During the past decade the Annual General Meeting has become a forum
for confrontation with shareholders as much as an assembly for the
conduct of company business. In today’s environment, companies
planning their AGMs must prepare for an array of potential disruptions
that can include organized opposition to agenda items, opportunistic
activism and campaigns to unseat or replace directors, often
accompanied by negative media coverage and reputational damage.
vary widely as to whether confrontation at annual meetings is a sign of
healthy corporate governance or a distraction from essential business
goals. Regardless of its merits, controversy at AGMs has become a fact of
life for listed companies around the world. How to avoid being surprised
or forced into a defensive posture or losing control of the annual meeting
is a serious challenge that corporate boards and managers will face once
again in 2013.
roots of confrontation
Disruptive annual meeting tactics started in the U.S. as a grass-roots
methodology used primarily by small shareholders, labor unions and special
interest groups. These gadfly campaigns had little impact until prominent
institutional investors joined the corporate governance movement in the
mid-1980s. Annual meetings gave these institutions an ideal platform to
promote governance reforms, strengthen shareholder rights and call
attention to egregious corporate practices. Over time the repeated
successful use of these aggressive tactics transformed the annual meeting
to the point where it is now viewed as a quintessential corporate
this background of long-term trends, today’s activism has been intensified
by the macro-economic issues and unstable market conditions that affect
companies around the world. These conditions create an unusually difficult
global context for companies planning their annual meetings in 2013:
decades of successful activism
and corporate governance reforms have permanently realigned the rights and
powers of shareholders and corporate boards. Institutional investors are
expected to oversee and engage with portfolio companies; corporate
directors are expected to be fully informed and responsive to shareholder
concerns. Global corporate governance standards have eliminated the old
“Wall Street Rule”: companies can no longer tell dissatisfied shareholders
to mind their own business and invest elsewhere.
in shareholder demographics
have concentrated voting power in a powerful cadre of global institutional
investors. Even hybrid companies in developing markets — those with family
ownership, majority control groups, voting agreements, or state-owned
“golden shares” — will usually find among their minority shareholders some
sophisticated global investors who bring critical perspectives, diverse
investment strategies and a wide range of attitudes toward governance and
have become a permanent fixture, facilitating the exercise of shareholder
voting rights, highlighting poor corporate governance practices and
strengthening support for shareholder initiatives. The prolonged global
debate over whether proxy advisors have too much power and whether they
should be regulated is beside the point. Whether or not regulators in
Europe or the U.S. impose new standards, proxy advisors are here to stay.
Companies in all markets must develop effective ways to counter their
global spread of Say-on-Pay voting rights (SOP)
has done more than any other issue to transform the dynamics of annual
meetings. SOP legitimizes shareholder scrutiny of companies’ compensation
decisions, which have come to be regarded as a reliable gauge of board
competence and independence. Shareholders now routinely use their SOP
votes as a lever to hold boards accountable on a wide range of governance
and performance issues. Directors must be prepared to explain and defend
their pay decisions in terms of performance metrics and strategic business
Celebrity CEOs and excessive CEO pay
at high-profile companies in developed markets have alienated
shareholders, attracted negative media attention and generated widespread
public resentment of business leaders. While rooted in broad cultural
trends, the problems of overpaid imperial CEOs, high CEO turnover and
mistrust of business create serious challenges for corporate boards and
fodder for activists.
Inefficient financial markets.
Despite the lessons of the financial crisis, stock markets and new trading
platforms continue to give precedence to opaque speculative practices and
high-frequency equity trading disconnected from listed company
fundamentals. These activities erode essential market functions of capital
raising, liquidity and equity valuation. In addition, derivative
investment strategies give rise to the possibility of “empty voting” —
decoupling voting rights from stock ownership and economic interest —
which undermines core governance principles. Regardless of these market
distortions, companies are still under an obligation to manage investors’
expectations and deal with stock price volatility, undervaluation and
other market dysfunctions.
Globalization of the investment process
has added complexity and inefficiency to the logistics of shareholder
meetings. Today’s cross-border proxy system is a multilayered morass of
intermediaries, third-party agents, proxy advisory firms, voting platforms
and opaque back office operations. It operates with little regulatory
oversight. Under these conditions, companies with global ownership have
little choice but to dedicate significant time and resources to their
annual meetings, even when no controversy is expected.
advent of Stewardship Codes and Principles of Responsible Investment
has turned a spotlight on the governance and conduct of institutional
investors. These new and evolving standards for investment managers —
which emphasize transparency, engagement and responsible exercise of
voting rights — increase pressure on portfolio companies in the form of
closer scrutiny of AGM agendas and higher levels of shareholder
participation at annual meetings.
