AGM wash-up: A perfect time to review shareholder unrest

IFRS news

A spike in first strikes experienced by a handful of high profile listed companies this AGM season should remind directors that poor management of stakeholder’s expectations in the lead-up to the annual general meeting can seriously backfire, cautions Ralph Martin, National Technical Director at RSM Australia.

By better tapping into the mood and expectations of shareholders, listed companies are more likely to avoid deteriorating confidence in their remuneration plans and a potential spill of their boards next year or beyond.

Under Corporations Act rules, boards are permanently on notice of a potential spill, and those that forget this do so at their peril. 

An advisory vote must be held at each AGM on the remuneration report and a ‘no’ vote of 25 percent or greater results in a first strike. When this occurs, the following year’s remuneration report must explain whether and how the issues raised by shareholders were taken into account.

If a ‘no’ vote of over 25 percent against the remuneration report occurs at the following year’s AGM, then a second strike occurs.  In this situation, the shareholders must then vote on a spill resolution, which would require all directors to stand for re-election within 90 days of the meeting.

Even for companies that didn't’t experience a first strike, any notable rise in votes against its remuneration plans should trigger alarm bells. To ensure it doesn't’t become an ever bigger issue over the next 12 months, smart boards will want to address the root cause of smoldering shareholder unrest.

As recently witnessed with first strikes against stocks like CSL, Slater and Gordon, AGL Energy and Commonwealth Bank of Australia, a vote against remuneration plans is invariably a lightning rod from the myriad of issues bothering shareholders.

That’s why boards clearly need to invest more time providing better disclosure, especially when a tough earnings outlook only fuels the reluctance by boards to offer anything more than hard numbers.

That’s especially relevant for junior resource stocks and R&D-intensive technology companies that can, almost by default - through insufficient disclosure - risk losing support from shareholders who may perceive the company’s board and management to be asleep at the wheel.

Slater and Gordon shareholder backlash over bonuses, should also remind companies what happens when they gratuitously reward incompetence.

A first strike was also recorded against blood serum and vaccine manufacturer, CSL – which despite a 10 percent drop in annual profit - moved to a US-style remuneration plan where bonuses are vested for clearing non-financial hurdles and short-term incentives well above the Australian norm.

Provide meaningful commentary to Shareholders

Clearly, there’s an art to providing meaningful commentary to shareholders and the broader market, especially when companies deliver disappointing results or remain years away from posting a profit. That’s equally true for companies in start-up phase that struggle with disclosure in fear of alerting new market entrants to the source of their competitive advantage.

Nevertheless, all companies, regardless of size, should consider how they are communicating their underlying narrative, both within the operating and financial review sections of the annual report and progressively throughout the year. That’s equally important for good stocks that, despite consistently delivering solid results the market’s come to expect, provide insufficient commentary to support the numbers.

Given how harsh the market can be on stocks that under perform, and especially IPOs that fail to meet prospectus forecasts, it’s important to manage expectations and minimise the likelihood of negative surprises.

The best time to start working on building a better narrative for the business is in the aftermath of the last AGM, when shareholders have aired their key concerns.  This presents an opportunity to review any other shareholder grievances that surfaced throughout the year.

Align remuneration with performance

Start by reviewing ways to make the company’s documentation more transparent around its remuneration strategy. What you should be trying to communicate within the remuneration report is how executive remuneration and greater shareholder value are directly aligned.

The use of independent remuneration consultants may help to align remuneration structures with industry best practice, and avoid any perception of conflicts of interest.

Other things to think about include the terms of any share option schemes. How these are communicated will determine whether they’re perceived to reward performance as opposed to entitlement.

To ensure the company approaches it’s AGM without any surprises, company secretaries and CEOs should remain in constant contact with key shareholders throughout the year.

First strikes matter

Companies that think first strikes are little more than a quickly forgotten embarrassment should think again.

Even where there is no realistic prospect of a board spill resolution succeeding, first and second strikes are an avoidable distraction and expense.

Recently released research by Macquarie Wealth Management shows that trading is 35 percent higher on the day of the AGM and for companies that receive a negative surprise, with the share price drifting down for the following six weeks and underperforming by an average 2.63 percent in the 30 days after the meeting.