Active ownership: how we voted on governance issues in 2023

UK: remuneration concerns

Our letter to board chairs before the 2023 AGM season made it clear that we expected remuneration committees to reduce the vesting of long-term incentive plans (LTIPs) where there was a windfall gain resulting from significant Covid-induced share price declines at the time of their grant.

With only a few exceptions, such as Paragon Bank, we felt that boards responded to this and our call to show restraint on chief executive officer (CEO) pay given the cost of living crisis. However, we continued to vote against remuneration reports where we thought that executive pay did not align to our clients’ long-term interests.

Two UK companies received more than 50% votes against their remuneration reports: Unilever and Plus500. At Unilever, we were concerned about the high salary for the incoming CEO, as well as the ongoing lack of a returns metric in the LTIP, an issue on which we have engaged for a while. Meanwhile, at Plus500, we had significant concerns about how the remuneration committee determined the CEO’s pay.

A new development this year were the 30 resolutions requesting an increase in the limit to issue shares without pre-emption rights that received more than 20% opposition. However, in the spirit of the new guidance from the Pre-emption Group, we chose to give companies the benefit of the doubt except where we had serious concerns with companies’ capital management. For this reason, we only voted against five companies on this issue.

US: shareholder resolutions and executive pay

There were two standout themes from the US proxy season. First, shareholder resolutions remained high on the agenda. While resolutions were filed on a range of human capital, social and climate topics, we were encouraged to a see a significant number of resolutions calling for governance reforms.

For example, we supported resolutions asking for:

- an independent board chair at Walgreens

- a policy to include non-management employees as prospective director candidates at Amazon; for future severance agreements to be submitted to a shareholder vote at Global Payments.

Overall, we supported c.60% of shareholder proposals this year. A key driver of our voting decisions was whether the outcome of the proposals would best serve the long-term financial interests of our clients’ investments.

Executive compensation was the second key focus. Our support for say-on-pay proposals showed a slight uptick compared to 2022 due to greater disclosure of pay outcomes, more performance-based awards and fewer companies granting one-off special awards.

We still, however, continue to be vigilant on whether pay outcomes are aligned to the shareholder experience. To help address this, we toughened our stance on compensation this year. For example, we took a more stringent view on performance targets, for example voting against payments made for less than median relative total shareholder return. This continues to pave the way for our ongoing engagement with US companies in the forthcoming year.

Europe: virtual AGMs and remuneration disclosure

Legal changes in Germany, Switzerland and Finland to enable companies to make permanent the temporary Covid measure of permitting virtual AGMs were contentious as many companies took this option. Opposition from investors, including Schroders, was widespread. We were concerned about the potential for reduced transparency and accountability, including the difficulty of asking questions and engaging with company boards and management. Our stance remains that shareholder meetings should be in-person or hybrid, that all board members and senior management attend in person, and that shareholders have the visible right to ask live and unmoderated questions.

An issue that still drives a significant number of votes against board recommendations, is that of remuneration disclosure. All EU issuers are required to produce a remuneration report annually, as well as to table a remuneration policy for shareholder approval at least every four years. Despite ongoing engagement, corporate transparency around specific performance targets and how pay outcomes relate to them is often lacking. We struggle to support remuneration resolutions without this disclosure as we are not able to assess alignment between pay and performance.

Asia: rising female board representation

Japan continued to see increased shareholder proposals this year, with a record number of proposals being tabled for a second consecutive year. Notably, there was an uptick in proposals aimed at improving capital efficiency and the price-book-value ratio which aligns with recent regulatory changes affecting prime market-listed companies. We supported these resolutions where the language and demands were not overly prescriptive, and where we felt that both shareholders and management would benefit from their implementation. For example, we supported such a resolution at Wakita & Co.

In South Korea there has been an increase in female representation on boards. Following the introduction of a mandatory gender quota for large Korean companies, we have seen a 14% increase in gender diversity. More positively, we also saw some smaller-cap companies appoint new female board members.