Review of 2018 AGM season and a look forward to the 2019 season

Insights - What we think

By Jai Baker, Head of Industry at Link Market Services

By Jai Baker, Head of Industry, Link Market Services

We have found that there is a clear lack of engagement from shareholders at client general meetings (GMs) after analysing voting results of over 1,000 GMs from 2018. We believe that using technology to create hybrid meetings may be the answer to this problem.

Is there an engagement problem?

Engagement is high on the business agenda as new corporate governance reporting requirements are being put in place to improve the engagement of shareholders, employees and other stakeholders.

We welcome these changes, but our data suggests there is some way to go before we can truly say that we have fully exhausted the engagement potential of the present arrangements.

With less than 4 per cent of shareholders returning proxy cards, less than 6 per cent of shareholders voting and a third of meetings passing with no questions asked, shareholders do not appear to be taking advantage of opportunities to influence corporate decision-making.

Is there more that can be done within our existing legal and regulatory framework to boost voting and engagement especially within the retail shareholder base? The mechanisms are there but how can shareholders be encouraged to use them?

Available technology

It could be argued that removing paper proxy cards reduces the number of channels shareholders can use to vote.

But 96 per cent of unused proxy cards suggest it is not a method that has much attraction for most shareholders. It is hard to ignore the waste of resources and cost the unused proxy cards represent.

According to the Office of National Statistics, 90 per cent of UK households have internet access and 90 per cent of adults use the internet. We would expect similar statistics for Ireland. These figures suggest that using the internet to deliver and receive voting choices or information on the actual meeting event may be an effective way to boost engagement.

A number of our client companies have opted to go down the paperless proxy route to engineer a greater use of the available technology. In general, companies that have removed proxy cards have not seen any change in voting numbers as shareholders migrate to electronic mechanisms. But they have cut costs and reduced their impact on the environment.

Regulation and understanding

Technology can certainly make voting easier and simpler but what about the legal and regulatory aspects?

Some shareholders feel that their influence on the outcome of voting at AGMs is minimal and therefore there is little point in exercising their rights. Or is it more to do with their understanding of what their rights are?

Shareholders can feel frustrated when they attend GMs only to find that their relatively small voting power is swamped by institutional proxy votes already lodged. However, they can still personally hold the directors to account and this power is not to be underestimated; many small retail shareholders have challenged boards to great effect.

There is a school of thought that suggests shareholders who invest via nominees are unsure of their rights or the rules of the nominee and therefore fail to exercise their rights. It is possible that regulatory change may help and that the Shareholder Rights Directive II will improve shareholders’ rights when using nominee services to exercise their voting powers, and force intermediaries to facilitate this.

So, there are various underlying reasons but what is clear from our analysis is that a large proportion of registered shareholders are not exercising their rights and only 54 per cent of the issued capital in the UK and 61 per cent in Ireland are engaging in the decision making process.

Shareholder engagement in the general meetings

Shareholder questions – in numbers[1]

  • Core areas of corporate performance dominate. ‘Corporate strategy’ and ‘financial performance’ are the two most common topics, representing 40 per cent of questions.
  • CSR and environmental issues appear third in the list of topics, representing 5 per cent of questions, closely followed by dividend policy.
  • At nearly one third of GMs, no questions were asked.

Aside from the formal business of the GM, the range of other questions asked by shareholders is varied. For companies with physical outlets it is common for enquiries about product quality, complaints and customer service to be raised. Shareholders also use the opportunity to question the GM itself – the event location, timing, catering and content of associated documentation. In total these account for around 10 per cent of questions asked.

When shareholders exercise the right to hold the board to account it appears that no subject is off-limits. Most boards are willing to allow the conversation to touch on all aspects of business even if these are not critical corporate or financial issues. This approach seems appropriate but it is important not to lose sight of formal business and the holding to account of the board of directors for the business critical decisions.

An absence of ‘hot topics’?

We expected to see more of the predicted ‘hot topics’ in the GM questions asked, including executive remuneration, board composition, diversity, the gender pay gap and auditor re-appointment. Surprisingly, these in total represented only 10 per cent of questions raised by shareholders. Companies are fully aware of the sensitivities around these subjects and are prepared to explain their approach to them at the meetings as well as in corporate document briefings.

Is voting telling a different story on ‘hot topics’ to the questions asked?

Looking at the voting results from our client GMs and the Investor Association Public Register[2] (IA), it is clear that shareholders are taking action in some areas of these “hot topics” even if they are not asking many questions. Among our client companies we saw a total of 399 resolutions register a vote against of 20 per cent or over. The IA register, looking at the FTSE All-share Index, recorded 231 votes against.

Remuneration policy/report

Many companies are engaging actively with shareholders in connection with their remuneration proposals. Among our client companies we saw over 12 per cent of remuneration report/policy resolutions with a high vote against, while in the IA Register there  were 63 companies (or 27 per cent of the total over 20 per cent against votes).

Director re-elections

These resolutions are generally supported by shareholders. But they are sometimes targeted if shareholders feel that the board’s approach to executive remuneration is wrong or that directors are taking on too many board appointments.

