The 2024 Annual General Meeting (AGM) season proved to be an unexpectedly busy one for several listed companies, with a higher than usual number of first and second ‘strikes’ against remuneration reports and significant protest votes against grants of equity incentives to directors.
We reflect on some of the insights gained from this year's events, focusing on our experience with clients in the metals and mining sector.
Proxy advisers to the fore
This AGM season, we observed several smaller companies in the metals and mining sector that had enjoyed significant share price appreciation over the previous 12 months, found themselves the subject of attention from proxy advisers for the first time.
Every industry has market ‘bolters’ of course, but the metals and mining sector, leveraged to sharp swings in commodities markets and with potential for significant discoveries, is more susceptible to rapid changes in fortune than most.
With increased market capitalisation and potentially index inclusion, a company’s shareholder base will begin to transition, with an increased proportion of institutional investors relative to retail. The proxy advisers inevitably follow.
The heightened influence of proxy advisers among these ‘early stage’ mid-capitalisation companies can (often quite suddenly) lead to AGMs being more contested affairs than usual. This can be a confronting process for companies that are still only part way through a journey to the more robust governance environment typically expected of companies included in the main ASX indices.
There can be an instinctively negative reaction to proxy advisers where their advice runs counter to that of the Board. However, in our view, when it comes to corporate governance, it is important to view proxy advisers not as adversaries, but as windows into the expectations of institutional shareholders. Most firms will publish their proxy voting guidelines in August or September. By proactively engaging with proxy advisers prior to dispatch of the notice of meeting, Boards can gauge attitudes to governance issues and understand what the ‘hot spots’ in any particular AGM season might be.
This year, for example, we saw a particular focus on provisions in incentive schemes allowing for accelerated vesting in the event of a change in control, with a strong preference for pro rata rather than full vesting. We also saw an increasingly formulaic approach to assessing the ‘independence’ of directors and a push-back against a failure to disclose performance thresholds associated with the award of short-term incentives.
Not all disagreements with proxy advisers can be resolved. However, one further benefit of proactive engagement is it provides an opportunity to enhance the disclosure around particularly controversial resolutions, which may assist in garnering broader support even in the face of (at least initial) proxy adviser opposition.
Shareholders strike back… again
The 2024 AGM season featured a significant number of first-strike and second-strike votes against the remuneration reports of companies operating in the metals and mining sector, driven largely by proxy adviser influence. The reasons varied but were increasingly linked to what might be considered general social license concerns, with a particular focus on the sometimes neglected ‘G’ factor of the ESG equation.
Section 250U of the Corporations Act 2001 (Cth) (Corporations Act) provides that if at least 25% of the votes cast at two successive AGMs are against the adoption of a company’s remuneration report, a spill resolution must be put to the vote at the second AGM. If successful, a spill resolution requires all directors (other than the managing director) to vacate their offices at a spill meeting held within 90 days.
Increasingly, it seems, votes against the remuneration report are used to signal general dissatisfaction with Board and management performance rather than specific concerns with remuneration policy, although as a practical matter the two are often closely linked. Spill resolutions themselves are seldom successful: indeed, even where a remuneration report has been resoundingly rejected for a second time, it is not uncommon for the spill motion to meet the same fate.
Equity incentives in focus
Resolutions considering the issue of equity incentives to directors also attracted attention. These issues generally require shareholder approval under Chapter 10 of the ASX Listing Rules (subject to limited exceptions) and potentially under the related party provisions of the Corporations Act. Approval is typically sought at the AGM. In contrast, non-director management can be issued the same incentive securities immediately, provided the company has sufficient placement capacity under Listing Rule 7.1.
This can create an interesting dynamic, particularly where there has been an increase in the underlying share price between the date of grant (often in May or June as part of the budgeting process for companies with a 30 June financial year) and the AGM: a considerable lag of potentially up to six months. What may have been considered as reasonable remuneration at the time of grant can seem overly generous at the time of approval, jeopardising the ability of directors to participate in incentive schemes on a level playing field with other management.
Increased non-executive director fees supported
In contrast to the position taken on incentive grants to directors, in most cases resolutions authorising increases to the non-executive director fee pool (which also requires shareholder approval under the ASX Listing Rules and typically, constitutions) were strongly supported. Similarly, most proxy advisers recommended voting in favour of resolutions to increase the number of directors on company Boards.
There does seem to be growing shareholder acceptance of the increased governance and compliance burdens being placed on company directors and the fact that this is starting to drive bigger Boards and higher fees. Institutional investors appear to prefer the increased overhead of director fees if this brings with it a more diverse and skilled Board.
Lessons learnt
While numerous factors influence a shareholder vote, our discussions with market participants revealed the following key factors that may position a company’s meeting agenda for success:
Prepare early: Involve investor relations and legal advisers early to ensure disclosure in the notice of AGM meets applicable legal standards and, just as importantly, market expectations.
Consult effectively: Engage in discussions with proxy advisory firms to understand their policies, key priorities for the year and their specific expectations. Addressing potential concerns of proxy advisers before public documentation is released can mitigate issues. For instance, providing comprehensive disclosure regarding the rationale for an equity incentive scheme or issue in the notice of meeting may prevent a recommendation to vote against it.
Adapt incentive arrangements: The significant votes against directors' equity incentive resolutions highlight the necessity for directors to ensure remuneration structures are aligned with shareholder interests and expectations. For example, careful consideration should be given to change of control triggers and ESG factors, including clawback and malus (remuneration ‘at risk’) provisions to provide the Board with discretion to reign in rewards where management conduct falls short of those expectations.
Governance and remuneration structures suitable for one market capitalisation band may quickly become unsuitable as a company transitions to the next band or achieves index inclusion. Some growing pains are inevitable but can be mitigated through early engagement and planning.