The Covid-19 outbreak saw the AGM shift online, raising further questions around the effectiveness of the existing model.
The annual general meeting (AGM) is one of the best opportunities for investors to hold boards and management teams at investee companies accountable, as well as to hear the views of other shareholders.
While investors are privy to a regular flow of information throughout the year, for example, quarterly investor calls, the AGM is where they can make a more tangible difference by way of vote.
However, the existing model is far from perfect. Important topics of discussion are crammed into a few short hours on an annual basis, essentially leaving too much to be covered in too short a time.
The Covid-19 pandemic has also had a big impact on how AGMs are run, with corporates shifting their meetings online. This hasn’t been without its challenges.
“Arguably, the current AGM model hasn’t kept pace with changes in society,” agrees Matt Crossman, Stewardship Director at Rathbones Investment Management.
Non-profit organisation ShareAction recently published its suggested future model, which includes encouraging more year-round engagement with the formation of “an annual calendar of communications between companies, shareholders and stakeholders”. In parallel, it suggests separating the “discursive elements” of the AGM from shareholder voting, which would occur after the AGM, the report noted.
This new approach would be “underpinned by a combined physical and online venue, which will transform the AGM into a genuinely accessible event”.
In a webinar held yesterday discussing the report, Lily Tomson, ShareAction’s Head of Networks and Co-Chair of the working group behind the proposal, emphasised that the organisation is looking to “generate further discussions on the nuances of the changes that are required of AGMs”.
ShareAction acknowledges that it’s implausible to suggest that investors should attend the AGM of every single company they invest in. Instead, says the report, investors should prioritise the top 10 companies they hold in terms of market value, companies in which they hold more than 3% of the total share capital, and companies where investors have “significant ESG concerns”.
“Companies can control the narrative for 364 days of the year, but the AGM is the one day when directors can be quizzed and challenged in person, when uncomfortable questions can be asked,” adds Crossman, who was part of ShareAction’s working group.
“As an investor, I could learn more about the quality of a board in an hour of open Q&A at an AGM than in a whole year of carefully cultivated corporate communications. Investors are likely to have more confidence in boards that can handle challenges with a mastery of detail and strategic thinking.”
Section 172 obligations
The future AGM model will need to better account for Section 172 of the updated UK Companies Act (2006), Rathbone’s Crossman continues.
Section 172 states that directors must account for the interests of stakeholders, encompassing employees, relationships with suppliers and customers, and their company’s overall impact on the environment and society.
“The fact that these issues are given short shrift at most AGMs has contributed to a lack of trust in companies among the general public,” Crossman says.
One of ShareAction’s proposed changes would be for company boards to include a report that is specifically focused on Section 172’s obligations and engagements alongside the company’s annual reporting and learning reviews.
“In the future, institutional investors will increasingly participate in the AGM process through an ESG lens – seeking to understand how a company is fulfilling its Section 172 obligations alongside other issues they would like to explore with a company,” the report added.
Behind closed doors?
Following the outbreak of Covid-19, temporary relaxations of certain requirements in the Companies Act – and therefore Section 172 – were introduced by the Corporate Insolvency and Governance Act (CIGA) 2020. This has allowed AGMs to be held virtually.
Due to the pandemic, virtual AGMs are becoming more popular globally, too. Warren Buffett’s Berkshire Hathaway, Amazon, BMW and Johnson & Johnson all elected to hold their AGMs online last year.
In the UK, retailer M&S hosted its 2020 AGM online. This was “one of the most interactive meetings of the season”, according to the ‘2020 AGM Trends’ report published by financial services firm Equiniti. M&S reported that 1,511 individual shareholders engaged via its digital platform and 86 questions submitted (compared to 28 the previous year).
Nonetheless, the pandemic has added another facet to the discussions needed at AGMs, the Principles for Responsible Investment (PRI) noted. Last year, the UN-backed body released guidelines for questions investors should be asking investee companies “to further their stewardship activities and build a collective response to the crisis”.
