The challenges of shareholder activism

by | Oct 13, 2016 | INSIGHTS | 0 comments

The growth of shareholder activism, together with a trend towards hedge funds and more institutional investors voting at AGMs, presents companies with increasing challenges.

Most companies are already aware of investors’ interest in their environmental, social and governance (ESG) policies and in the extent to which they adhere to them. At the same time, companies in certain sectors, such as coal, are having to face public announcements of institutional shareholders’ divestment decisions, as well as demonstrations or interjections at shareholder meetings, or activists standing for the board. Advance awareness of possible protests enables a company to prepare to handle them.

Today, more than ever, companies need to know the composition of their register and keep close to their shareholders, understanding their investment objectives. They need to be aware of investor concerns – and especially misconceptions – before they surface publicly, so they have an opportunity to consider how to address them.
The influence of proxy advisers is also growing and companies should engage with, and listen to, them – not just leading up to an AGM.

Executive remuneration structures
There is likely to be increased focus on executive pay, fuelled by recent developments in the UK, where some ASX-listed companies also have listings. In her first interviews after her appointment as prime minister, Theresa May called for companies to publish the multiple by which CEOs’ remuneration exceeded their average employee’s pay. She also called for shareholder votes on pay to be binding and for greater diversity, including employee representatives, on boards.

There was a similar, although not quite so radical, call at the end of July in a report by UK Investment Association’s Executive Remuneration Working Group. While it stopped short of backing binding shareholder votes on executive pay, the report made ten recommendations aimed at rebuilding public confidence in executive pay structures and increasing the alignment of executives’ interests with those of shareholders.

Among these recommendations are that remuneration committees should have flexibility to choose the most appropriate remuneration structure for a company’s business needs and should rely less on the advice of remuneration consultants. The report also recommended that companies should be more transparent in explaining the rationale for targets on which bonuses are based.

While Australia has already moved some of the way in this direction with the ‘two strikes’ rule, and the average difference between top executives’ and average pay is significantly less than in the US, shareholders are likely to increase their scrutiny of remuneration structures.

As with other ESG issues, companies will have to decide how far they should go with anticipating, and hopefully defusing, activist shareholders’ governance concerns in their investor communication. They may also want to increase their dialogue with proxy advisers. Greater transparency on how bonus targets are calculated can help increase investors’ trust in a company’s remuneration procedures and convince them that management’s interest is fully aligned with theirs.