Capital Flows

Remuneration and diversity under the microscope at AGMs

Asset managers and investors are seeking more action from companies over fair pay, as well as gender and racial board representation.

The 2022 AGM season is shaping up to be a busy – and contentious – period for listed companies as asset managers and investors prepare to scrutinise boards over pay, diversity and climate issues.

In one of the most recent announcements, Royal London Asset Management, one of the UK’s largest investment groups with £164bn in assets under management, set out executive remuneration and diversity issues as key topics for voting this year. RLAM corporate governance manager Sophie Johnson said it was “paying particularly close attention to how companies operate in a post Covid-19 world”.

She added: “Pay awards this year are a huge focus – and we will be identifying those who are making better decisions, ensuring they are in line with their financial performance. We will also be looking closely at those companies who haven’t paid back Covid relief but are choosing to grant substantial bonus payments.”

RLAM announced on 3 May that it had voted against the pay proposals of food delivery company Ocado, citing “serious concerns” about a “poorly designed” incentive plan. “We have consistently voted against, or abstained on, executive pay for a number of years at Ocado, including voting against the value creation plan,” said Johnson. The value creation plan would see executives receive as much as £20m a year, according to RLAM.

“We would have preferred a more balanced long-term incentive plan, with a range of measures looking at different aspects of performance and the overall health of the business,” Johnson added.

Remuneration and performance

The Covid-19 pandemic highlighted, and in some cases exacerbated, inequalities across society. With inflation also on the rise, investors are more likely to scrutinise executive pay packages.

Brian Harward, a research scientist at US-based research group Ethical Systems, says improving transparency and communication around executive pay could have a positive impact, if this demonstrates that pay gaps between employees and executives are fair.

In a recent blog on executive pay, Harward said large pay gaps “may improve performance when employees perceive it as fair”, adding: “Pay gaps that go unexplained – whether they’re due to a CEO being overpaid or employees being underpaid – signal lower future performance.”  

Last year, there was an increase in ‘say on pay’ proposals being rejected by shareholders, according to proxy voting firm ISS. ISS says this “signals many institutional investors’ increased willingness to hold companies accountable for poor compensation decisions, which will likely be a continued trend into 2022”.

Push for diversity

As national regulators begin to roll out diversity guidelines and requirements for corporate boards, investors are also calling for improvements at the companies in which they invest. 

New UK rules, in force from 1 April 2022, require companies to align with diversity targets on a ‘comply or explain’ basis. They include women comprising 40% of boards and at least one board member being non-white. Meanwhile, in the EU, many countries are below the 40% target for women on boards set by the European Commission in 2012. 

Proxy advice firm Glass Lewis will “generally recommend” a vote against any nomination committee chairs where the company has failed to have at least one non-white director and “failed to provide clear and compelling disclosure for why it has been unable to do so”. The company said it would also include additional analysis regarding corporate disclosures of board-level ethnic diversity.

Lack of transparency

Meanwhile, investors are also starting to question companies’ use of “concealment clauses” and non-disclosure agreements, especially at major technology companies such as Alphabet, Amazon and Meta. Investors are concerned that these are being used to stop current and former staff from speaking out about workplace practices.

A shareholder proposal being put to Amazon’s board at its AGM on 25 May will call for the company to prepare a public report “assessing the risks to the company associated with its use of concealment clauses”.

It follows several instances of women having sued Amazon over alleged racial or gender discrimination, with the National Labor Relations Board in the US subsequently finding that the company had “illegally retaliated” against them, according to the proposal.

Amazon has recommended investors vote against the proposal. It says that it has already produced such a report and is supportive of employees’ rights to speak out.

 

 

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