The 2019 AGM season
Overall trends remained unchanged, but increased focus on management remuneration
VP’s AGM statistics and trends: continuation of overall trends – but beneath the surface something is cooking
Over the last six years, VP has gathered data from Danish AGMs in order to shed light on key facts and development trends. Flemming Merring, Head of Issuer Services at VP, summarises the key take-aways from the 2019 AGM season as follows:
- Registered capital was 54 per cent of the total capital and close to the level in previous years. Foreign ownership represented at the AGMs was 39 per cent and the decrease from 41 per cent in 2018 may be attributable to the increasing investment in passive index funds.
- After an increasing trend over the past years, the number of voting instructions from foreign investors decreased slightly in 2019 – but the decrease is mainly attributable to fewer instructions concerning a single company.
- 64 per cent of foreign voting instructions were approved by AGM chairmen in 2019, which is a small increase from the previous year. The main reason for not approving voting instructions is a lack of power of attorney. According to Flemming Merring, efficiency in the proxy voting chain seems to have reached a maximum under the present regulatory regime. The intention behind the implementation of SRD II is to make it easier for investors to vote at AGMs, but the Danish regulation implementing SRD II does not in itself change the present proxy voting regulation. The opportunities for further optimisation of the proxy voting chain thus depend on its practical implementation, including new cross-border initiatives and the development of new IT procedures and processes.
- The number of ballots has been at a low level in recent years – among other things reflecting the steady increase in the number of authorisations with specific instructions, which make voting at AGMs irrelevant; fewer proposals from shareholders (ballots are typically held as a consequence of these proposals); and a generally attractive economic climate for companies. But in 2019, the number of ballots increased, due to proposals in three banks. Excluding the ballots following these proposals, the number of ballots was at the same low level as in previous years.
- The key issue for debate during the 2019 AGM season was management remuneration, but we also saw increased discussion of the sustainability issue.
The basic 2019 AGM statistics show that the development is by and large a continuation of the trends observed in previous years. However, if we observe what is actually happening at AGMs, and before and after AGMs, together with the changes expected in the years to come, the picture is more varied. More institutional investors are active at AGMs and they express their views and expectations more explicitly than before. In addition, more institutional investors engage with companies, and the interaction between companies and their shareholders has changed significantly in the wake of institutional investors’ implementation of responsible investment policies. We expect this trend to become stronger in the years to come and we foresee that investors will demand more transparency in every respect, implying that companies will need to adapt their AGM set-up accordingly.
Companies should start preparing for the new rules on remuneration policy and reporting
With regard to transparency, the implementation of SRD II among other things entails that companies should prepare a remuneration policy and a remuneration report. At the meeting at VP, Niels Kornerup presented the SRD II framework for remuneration policy and remuneration reporting and gave some valuable advice on how to prepare for the new regime – and what to watch.
On 4 April 2019, the legislative package implementing the amendments to the Shareholder Rights Directive in Denmark was adopted by the Danish Parliament and entered into force on 10 June 2019 (the general implementation deadline). The requirements concerning remuneration policy and reporting will apply to annual general meetings convened in fiscal years beginning on 10 June 2019 or later. For listed companies with the calendar year as the fiscal year, this means that they will have to vote on their remuneration policy at the annual general meeting in 2020, and that their remuneration report must be presented at the following ordinary general meeting in 2021.
The key elements of the SRD II regulation on remuneration policy and remuneration reporting are described in the attached presentation.
”Over the past couple of years, both institutional and private investors have increased their focus on management remuneration, and this focus intensified further during the 2019 AGM season. The political focus on remuneration has also intensified – and the consideration of political regulation of the level and composition of management remuneration is not foreign to many politicians. Lastly, management members at executive level are inherently very focused on remuneration schemes and structures, and the involvement of the Executive Board should therefore be taken into careful consideration when the process of preparing the remuneration policy is organised. I therefore advise all companies to start to consider how to handle the new requirements, including what to include in the remuneration policy and how to prepare the individual elements of the policy, particularly since the policy is binding,” says Niels Kornerup.
For example, he advised companies to be aware of the following when preparing their remuneration policy and planning how to handle its presentation at the AGM:
- The remuneration policy is not only the shareholders’ tool to obtain insight into and control of the management's remuneration, but also the companies’ primary channel for communicating about management remuneration and the underlying rationale.
- A reasoned and exhaustive explanation of the remuneration policy could counteract criticism of management remuneration and that e.g. the media come to inaccurate conclusions about this.
- It is important to bear in mind that the remuneration policy is a framework for management remuneration. The remuneration policy should therefore not encompass highly specific details of the management remuneration, but rather a number of broader criteria enabling the Board to navigate flexibly within the remuneration framework.
- To achieve the greatest possible flexibility for the Board of Directors, it may be expedient to incorporate opportunities to allocate extraordinary bonus and/or incentive payments. This might, for example, be relevant in relation to retention, accession and/or other types of bonus when new Executive Board members are appointed.
- Proxy advisers relatively often vote against Danish companies’ remuneration proposals. In addition to taking proxy adviser guidelines into account, it may be appropriate to enter into dialogue with the proxy advisers, who are often open to departing from their general guidelines in connection with specific AGM proposals.
- When preparing management payment schemes, companies should not only observe geographical benchmarking, but also management remuneration in relation to comparable companies in relevant peer groups. For reference, one of the most active major Danish shareholders accepts variable remuneration structures, as long as the variable remuneration is in conformance with the market, particularly in relation to Northern Europe.
- The use of specific share instruments for management remuneration is attracting ever-increasing attention and should therefore be considered carefully when the remuneration policy is prepared.
- The trend is for companies to use conditional shares as part of the management's share-based incentive pay, at the expense of share options.
Concerning remuneration reports, Niels Kornerup presented the following reflections:
- Until Section 139b of the Danish Companies Act enters into force (i.e. until the 2021 AGM season for companies with the calendar year as the fiscal year), the remuneration report can be included as an integral element of the annual report.
- However, separate publication of the remuneration report would be perceived as more transparent. Companies might thus consider aligning the content of the remuneration report with the requirements of Section 139b of the Companies Act before it enters into force.
- The Commission's guidelines – which are only available as a draft version – can serve as inspiration for the preparation of the remuneration report.
- Companies can use the remuneration report to set the scene for the debate on the company's remuneration and the underlying considerations.
- There is an increasing tendency for shareholders to ask concrete (and critical) questions about management remuneration at AGMs. The questions are often based on a lack of understanding of specific remuneration structures and the functioning of the individual remuneration components. As part of the presentation of the remuneration report, it may therefore be appropriate to articulate and explain the company's remuneration structure and remuneration components, so that the broader shareholder group gains a better understanding of the company's remuneration.
Compared to existing regulation, in several ways the new requirements will significantly change how listed companies should handle management remuneration, how they should formulate the remuneration policy, and not least how they should report on remuneration. Companies should therefore soon start to consider – if they have not yet done so – how to act under the new regulation. This is an obvious opportunity to reconsider the elements and the composition of management remuneration, and to consider how to achieve the necessary flexibility and communicate with relevant stakeholders.
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