What’s on the watchlist

While TSR is forward-looking and financial outcomes used for many incentives are backward- looking, Robinson says it appears that a significant proportion of voters do not recognise this. “The only way to address this is for board and remuneration committee chairs to actively engage proxy advisers and their investors, and explain the logic behind incentive payments based on good financial results, even when TSR is down. Likewise, salary increases will be disclosed when some markets are hot with labour shortages. This is particularly evident in the resources and associated industries, as well as in technology. The remedy is, again, engagement to tell the story behind the disclosure and that this is not necessarily a predictor of future remuneration.”

Robinson believes the most contentious issues during this AGM season will probably be around CEO equity grants. “With inflation impacting earnings, supply chain disruptions continuing, tempering consumer demand, lower business investment and the costs of capital rising, earnings growth may be tepid at best and negative for many companies,” he says. “As a result, CEO equity grants may have lower performance thresholds for vesting. This will not be welcomed by many investors.”

Another issue, according to Robinson, will be the extent that non-financial measures are finding their way into incentive frameworks. This has two drivers. “One is the Australian Prudential Regulation Authority’s regulation of financial services companies that require a ‘material’ proportion of variable remuneration to be subject to non-financial performance,” he says. “The other is the requirement from many ESG-focused investors for better ESG performance. This will be particularly evident in the resources sectors, as well as financial services. We expect the way these non-financial measures are factored into incentive systems will not be supported by a significant proportion of investors, whereas the absence of non-financial [measures] will upset other groups of investors. It is guaranteed that some investors will not be pleased with CEO remuneration frameworks this season.”

He notes that the salary cuts and director fee reductions we saw at the beginning of COVID-19 have been reversed. “Be aware that some increases are not increases at all, but reversion to what was on-foot in the past,” says Robinson. “Directors should not take understanding as a given and should clearly explain this when applicable.”

In investors’ sights

Davidson notes that there was a huge rebound in the incentives awarded by ASX 300 boards in 2021 as markets improved. This year, she says remuneration outcomes will be judged against the backdrop of difficult financial markets and an uncertain economic outlook. “The link between remuneration and long-term performance remains important. There will be close scrutiny of incentives this AGM season, particularly of the justification for any retention awards.”

Similarly, Foo says, CGI Glass Lewis has its eye on some retention arrangements and some one-off awards. It will also be watching companies that have had a share price slump and have underwater award structures. Its focus will be on what remedial action they have taken to retain staff in these situations.

Remuneration is another of ASA’s four key focuses for this year’s AGM season. It believes that a company’s remuneration report should be readable, transparent and understandable for retail investors and that there should be a logical relationship between rewards, financial performance and corporate governance. ASA says it will refer to benchmarks to assess whether the amount and structure are reasonable compared to similar companies.

For Waterhouse, remuneration is always a concern because directors determine the size of remuneration of the executives with whom they have a close relationship. “We need reports that show directors asked themselves how much is too much,” she says. “We see excesses from time to time, and we call them out.”

Hybrid or virtual AGMs?

This year’s AGM season will be the first test of changes this year to the Corporations Act 2001 (Cth), which now allow companies to hold hybrid and virtual AGMs. These changes made permanent the temporary relief measures introduced during the pandemic. However, virtual meetings can only be held if they are permitted by the company’s constitution, or if at least 75 per cent of shareholders agree to amend the constitution.

However, some experts expect opposition to any proposed constitutional amendments at this year’s AGM season. That’s because the introduction of virtual-only AGMs has worried groups such as ACSI and ASA, both of which advocate for hybrid meetings. Both groups have expressed concern that virtual-only meetings might well reduce the transparency and engagement of AGMs.

“Improvements to virtual meetings to give shareholders a reasonable opportunity to participate and speak verbally or in writing during meetings are expected to curb some poorer practices that developed in the 2020 AGM season,” noted ACSI in an October 2021 statement.

“These included filtering or censoring questions provided in writing, and preventing shareholders from speaking in real-time.”

ASA says it will only support the holding of totally virtual AGMs when that technology and practice give shareholders a reasonable opportunity to participate. That, it believes, is a long way off.

According to the 2022 AGM Intelligence Report from stock transfer company Computershare, 29 companies across the ASX 300 proposed changes to their constitution that would enable them to hold virtual meetings in 2021 — that is before the changes to the Corporations Act. Overall, the average support received was 81 per cent, exceeding the approval threshold of 75 per cent. In addition, four proposals were withdrawn and one received a majority of votes against.

With this in mind, Computershare says key feedback from the past two AGM seasons is around shareholder concerns that virtual meetings can potentially undermine meaningful exchanges between directors and shareholders. And that companies must remain vigilant in managing Q&A sessions in an online environment to ensure all shareholders are accurately represented.

Looking ahead to this year’s AGM season, Waterhouse says ASA doesn’t want to see face-to-face meetings with a webcast.

“Webcasts don’t allow retail shareholders to engage directly with the board. The choice of a face-to-face AGM in a location where there are limited retail shareholders with a webcast does not allow appropriate engagement.”

Noting hybrid meetings give investors the opportunity to attend various AGMs from the comfort of their homes or workplaces, and this facilitates attending multiple AGMs in the peak of the season, Waterhouse adds this caution. “We will be monitoring notices of meeting to see if more companies try to change constitutions to allow virtual-only security holder meetings.”