FTI Consulting Governance Event: Key Takeaways

On 6 December 2023, FTI Consulting hosted a corporate governance event in London, featuring speakers from key players in the UK’s capital markets, including the Investment Association, Capital Group and Schroders, as well as the world’s leading proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis. The conversation focused on recent market developments and investors’ evolving expectations around corporate reporting, shareholder engagement and proxy voting as we approach 2024.

The event started with a keynote address delivered by the Investment Association, which looked back at the 2023 AGM season before setting out the key topics of debate in the investment industry, such as the competitiveness of the UK market, regulation of stewardship, and the growing expectations asset owners are placing on their investment managers. This address was followed by a panel with representatives from Capital Group, Schroders, ISS, as well as the Investment Association. The event concluded with a reporting workshop conducted by Glass Lewis.

The discussion throughout the event presented a range of insights and our governance team has set out six key takeaways for 2024:

1. Executive pay in a global context

Over the past year, there has been significant focus on the competitiveness of remuneration in the UK versus US counterparts, particularly for those business with a genuine global footprint. While strong governance continues to be linked with the protection of shareholder value, several structural features in the UK – deferral of bonuses, holding periods, and extensive malus and clawback provisions – may now be seen as reducing the (relative) perceived value of remuneration. Although the focus on the lack of latitude over executive pay practices has been more pronounced in the UK, the panel reminded the audience that discussions on executive pay are a common theme across all European markets, with the requirements of the Shareholder Rights Directive II mandating say on pay across the continent.

The investors on the panel highlighted that any review of executive pay practices should be carried out in the context of the wider executive team and considering the operational and workforce footprint of the business. There was an openness from the panel to support more competitive levels of pay against US levels; however, this support was conditional on detailed disclosure, context and rationale that goes beyond a simple description of companies’ geographical footprint.

Notably, in terms of pay structures, investors seemed to have become more lenient on hybrid schemes, exploring the potential for a combination of performance and time vesting shares to be awarded to Executive Directors, a practice that is common in the US but has historically been heavily opposed in the UK.

2. Regulation, stewardship and market competitiveness

The Financial Reporting Council (FRC) recently announced that it has rolled back on many of the proposed changes to the UK Corporate Governance Code (the “Code”). The revised stance appeared to align with the government’s focus on strengthening the competitiveness of the UK market, with some pointing to the Code as a burden that is potentially discouraging new listings. It was noted by speakers that some of the proposed amendments appeared to be embedding market practice, which had been driven by investors, shifting engagement subjects to regulatory and reporting burdens for companies.

Much like discussions at our Dublin event, the idea of ‘comply-or-explain’ – the principle at the core of the Code – was addressed by the speakers, noting that certain of the provisions may be interpreted too strictly by certain investors, removing the ability of companies to ‘explain’ rather than ‘comply’. Overall, there was a clear sense that companies should not feel compelled to comply with all provisions; however, an explanation should clearly outline their reasons for disapplying a provision, setting out why their practice includes less governance risk than the regulatory provisions.

3. Voting and what constitutes ‘significant’ dissent

Investors and proxy advisors also debated the definition of significant dissent and what its impact has been. Currently set at 20% of votes against a proposal, there has been concern that such a threshold has resulted in less freedom for Boards to pursue decisions in the best interest of the business given the perceived adverse scrutiny and reporting obligations associated with significant dissent. Nonetheless, the panel noted the complementary role of shareholder engagement in bringing reporting to life and ensuring that any significant changes to companies’ governance frameworks are in line with shareholder expectations. On balance, while the merits of the threshold were probably agreed upon, the challenge was for Boards and companies to view dissent holistically and perhaps point to the clear understanding of shareholder voting from prior engagement as a reason to not necessarily have to engage again extensively following the AGM. Of interest, the lack of detail around capital management proposals during the 2023 AGM season was noted as an example of the importance of shareholder engagement on all topics that may materially impact the business.

4. Active vs passive managers’ approaches to investment stewardship

As highlighted across capital markets, there is significant difference between passive and active investment strategies, with the benefits of passive investing to the populace set out in terms of cost and access to investment strategies. There are similar differences in approaches to engagement and proxy voting, with stewardship practices of active and passive managers differing significantly. Given the smaller number of positions held by active managers – and the deliberate decision to invest in a company – there is a sense that they have the opportunity to build a deeper understanding of investee companies, alongside greater flexibility in how to vote. Interesting though, was the point that dissent may not necessarily be a bad thing (relevant again); as a company seeks to engage with investors of different sizes, strategies and locations, Boards must ultimately be guided by the interests of the business. Trying to please each subset of investor is impossible and, ultimately, undesirable for long-term value creation.

5. The growth in pass-through voting

Over the past two years, several asset managers – large and small – have started the practice of ‘pass-through voting’ solutions, which offer asset owners greater flexibility in voting their shares – either in alignment with the asset managers’ approach or based on different guidelines. While the democratisation of voting practices can be viewed positively in the sense that it may lead to an empowerment of ultimate asset owners, there was a general understanding that most may not possess the same capabilities as asset managers in terms of voting and engagement. Further, there was a focus on the panel as to whether pass-through voting may present challenges to companies, with strong engagement not necessarily translating into strong mandates through proxy voting, as companies are unable to reach out directly to asset owners in the same way they can to asset managers.

6. The importance of reporting quality

A common thread through the discussion was the importance of reporting for asset managers and proxy advisors to build a better understanding of the decision-making of public companies. In particular the emphasis was on the availability and detail within company disclosures to demonstrate that the Board’s decision-making process has been thoughtful and considered. Strong reporting is crucial when a company is seeking to change executive pay structures, when it seeks to deviate from certain provisions of the Code, or after receiving significant dissent on a proposal at a previous meeting. In the past, many have seen reporting as a regulatory burden or through the lens of a legal document; however, it was clear from each panel member that reporting provides a window into the strength of governance at Board and Committee level, thereby improving the likelihood of supportive recommendations from proxy advisors and asset managers.

The team at FTI Consulting

The focus on robust reporting and meaningful shareholder and proxy advisor engagement, should remain a priority for companies as preparations for the 2024 proxy season ramp up. FTI Consulting’s Strategic Communications team brings together experienced corporate governance, ESG and communications professionals who have a deep understanding of the proxy advisory and stewardship landscape with a proven track record in helping companies shape better AGM outcomes through effective reporting and engagement.