IN FOCUS6-8 min read

What to expect from the 2024 AGM season

We look ahead to this year’s proxy season and highlight the issues most likely to be up for debate.

30/01/2024
Photo of shareholders at AGM

Authors

Corporate Governance Team

With rising geopolitical tensions, climate change and ongoing global economic uncertainty, 2024 is shaping up to be another challenging year. As we approach the 2024 AGM season Schroders’ Corporate Governance team will be interested in how boards are refining their strategies and navigating these systemic risks and potential opportunities.

In December, we wrote a letter to the chairs of the public companies in which we are invested detailing how we are thinking about key governance issues and our expectations for companies ahead of the 2024 proxy season.

UK – executive pay under scrutiny

After what was a quieter than anticipated 2023 AGM season, 2024 could be a more interesting year in comparison. The UK market is at a critical juncture with low valuations, higher outflows, lack of liquidity and companies being taken private at a faster rate than new listings. Questions around UK competitiveness are front of mind for boards and shareholders alike.

Executive pay continues to be part of this debate, with the disparity between executive pay in the UK and the US being cited as one of the disadvantages for UK PLCs when competing to attract and retain top talent. As a result, we expect to see more UK companies proposing remuneration policies that replicate variable pay structures common in US companies, such as a hybrid long-term incentive award including both time-based and performance-based equity.

When assessing executive remuneration, we will be looking for strong financial performance to be the key driver of pay outcomes and will be scrutinising awards where achievement of targets is driven by personal, non-financial performance measures (such as ESG – environment, social, governance - factors).

We will also be interested in the ‘tone from the top’. Are boards adequately overseeing workforce pay, to ensure equality and fairness? Are they taking steps to improve diversity and inclusion? And are they making decisions that consider all stakeholders, including employees, customers and suppliers as well as respecting human rights? These will be key considerations for us when we’re making voting decisions this year.

US – shareholder rights and executive pay in the spotlight

We think this will likely be another vibrant proxy season in the US, characterised by a large volume of shareholder resolutions covering a range of ESG issues. Like 2023, we anticipate reforms to improve shareholder rights to be a key focus for shareholders filing resolutions at US companies this year. For example, calls for an independent board chair and equal voting rights could be topics that we see proposals on.

When making voting decisions on these resolutions, we will be considering, above all, whether the intended outcome is in the best financial interests of our clients’ investments, if the resolution is the best way to address the issue and if it will ultimately add value to what the company is already doing.

It’s probable that executive pay will also remain in the spotlight this year and continue to face an elevated level of scrutiny in the context of a challenging labour environment and increased pressure on shareholders, from many of their clients, to justify support for large pay packages.

This year, the boards’ ability to demonstrate a clear alignment between pay and performance will be critical to securing our support for their Say-on-Pay proposals, as well as ensuring that management is being incentivised to demonstrate the right behaviours and act in the best interests of its shareholders, over the medium to long-term.

We will also think about executive pay in the context of a company’s wider stakeholders, particularly its employees. Assessment of how companies treat their employees in relation to fair pay, diversity and inclusion and good human capital management are going to be under the microscope this year. In most cases, we anticipate any salary increases for executives to be at a lower rate than those of the wider workforce.

Europe – focus on alignment of pay for performance, and diversity & inclusion

Most European companies now include an element of ESG-linked remuneration. We are concerned by the tendency for non-financial targets to be met more fully than financial targets, suggesting that they are not demanding enough. We will, therefore, increasingly be scrutinising this trend. We may vote against companies where personal, strategic and sustainability targets pay out significantly more than the financial elements of variable pay.

To help with our assessment of pay for performance alignment, we encourage companies to be transparent about the ESG targets being used, why these are deemed as material to the company’s strategy, and how payouts have been determined.

Diversity and inclusion remain a priority. Whilst we have historically monitored and engaged on diversity at all levels across the organisation, from 2024 our voting approach in Europe will extend to diversity on the executive committee in addition to on the board. At a minimum, we expect one woman in an executive position.