However, in the UK, the changes to the Companies Act also mean “shareholders do not have the right to attend the meeting in person or otherwise, so companies can hold closed door meetings instead,” according to global law firm Norton Rose Fulbright. If a company chooses to hold its meetings behind closed doors, then shareholders legally cannot attend, and will only have the option to vote. These relaxations in format have been extended until March 30 2021.
“While the position for companies planning their AGM before the end of March 2021 is clear, it is very uncertain for those companies planning on holding an AGM after,” Norton Rose Fulbright noted.
Accountability during a pandemic
Despite the uncertainty, not all are convinced of the threat to shareholder rights and management accountability.
“On the whole, online AGMs haven’t seen any less engagement from investors,” says Joe Dabrowski, Deputy Director of Policy and Advocacy at Pensions and Lifetime Savings Association (PLSA). “Attendance continues to increase and we’ve seen an increase in votes subject to 20% dissent, and an increase in shareholder resolutions. Moving into 2021, the jury’s still out on whether virtual AGMs are here to stay, but it seems clear that shareholders are increasingly keen to hold boards to account.”
Dabrowski adds that investors should continue to “keep an eye” on how investee companies manage the pandemic, particularly around social issues, ahead of the next AGM. The PLSA encourages investors to consider voting against directors of corporates they believe didn’t behave “appropriately” towards their workforces throughout Covid-19.
“If a company behaves poorly now towards their workforces, it will likely have a material impact on their future revenue, operating costs and even the post-Covid-19 regulatory environment. This in turn has consequences for scheme investors’ risk-adjusted returns and ultimately for the value of beneficiaries’ savings,” he says.
Nonetheless, with four out of five FTSE 350 companies holding their AGMs ‘behind closed doors’ in 2020, according to ShareAction research, concerns persist about restrictions on the opportunities for investors to engage with investee companies.
Covid-19 has merely exacerbated an existing trend, Crossman notes, more quickly exposing the flaws within the existing AGM model. “We had already experienced a steady erosion of company commitment to dialogue with stakeholders at AGMs,” he notes.
Virtual versus in-person AGMs
The shift to online AGMs can have benefits, allowing investors to “travel digitally”, rather than having to travel physically to meetings, says Jeremy Richardson, Senior Portfolio Manager and Consumer Specialist on the Global Equity Team at RBC Global Asset Management.
“The move to the digital realm has actually prompted innovation. It would be useful if the AGM became a hybrid model, with both physical and online aspects,” he continues.
Hosting an AGM online is cheaper and, for international investors, more convenient. During lockdown, Richardson noticed more regularity in communication from companies which could arguably bolster AGM discussions. Working from home during a pandemic, corporates, investors and asset managers are “working more proactively” to have regular conversations with one another.
“It’s no longer the case that you have to diarise a meeting for an hour every six months or so. We’re seeing a more informal and fluid conversation, reflecting the fact that the world is that much more uncertain. I hope we can hang on to that, because that has been very constructive,” Richardson notes.
Nonetheless, the virtual AGM should not replace the physical model entirely.
“In-person AGMs present investors of all sizes with an unfiltered opportunity to question companies and have dialogue around particular proposals. It’s especially important for smaller investors who see less engagement throughout the year,” he adds.
“It’s important that we look to hold on to the best of the old. And by that, I mean the guaranteed chance once a year to look the entire board in the eye and challenge them. Responsible capitalism has no future without accountability,” Crossman agrees.
“Heated exchanges and unmet expectations”
Institutional investors, who generally own over 90% of a company’s shares, are “frequently absent” from FTSE 100 companies’ AGMs, ShareAction noted.
“No two AGMs are alike, but typically smaller retail shareholders attend whilst those with the most voting power – the institutional investors – do not,” Crossman points out.
Furthermore, as the AGM is the main point of contact between shareholders, stakeholders and company staff each year, it can often suffer from “heated exchanges and unmet expectations” when investors are in attendance.