On the Public Register, 87 resolutions (or 38 per cent of the total resolutions with 20 per cent against) had a high number of votes against (up from 57 in 2017) and 17 director re-election resolutions were withdrawn. The results for our client companies accords with the IA percentage.

Auditor re-elections: On the whole few questions were asked and only seven auditor resolutions received high votes against, according to the IA register.

So how can we encourage shareholders to engage in the GMs of the companies they invest in? Can we use technology to develop more channels for investors to join in the AGM process and exercise their rights to speak/vote at meetings?

A changing GM approach for the future

Start by removing paper?

We have highlighted that 96 per cent of paper proxy cards are never used/returned in the voting process. The internet is sufficiently mature and well used for all aspects of life now that it seems strange not to use the technology for interaction with shareholders.  Demographic of investors are becoming users of the technology as the figures from the Office of National Statistics[3] below show.

  • 90 per cent of adults in GB use the internet weekly, up from 51 per cent in 2006
  • 87 per cent of households with 2 adults that include one 65 year-old or older have internet access
  • Among the 65 to 74 age group recent internet use has increased from 52 per cent in 2011 up to 80 per cent in 2018  
  • Among the 55 to 64 age group recent internet usage was 92%

Technology can be a low-cost method of increasing the variety, quality and frequency of communications with shareholders to better engage them  with a number of corporate matters.

The right to be heard – in person or not

Our data shows that shareholders do not attend General Meetings in large numbers. Reasons for this include:

  • Physical distance to the venue
  • Inconvenient timing of the event
  • Cost of travelling to the venue
  • Lack of confidence in engaging at a high profile event and tackling directors head on – an issue which is clear in the high proportion of meetings  that pass with no questions asked (1/3rd)
  • Feeling that they will not or cannot influence the outcome of any voting or decisions

Is there more of a debate to be had about how we enable and encourage active engagement from shareholders in the GMs of the companies they invest in? Can we utilise technology to develop more channels investors can use to become involved in the GM process and exercise their rights to speak/vote at meetings?

While there has been some criticism of moves to introduce completely virtual GMs, hybrid GMs are a viable and positive solution that combines the merits of physical and online attendance where voting and speaking is possible from either ‘location’. Link Group was the first ASX200 company to hold a hybrid AGM; it attracted twice as many attendees as its physical meetings and saw participation from shareholders across the USA, Australia and New Zealand.

Over the last two years some companies have been making changes to their Articles of Association to ensure they are compatible with holding virtual or hybrid meetings in the future should they wish to. We are working with our colleagues across Link Group to enhance the voting experience by hosting hybrid meetings in the near future.

Will regulatory change help?

It is possible that the Shareholder Rights Directive II will improve shareholders rights to exercise their voting powers when using nominee services and force intermediaries to facilitate this. However, this will not help if the underlying issue is shareholders’ access to the most convenient methods of engagement.

Dematerialisation under the Central Securities Depository Regulations will remove paper share certificates from the securities industry. Shareholders will continue to be named on the share register and be able to act directly to buy, sell or transfer their own shares electronically without the services of a nominee or intermediary.

This will be a major change for the securities industry that may usher a wider embracing of technological solutions. The end date for dematerialisation to be implemented is 2023 for new issues of shares and 2025 for existing shareholdings. We may however see the Irish market achieve dematerialisation before the UK and we are waiting on the UK government to confirm the revised timetable for UK dematerialisation.

As the UK and Ireland’s leading registrar, we believe that improving shareholder engagement is vital and that GMs must be fit for purpose in the 21st century. We will continue to work with our clients, retail shareholder bodies and other trade institutions to understand retail shareholders’ views and requirements.

Voting at general meetings and engagement - statistics

Voting in numbers for the UK and Ireland

  • 1,069 GMs analysed
  • Almost 10,000 resolutions put to shareholder votes
  • 6 million shareholders eligible to vote
  • Over 96 per cent of physical proxy cards issued by companies were not returned.
Percentage of eligible shareholders who voted
  • 5.7
  • 3.4
Percentage of shareholders voting who used    
  • CREST or web
  • Paper
  • 1.9
  • 3.8
  • 1.8
  • 1.6
Percentage of issued capital voted at each meeting
  • 54
  • 61
Percentage of issued capital voted using    
  • CREST or web
  • Paper
  • 32
  • 22
  • 35
  • 26
Percentage of shares voted using    
  • CREST or web
  • Paper
  • 60
  • 40
  • 57
  • 43

The above percentages are averages from the GMs analysed.

Jai Baker, Head of Industry, Link Market Services
t: +44 (0)7799 408281

[1] Data gathered from over 100 client company GMs.

[2] Investment Association Public Register

[3] See ONS website

Jai Baker

Head of Industry at Link Market Services

Tel: +44 (0) 7799 408281

Email: Jai Baker

07 September 2020

AIM Dividend Monitor 2020

AIM dividends set to fall by at least a third in 2020 following a record 2019 as COVID-19 crisis bites into company profits

Read more

20 July 2020

UK Dividend Monitor Q2 2020

UK dividends plunged by 57% in Q2 and will fall by at least two fifths in 2020

Read more