There is growing interest in the intangible, nonfinancial aspects of
corporate conduct and performance, including sustainability,
environmental, social, community and governance policies (ESG). Although
ESG issues are important to companies, most analysts and portfolio
managers are reluctant to give them equal billing with earnings, stock
price and traditional financial metrics. Companies must therefore deal
with contradictory messages from institutional investors: governance
activists want more attention to ESG, while portfolio managers and
analysts continue to focus on earnings and stock price.
A persistent and widespread focus on short-term performance has distorted
the incentives, metrics and strategic focus of both companies and
investment professionals. Companies are told to manage for the long term
but are judged on the basis of short-term results. After years of
finger-pointing and rhetoric about shorttermism, there is a growing
consensus that all parties — financial market professionals as well as
companies — must take responsibility and modify their practices in ways
that will “break the short term cycle.” Companies should anticipate that
pressure to modify short-term incentives will gain increasing prominence
on the activist agenda.
adversarial and legalistic U.S. governance model
— with its detailed and prescriptive rules, strict compliance and systemic
reliance on shareholder resolutions and litigation — continues to spread
globally. U.S. institutional investors’ increasing presence in developing
markets brings activism and combative tactics to the shareholder meetings
of companies outside the U.S.
long list of trends and conditions that promote controversy, aggressive
conduct and activism at AGMs is tempered by the principles-based corporate
governance system that prevails in countries outside the U.S.
Principles-based governance and its comply-or-explain methodology
encourage board-level dialogue, consensus decision-making and flexible
implementation of governance policies. This flexibility can take the edge
off of activism and make it easier for companies to avoid confrontation
with shareholders. Nevertheless, as the European Commission cautioned in
its second Green Paper in 2011, comply-or-explain governance is only as
effective as the explanations that companies are willing to provide. The
Commission found that in many cases of non-compliance companies have
provided little more than “group-think” and boiler-plate instead of
meaningful explanations for their decisions. Weak explanations provide
fertile ground for confrontation and activism.
Rethinking the AGM
rethinking their AGMs, companies should question their most basic
assumptions and attitudes about shareholders and the purpose of the annual
meeting. Their goal should be to initiate and manage the process of change
rather than reacting to external pressure.
Development of a new and constructive mindset toward the annual meeting
should begin with the following basic do’s and don’ts:
think about shareholders collectively. Analyze your ownership base with a
view to understanding shareholders’ diverse characteristics, investment
goals and track record on activism and governance issues. Understanding
your audience is key to preparing an effective message and gaining support
at the annual meeting.
assume that shareholders want to use the annual meeting to micro-manage
your business. In most cases the opposite is true: shareholders want the
board and management to run the business, but they also want sufficient
information to make an independent judgment that the job is being done
well. Their goal is to cast an informed vote on agenda items, particularly
the election of directors.
let activists dominate your thinking about shareholders. Rather than
worrying about speculators, hedge funds and activists, companies should
focus on attracting and retaining the long-term investors who will
generally support the company’s annual meeting agenda.
Benchmark your company’s governance policies and practices against peer
companies and global standards. Conduct a perception study among your
largest institutional investors if a controversial proposal is on the
agenda. Understanding your strengths and weaknesses relative to other
companies will enable you to anticipate problems, prepare an appropriate
proxy solicitation campaign and counter the effects of negative vote
recommendations from proxy advisors.
unsparing in your internal analysis of conflicts of interest,
related-party transactions, ethical problems, accounting policies,
performance shortfalls, whistle-blower initiatives and other sensitive and
confidential matters. Be prepared to respond appropriately in case these
issues arise at the annual meeting.
sparing in the use of outside advisors for assistance on the board’s core
governance responsibilities such as compensation, director recruitment,
CEO succession planning and accounting policy. Third parties should not be
in the driver’s seat on issues for which shareholders hold the board of
directors primarily accountable.
Initiate dialogue with institutional investors and proxy advisors. Listen
to their views, but don’t look to them for guidance. There is no question
that a company’s management and board understand the details of their
business better than shareholders do, but they often do not understand how
the business is perceived externally. Outreach and engagement with
shareholders is the most effective means to deal with misperceptions and
avoid negative surprises at the AGM.
directors a voice and a defined role at the annual meeting. Traditions of
boardroom collegiality and privacy should not prevent directors from
engaging with the shareholders who elect them. In addition to the annual
report and meeting agenda, boards should consider providing a written
report that describes the directors’ expertise and competence, explains
their decision-making processes and informs shareholders about key
governance issues such as compensation, succession planning, related-party
transactions, split chair and CEO and other governance hot topics.
let legal constraints or competitive concerns override transparency in
your annual meeting disclosure documents. A principles-based “explanation”
that gives confidence to shareholders should (i) provide a clear and
detailed articulation of the company’s business strategy and goals; (ii)
explain how the board’s policies and decisions relate to the strategy and
goals; and (iii) make a persuasive case that these policies and decisions
will benefit shareholders.
