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ESG Focus: AGM Strikes Down But Not Out

ESG Focus | Jan 15 2020

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Analysis of last year's AGM season shows boards in Australia are receiving less rejections from shareholders, but larger sized companies receive more plus climate change is now firmly in focus.

-Remunerations strikes fall in 2019
-Shares of companies receiving a strike underperform
-Climate change dominates non-remuneration resolutions

By Sarah Mills

Remuneration strikes fell last year, according to Macquarie Wealth Management’s analysis of the 2019 Annual General Meeting season.

The shareholder strike rate for the entire share market fell to 8.2% in 2019 from 8.5% in 2018.

ASX100 underperforms broader market

In a reversal of fortunes, the ASX100 underperformed the ex-100, logging a 10.8% strike rate, up from 6.3% in 2018. It is only the third time the top-100 has a logged a higher rate of shareholder strikes since the introduction of the two-strike legislation in 2011.

The sample size was 181 companies and represented all those covered by Macquarie who held a vote on their remuneration report in the second half of 2018

The picture improved in the calendar 2019 second half, ASX100 companies recording a decline in strikes to 9.2%, down from 10.7% in the 2018 second half. The ex-100 strike rate fell to 6.7% from 8.4% in the corresponding periods.

These figures compare with the historical average of 6.1%.

SEEK, ((SEK)) Sonic Healthcare ((SHL)), Westpac ((WBC)), WorleyParsons ((WOR)), Evolution Mining ((EVN)), Harvey Norman ((HVN)), ((CAR)), Cromwell Group ((CMW)), Lovisa Holdings ((LOV)), and Ramsay Health Care ((RHC)) were among the bigger players to receive a red card.

Westpac received a second consecutive remuneration strike, and more than 50% of shareholders in Cromwell Group voted “against” its proposal for director pay.

Recent underperformance proves catalyst

Underperformance proved the main trigger. The data show companies to receive strikes underperformed the market by -6% on average leading into a “strike” event, and -6.7% in the 120 days after.

So it seems that even if a company‘s share price is up on the year, a savaging in the three months before the AGM carries greater power. It is conceivable that this could be manipulated by large stakeholders.

Still, only a handful of the larger companies to receive strikes suffered a share price fall in the final quarter of 2019.

On the flipside, the majority of remuneration reports were well supported with 74% of companies garnering more than 90% yes votes in the second half of calendar 2019, steady with the 2018 result but still down on 2017.

Nine companies narrowly missed a technical strike, with more than 20% of votes cast against the remuneration report. These included larger players such as Amcor ((AMC)), Baby Bunting ((BBN)), Fortescue Metals ((FMG)), LendLease ((LLC)), Medibank Private ((MPL)), Metcash ((MTS)), and Wesfarmers ((WES))

Climate change dominates ordinary resolutions

Climate change stole the limelight on the ordinary shareholder resolutions front, proving the subject of 12 out of 15 ordinary resolutions.

The main issues related to transition planning, disclosure, lobbying inconsistent with the goals of the Paris agreement and the public health risks of coal operations. Human rights also drew some attention.

The lion’s share of votes on broader shareholder resolutions were carried, and overall share holder dissent appears to have eased.

Of the AGMs held in the second calendar half of 2019, 46% had more than 10% of votes cast against one or more of the resolutions, compared with 55% in the corresponding 2018 half and 48% in the 2017 second half.

About 50% of these were remuneration related, another 41% related to director elections, and others proved mixed including conditional spill resolutions and ratification of prior share issues.

Macquarie’s analysis was echoed by Morningstar whose analysis shows 9% of ASX 200 companies received remuneration strikes.

Morningstar says this figure compares with a 10-year average of about 14% had the rule hypothetically been in place in from 2008 to 2010.

Is the two-strike rule working?

So, looking back on 2019, it is fair to say that, despite heading into the most intense AGM season on record, shareholders demonstrated considerable restraint. They had the opportunity to attempt to spill the boards of at least 15 companies but issued only a handful of second strikes. Board spills were zero.

Some say this is proof the system is working, others that it is proof the system is a waste of time and board energy, given that the hurdle for a board spill is 50% of the vote – a much more difficult hurdle than 25%.

At face value, the figures suggest the former. Major banks substantially remodelled remuneration reports, as did other organisations, revealing a level of mindfulness and action not evident during previous periods of underperformance.

The alternative is that the remodelling was nothing but a giant mea culpa for public show – a fairly long bow to draw – or perhaps as an appeasement to regulators.

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