Significant numbers of large investors are taking their stewardship role very seriously, taking heed of a rising tide of environmental, social and governance (ESG) concerns among stakeholders to guide the toughness of their stance. Not only has the need for action on climate become compelling as environmental risk escalates around climate change, but the economic challenges post-pandemic and alongside the situation in Ukraine, is everywhere in plain sight.
Against that backdrop, executive remuneration is under unflinching scrutiny at every AGM, and is likely to remain firmly in the media spotlight. It is no longer only about the size of the pay packet, but about the human as well as the financial context.
The Investment Association (IA), which represents the UK’s £8.5 trillion fund management industry has provided regular updates on shareholder expectations during this period. Companies would be advised to have clear thinking on how their remuneration arrangements across the entire company are reconciled with increased pay packets at the top table.
During the pandemic, it issued an early warning of the “reputational ramifications” of “windfall gains” at executive level. These concerns have been magnified in 2022 as the UK deals with a cost-of-living crisis with soaring energy bills, high inflation and rising interest rates.
Its renewed emphasis on maintaining a sense of employee context in considering remuneration policy reinforces the message coming from the regulator on the need for businesses to ensure they engage with their workforce.
The 2018 UK Corporate Governance Code specifically refers to the role of the workforce and promotes its involvement in company governance. The Financial Reporting Council (FRC) has been monitoring progress in this area and has made it clear that it feels there is still a long way to go on implementing its thinking.
It finds the number of firms that “provide rather vague platitudes and boilerplate statements on workforce engagement in their annual reports, remains disappointingly high.” While the Code is a flexible tool that respects companies’ different circumstances, in future years the FRC would like to see “better reporting in how companies have used this flexibility,” said Sir Jonathan Thompson, FRC CEO. Not only must the practices adopted towards better workforce engagement be clearly laid out in company reports, so must the thinking behind their adoption, and the company’s views on how effective they are judged to have been.
For the mindset in many companies to change, they will need to remain open to fresh thinking on ways in which to open those conversations with the workforce as key stakeholders in the business. Not only do they need to put engagement mechanisms in place, but to complete them with a feedback loop linked to measuring results. From a practical perspective, Company Secretaries can support with this by ensuring that Terms of Reference and forward agendas for Remuneration Committees capture this and are actively discussed at meetings.
Companies must be able to identify all their key stakeholders and understand the societal shift in emphasis from hierarchical organisations to inclusive ones, in line with best practice laid out by the Code. Many companies report on their stakeholders in their Annual Report, however much of what is written reveals very little about the real level of detail that organisations presumably go into when considering the stakeholder view on strategic decisions. No boardroom plan for stakeholder engagement can afford to be unaware of the trends emerging elsewhere. Voting patterns at AGMs should also be monitored and assessed to ensure that feedback and engagement align with intended outcomes.
Far from being “routine”, every AGM should be seen as an open stage for a potential piece of theatre that is likely to be unscripted. Investor activism is on the rise and has been for several years across the United States and Europe. Many analysts expect this dominance to continue amid the compounded economic uncertainties and market volatility seen globally.
Boardrooms need to make sure they are listening to all of their stakeholders if they are not to be caught out by dramatic AGMs with unexpected consequences.
David Gracie, Director and Co-Owner
Indigo: Independent Governance