AGM preparations early. Don’t underestimate the resources and expertise
required for an effective crossborder solicitation campaign. Use your web
site and all available technology to facilitate information flow and share
voting. Coordinate these activities with your Corporate Governance,
Investor Relations and Human Resources programs.
basic advice may sound like “Annual Meetings for Dummies,” but in today’s
unstable, high-pressure environment it has proven remarkably difficult for
companies to establish trust and make productive use of their AGMs.
motto — “Treat shareholders as customers” — is the key to managing a
successful annual meeting. Companies rethinking their AGM can often find a
useful model in their own market research, marketing and customer
relations activities. Planning for the AGM should begin with basic
research and benchmarking that can provide answers to critical
starting-line questions: who are the company’s ultimate beneficial owners;
what are their characteristics and investment goals; what are their
perceptions about the company; how can their misperceptions and biases be
corrected; how does the company’s risk profile, governance and performance
compare with competitors; how can the company convince shareholders that
its policies and decisions serve their interest; what sort of packaging,
written materials, outreach, road shows and electronic communications can
be used to build loyalty and strengthen relations with
companies dedicate executive time, money and resources to conducting
market research and surveying customers, they should be equally willing to
commit resources and underwrite the costs of identifying, characterizing
and analyzing their ownership base and benchmarking their strengths and
weaknesses in preparation for the AGM.
model for AGM planning can be found in companies’ investor relations
programs. However, it is wrong to assume that the AGM can piggyback on
investor relations contacts and road shows developed for financial
communications. A successful IR program is generally not a path to
establish relations with investors’ policy and voting decisionmakers. The
opposite is often true. Many institutional investors suffer from the
so-called “split-brain” syndrome that creates an unbridgeable gap between
their investment decisions and their voting decisions. To deal with this
gap companies have two choices: (1) they can develop an expanded form of
holistic investor relations that addresses both governance and
non-financial issues (the board perspective) as well as the financial
expectations of investors (the management perspective); or (2) they can
create a separate institutional investor relations program, independent
from IR, that works with the company secretary and the board of directors
to engage with shareholders on ESG and other board-level issues. Both
holistic IR and institutional investor relations programs require an
expanded level of communication from the board of directors that should
not duplicate or conflict with communications from management. Both
approaches require outreach to an unfamiliar audience that includes
governance policy-makers and an array of third-party agents, custodians,
proxy advisory firms and other intermediaries who assist them in proxy
voting. Many of these players are difficult to identify or reluctant to
engage with companies.
successful AGM, companies must be willing to simplify, clarify and amplify
the information they provide in support of their policies and decisions.
The existing comply-or-explain standard does not go far enough. Companies
should not limit their explanations to con-compliant policies. Instead
they should provide a customized, comply-and-explain narrative that tells
a compelling story of how the company is being run, where it stands
competitively and how its board-level policies and decisions (executive
remuneration is a case in point) are linked to business goals. The board
of directors, as the elected representatives of shareholders, should take
primary responsibility for producing a narrative that explains the
company’s culture and values and describes the internal processes by which
governance serves business strategy.
list for a successful annual meeting should also include improvements in
cross-border logistics that are beyond the reach of individual companies.
Some form of global initiative will be needed to achieve a more open and
less costly process for cross-border communication and share voting.
Long-sought goals — end-to-end vote confirmation, a vote audit trail and
identification of beneficial owners — will remain elusive until global
standards can be established through harmonized regulation and enforceable
standards of best practice.
Theoretically, the annual meeting should be a litmus test that reveals
whether shareholders support the company’s governance and business
strategy. The level of shareholder support at the AGM should measure the
degree to which the interests of the company and its shareholders are
aligned. In practice, however, this correlation is rarely achieved. Many
obstacles stand in the way. Mechanical and systemic complications,
inadequate regulation, shareholder apathy, legal and cost concerns, poor
communication, a compliant mindset and fear of shareholder activism all
contribute to less than optimal results at AGMs regardless of
fundamentals. These conditions are likely to worsen as macro-economic
conditions, increased regulation and stewardship codes increase pressure
on both companies and shareholders.
final analysis, responsibility for a successful AGM rests with each
company’s management and board. They should make certain that the AGM is a
platform that informs and educates shareholders, explains the links
between governance and business strategy, brings transparency to boardroom
processes and eliminates contentious issues before they develop into
activism. A successful AGM should be a customized and highly individual
event that demonstrates the company’s commitment to serving shareholder
interests while giving priority to the achievement of business goals.
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