGM.”

But companies can still engage stakeholders earlier, says Matheson.

He believes companies should consider holding their AGM closer to their full-year results announcements. Those with a June 30 year-end typically announce their full-year results in August and hold their AGM in late October or November, a lag that reduces the currency of their profit announcement at the AGM.

Matheson says: “Bringing the AGM forward would allow boards to discuss the full-year results when they are more current, and provide greater insight for retail investors about company performance. It would also mean companies prepped their boards once, rather than twice, for the full-year results and AGM.

“Discussing the full-year results in November after they have been in the market for several months can be a bit of a yawn for some investors.”

Releasing information on the AGM before the sharemarket opens that day makes sense, says Matheson says.

Many listed companies provide a first-quarter trading update at their AGM and some forward-looking commentary. Sometimes they release information to the market just before the AGM starts, or even during the meeting, meaning there is less chance to respond to institutional investor queries.

“It’s a disorderly way of updating the market,” Matheson says.

“If the board has something material to say about the AGM, it should release that information before the market opens that morning. That is far more orderly than releasing information just as the AGM starts. The risk is that the information spooks the market and there are no executives from the company to comment because they are all at the AGM.”

Matheson says companies can make better use of technology at AGMs. Most ASX 50 companies webcast their AGMs and some use electronic voting systems, such as IML Connector, to improve shareholder engagement at the meeting, collate votes instantaneously, and reduce the risk of vote miscounting.

Electronic voting systems can also speed up procedural aspects of AGMs, allowing the board to spend more time discussing strategy and performance.

Matheson believes the AGM still has an important place in the corporate calendar.

“It remains an opportunity for genuinely interested retail investors to ask questions of the board and management. Yes, boards still get uniformed questions from time to time. But some AGMs this year I listened to – for example, AMP and GPT Group – were respectful of their audience and had harmonious meetings.

“The number of controversial questions at AGMs seems to be declining as companies disclose more information to investors and have greater transparency.

“But this is no time for boards to be complacent about AGMs: you simply cannot leave any stone unturned through poor pre-meeting engagement with shareholders.”

Tips for preparing for the AGM

Smooth AGMs are usually the result of careful planning, regular board engagement with key investors in governance roadshows (led by the chairman) and a willingness to hear and respond to stakeholder concerns. Most large listed companies are well versed in the strategies below, but smaller and mid-size listed enterprises can use them to improve their AGM preparations.

1. Start early
It is not unusual for large companies to start preparing for next year’s AGM when they finish the current one or to work with the chairman six months in advance. Smaller companies obviously need less time, but it pays to plan as soon as possible.

2. Understand your organisation’s shareholder base
This ongoing requirement for listed companies has a big bearing on the success of the AGM. Knowing the organisation’s shareholder base, investing styles and preferences helps boards better communicate with key stakeholders before the AGM.
A company with an open share register and some activist investors will have a different communication strategy compared to another with one or two large investors and a more passive share register. “It is important for directors to know the make-up of the shareholder base, as well as any significant changes in ownership,” says ISS executive director, Dr Ulysses Chioatto.

3. Governance roadshows
High-performing boards spend considerable time meeting stakeholders well before the AGM to present their position and hear investor concerns. They talk to key institutional investors, retail shareholder representatives, proxy advisers, analysts, and non-government organisations, among other stakeholders.
“Engagement is on the rise globally and directors are increasingly involved in the discussions with shareholders,” says Chioatto. “Companies are reaching out, in and out of proxy season, to engage with their shareholders.”

4. Broaden the consultation process
Boards of large listed companies know that the consultation process before the AGM must extend well beyond the biggest shareholders. Companies with community-sensitive projects, or with health and safety concerns, need to consult widely with stakeholders, such as environmental groups. These groups are becoming more sophisticated in how they pressure boards at AGMs and are framing their concerns in the language of corporate risk management.

5. The role of committee chairmen
Increasingly, key stakeholders of larger listed companies want to meet the chairmen of key committees, such as remuneration, during the governance roadshow. Companies should consider how one or two directors, in addition to the chairman, will present the organisation’s governance message to the investment community.

6 Transparency
High-performing boards ensure institutional investors and proxy advisers are equipped with as much timely information as possible to make informed decisions. Greater transparency and disclosure by listed companies is a precursor to smoother AGMs because there are fewer surprises.
“Disclosure is key,” says Chioatto. “Transparent, clear and concise disclosure assists shareholders who will make informed voting decisions, based on the information provided by the company. The proxy statement is the source document for voters; it should tell the board’s story to investors.
“Engagement and good disclosures help the proxy advisers in their role serving their clients.”

7. A different discussion
Governance roadshows before the AGM are typically slanted towards explaining executive pay. Proxy advisers say these discussions in the past two years have moved beyond pay-for-performance, as investors use the opportunity to question the chairman about issues such as board composition, director performance, board and executive succession planning and strategy. The takeout for boards is to prepare for a wider range of questions during these meetings.

8. Sticking POINTS
Having met a range of stakeholders, high-performing boards identify key sticking points with stakeholders around issues such as executive pay or boardroom performance, and take steps to address them with further consultation. Knowing which issues rankle key investors, and why, allows boards to frame carefully considered arguments to present their case before the AGM.

9. Focus on key investors
Boards that cannot convince certain investors of their position need to spend more time shoring up support from key investors for board resolutions. The best boards build long-term relationships with key stakeholders, so that they can draw on their support when needed.

10. Consultation
Most chairmen of ASX 200 companies are good listeners and genuinely take on board investor concerns. But there are always exceptions where chairmen are unwilling to hear dissenting opinions, quickly dismiss investor concerns, or are abrupt in meetings. This market shows little tolerance for boards that will not listen to key shareholders or respond to issues they raise. Consequently, some dissenting stakeholders use the AGM to embarrass the board – or send a message – by publicly raising their concerns or voting against key resolutions.

11. Fighting the investor relations war
Shareholder activists who are unhappy with the board’s position on an issue can go public through selective media briefings or adroit use of social media. Environmental or community activists can do the same to build support for their case before the AGM. Boards should ensure that the company has appropriate investor relations support in the lead-up to the AGM and after it. Monitoring and engaging in social media is vital as activists use these media channels to spread their messages.