We also encourage companies to ensure succession plans consider diversity at the top of the company including roles such as chair, lead independent director, CEO and CFO. We expect to see evidence of increasing diversity and inclusion, not only limited to gender, throughout the workforce.

Resolutions to amend articles to permit the use of virtual AGMs are likely to remain under a lot of scrutiny in 2024. The risk of reduced transparency and accountability in virtual meetings, including the difficulty of asking questions and engaging with company management, all raise concerns for shareholders.

Our stance remains that the preferred format for shareholder meetings should be in-person or hybrid, that all board members and senior management attend in person, and shareholders have the ability to ask live and unmoderated questions. We may be more lenient where companies state that these permissions can only be used in exceptional circumstances such as a pandemic.

Asia – increasing commitment to ESG issues

Given the recent wave of governance reforms across several markets in Asia, we expect a more committed approach to ESG issues in 2024. 

Singapore has introduced tighter rules on the length of tenures for non-executive directors, adopting a hard-stop threshold of nine years to encourage more diversity and the refreshment of boards. Another significant regulatory change in Singapore is the disclosure of CEO remuneration by companies (on a comply or explain basis) will be mandated. Although these changes will take effect on 1 January 2025, it is expected that some companies will undergo board refreshments in 2024 to stay ahead of their peers.  

Whilst we recognise the argument that some valuable experience on the board may be lost as the result of refreshment, our expectation is that boards will enrich their current composition by integrating new perspectives through the addition of new, diverse members. Where we have not seen sufficient refreshment, and the average tenure of the board exceeds a decade, we may vote against the Chair of the Nominating Committee.

Japan has witnessed a dramatic shift with Tokyo Stock Exchange (TSE) reforms actively aiming to boost shareholder value and urging companies to unwind cross-shareholdings. While positive for shareholders of undervalued stocks, this may result in an increase in shareholder resolutions calling for immediate action to address low price-to-book ratios, which may not be in the best interests of longer-term shareholders. We will, therefore, review such shareholder resolutions on a case-by-case basis to ensure that they do not have unintended consequences.

There has also been an increased focus on gender diversity at both government and TSE levels. We welcome potential further declines in all-male boards, as well as an increase in female representation at both board and senior management levels. We will continue voting against top management where this is not the case. 

In China, the China Securities Regulatory Commission (CSRC) has emphasised the role of directors and the quality of independent non-executive directors, leading to the abolition of supervisory boards and the introduction of audit committees in their place. Supervisory boards have long been opaque and unclear in their purpose, with supervisors often linked to management and not considered independent. We welcome this change as it should lead to greater and more accountable independent oversight.

On the other hand, we are observing several retrograde changes in South Korea, such as the introduction of cross-shareholdings, and lobbying from conglomerates to introduce virtual-only AGMs, which is an unwelcome reduction of shareholder rights.

South Korea has experienced a boom in the retail shareholder base. According to the Asian Corporate Governance Association, almost 30% of registered voters in Korea are active retail shareholders, who are often relatively young. This has been leveraged by local activists, for example, Align Partners with SM Entertainment, who have successfully utilised social media to garner support and push for governance reforms.

An increase in activism and shareholder resolutions at Korean companies in the upcoming year is expected; a welcome trend given the long-standing governance issues in the market.

Emerging Markets (excl. Asia) – focus on quality of disclosure, board diversity and emission reduction targets

Despite steady improvement over the years, emerging market companies could still further improve when it comes to the quality of their disclosure. Lack of sufficient disclosure is likely to continue to be a key challenge during the 2024 voting season. When we wrote to board directors in December, we called for improved quality of supporting information on board resolutions, to enable us to make more informed voting decisions.

We also continue to encourage companies to aspire towards achieving a genuinely diverse board, senior management team and workforce, including taking diversity into consideration when succession planning, specifically for roles such as the chair, lead independent director, CEO and CFO.

Finally, we hope to see some progress this year in relation to companies setting scope 1, scope 2 and scope 3 emission reduction targets, and publishing detailed climate transition plans. Whilst many companies have made the commitment to transition to net zero by 2050, we would like to see that addressing climate risks is a central focus for companies this year, and in years to come.

Authors

Corporate Governance Team

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