To improve attendance and participation, says Richardson, the AGM should be adapted to better facilitate discussion through a blend of online and in-person resources.
Crossman notes that having proxy voting take place ahead of the AGM arguably “robs” the meeting of its usefulness when it comes to “debating matters of strategic importance”.
Instead, as is suggested in ShareAction’s future model, having the proxy voting take place after the AGM would allow voting decisions to be made on the basis of answers given during the meeting and also may also encourage more investors to attend the discussion ahead of casting their vote.
“Shareholders must understand the purpose and impact of the companies in which they invest more intensively than ever before, and to do this, they must listen to the stakeholders of their investee companies,” ShareAction said.
Initiatives to drive active stewardship
On ESG issues, in particular, investors are looking to scrutinise corporate performance and future-focused targets. AGMs can play a key part in ensuring investors, asset managers and investee companies are all on the same page when outlining ESG-related priorities.
To better standardise and manage the process, smoothing the way for investors to undertake more active stewardship, industry bodies are launching initiatives designed to address issues with communication.
In the UK pension schemes space, for example, the PLSA has partnered with the Investment Association (IA) to launch a new steering group that will “examine how stewardship and long-term investment can be better integrated into the investment process to create sustainable value for savers and investors”, Dabrowski says.
“Through this new group, we will aim to look at issues including the proactive steps investment managers can take to understand and deliver their clients’ stewardship priorities and the role of asset owners in ensuring stewardship plays a key role in their approach to manager selection and ongoing performance and oversight assessment,” Dabrowski adds.
Better standardising the structure of the AGM may help improve communication between corporates, investors and asset managers, ensuring that the meeting is more productive for all involved.
When addressing ESG-related performance within pooled pension funds, Andrew Ninian – Director of Stewardship and Corporate Governance at the IA – says that AGMs provide “an important public forum” that will further help shareholders hold company directors accountable.
“Central to this is the opportunity for live Q&A between shareholders and the board, investors want to see this open dialogue maintained in the case of a virtual or hybrid AGM,” Ninian says.
“Use it, or lose it”
This year’s AGM season – and discussion of future models – is likely to be shaped by investors’ ever-increasing focus on ESG-related disclosures.
In its updated 2021 Policy Guidelines, Institutional Shareholder Services (ISS) stated it will consider recommending a vote against the election or re-election of any director the responsible investment solution provider believes has exercised “demonstrably poor risk oversight of environmental and social issues, including climate change”.
To see a faster adoption of climate-related targets in 2021, such as net-zero carbon emissions pledges, Rathbone’s Crossman wants to see the “wider inclusion of stakeholders in the AGM process, for affected group to have standing at AGMs even if they aren’t shareholders”. He adds that this is particularly appropriate given the sheer scale of some public-listed companies – more manpower is needed to up the pressure and facilitate change.
Initiatives such as Say on Climate – which was first launched by the Children’s Investment Fund Foundation (CIFF) – have been introduced in order to encourage companies to publish their climate transition plans, putting them to an annual shareholder vote.
“Shareholders in general, and institutional investors in particular, must raise their game. They must understand not only the purpose, but also the impact – positive and negative – of the companies in which they invest,” said Guy Jubb, Vice Chair of the European Corporate Governance Institute and Co-Chair of ShareAction’s working group, speaking at the webinar.
Jubb emphasised the importance of investors continuing to hold corporates accountable on all ESG-related issues throughout the year, exercising their right to vote at the AGMs. “ESG has now moved from the wings to centre stage,” he said.
With the pandemic allowing companies to change their bylaws to shift AGMs online or behind closed doors, Crossman’s concern is “that they will retreat into this comfortable shell and dodge the hard questions”.
Any future AGM model needs to avoid becoming “another scripted, set-piece event”, instead allowing investors and stakeholders to hold corporates accountable.
“AGMs are a powerful tool for corporate accountability and well-functioning responsible capitalism. Use it, or lose it,” Crossman concludes.