After an eventful 2014 AGM season, the National Association of Pension Funds (NAPF) has published its 2014 AGM Season Report in respect of the FTSE350. This second annual NAPF Report looks back at the AGM season just gone in advance of the update to the NAPF’s Corporate Governance Policy & Voting Guidelines. Commenting briefly on issues such as changes in pay within the banking sector and the new form of the past season’s audit reports, the majority of the NAPF Report focuses on executive pay, the implementation of the new UK DRR Regulations and shareholder voting on the DRR (and the Remuneration Committee members).
Quantity vs quality
The Report conveys the NAPF’s view that, while “there was much of positive to note” during the last AGM season, and that “in general both the quantity and quality of engagement between companies and shareholders continues to improve” with “many companies… moving aspects of remunerations in the right direction”, there is still progress to be made. The new DRR regulations have resulted in an increased number of disclosures as to directors’ remuneration but the Report questions whether the quantity of these disclosures overshadows their quality, with the Report suggesting that the new DRRs “too often read as compliance documents as opposed to communication tools”.
Spirit over the letter of law
In addition, the Report comments that “with the letter of the new regulations in most cases being well adhered to, it is hoped that companies will next year seek to move closely embrace the spirit of the new reforms and communications more effectively”. This isn’t the first time that it has been suggested that companies are putting the letter of the law over the spirit of the regulations; see our briefing with details of Vince Cable’s April 2014 remarks. In addition, the NAPF suggests that shareholders may have actually given companies the “benefit of the doubt” this past year as companies have sought to adapt to the new requirements. Perhaps shareholders will be more vocal next season.
Drilling into shareholders’ concerns is a pretty constant theme in the Report, which acknowledges that the new binding vote requirements gave rise to an “understandable… anxiety on the part of companies” which “at times led to consultation overload”. As a result, shareholders may have had too many conversations about “insignificant policy changes” rather than “more strategic or important holistic conversations covering issues such as succession planning, corporate culture or corporate strategy”. Now that most companies will have a policy approved for the next three years, the NAPF is hopeful that next year will see the conversations shift away from the period preceding the AGM season and become more holistic in nature (although how, given policies are now in place for three years, these conversations will have any short-term effect remains to be seen…).
Remuneration positives – but the why remains key
There is express credit given to those companies who are seen to be implementing the NAPF’s 2013 Remuneration Principles for building and reinforcing long-term business success. For example, ITV and Royal Dutch Shell’s increased shareholding requirements are highlighted, as are Meggit and Capita’s Remuneration Committees’ use of discretion to reduce the level of bonus payment to better reflect company performance.
Interestingly, the Report acknowledges that companies were faced with a “significant task” in “getting up to speed with the new requirements”, and asks investors to “give companies the space” in the DRR to explain why remuneration policies are structured as they are, particularly given each company’s own unique circumstances. To quote the NAPF, when reviewing a DRR “it is easier now than before to grasp the what and the how” an executive is paid, however “it remains difficult in many cases to grasp the why“. So, room for improvement according to the NAPF.
Spotlight on specific companies
Commenting on the 2014 DRR voting results, the Report puts a spotlight on the eight FTSE350 companies with successive years of DRR dissent, noting that they each received more than 20% shareholder dissent in the 2013 season and more than 15% dissent again this year, and suggesting they enter into discussions with shareholders to avoid any further shareholder rebellions. The only FTSE100 company included in the list of eight is easyJet. Given easyJet’s unique set of circumstances (with a single dominant shareholder whose relations with the board are a little strained), the FTSE 100 has escaped relatively unscathed from the NAPF’s scorn. The Report states that the NAPF has highlighted these eight companies as it “may be valid to question whether the board has sufficiently sought to address shareholder dissatisfaction”, with the companies listed now facing more pressure to engage with shareholders and deal with shareholder concerns.
The report also sets out the ten FTSE350 companies which received the largest votes against either part of its DRR, being its policy report or implementation report. More FTSE100 companies feature here (Burberry, Reckitt Benckiser, Carnival, Standard Chartered and Astrazeneca) than in the dissent list. However, the NAPF is hopeful that these companies will be “endeavouring to listen and learn over the coming year” and specifically mentions Sir John Peace, the Chairman of Burberry and Standard Chartered, who acknowledged that the Burberry board would, having faced a shareholder protest against the Chief Executive’s remuneration, have to “reflect on that and talk to shareholders”. It appears that communication will be the key for these companies to avoid any similar dissenting votes, and NAPF spotlights, next year.
And… Sports Direct: the “soap opera”
The Report also has some space set aside for “the needless soap opera” that has been Sports Direct (which we have also been covering in our blog (see our most recent post on last week’s AGM result)). The NAPF comments that “ironically the final policy…had many commendable aspects. It is a shame that the process to get there was so unnecessarily fraught”. With the policy now approved, maybe next year will be a quieter year for Sports Direct.