FTI Consulting’s Corporate Governance Breakfast: Four Key Takeaways

During the panel discussion, the speakers outlined topics that will be of particular interest in evaluating companies at the upcoming AGM season. Unsurprisingly, remuneration continues to be at the forefront of both investors and proxy advisors’ minds. Against the backdrop of a turbulent macro-economic environment, top of the agenda for all four parties was the cost-of-living crisis and the widening gap between executive remuneration and that of the wider workforce. How companies are addressing the cost-of-living crisis, whether through wage increases for employees, one-off support, or non-financial benefits, should be front and centre of remuneration reports and engagement agendas according to these institutions and their advisors. It should be made clear through reporting that the Board is aware of the struggles affecting its stakeholders and reporting should outline in detail the actions it has taken in response. Companies need to not just be mindful of these considerations, but demonstrate genuine actions to address them.

In the same vein, increases in executive salaries this year will be subject to increased scrutiny, and Remuneration Committees should provide robust explanation and context to any changes. Given the potential impact of increases on other elements of pay, even raises for executives that are in line with inflation will be closely scrutinised.

Reporting constitutes the first point of information for investors, and therefore one of the biggest opportunities for companies to set out all the key actions, initiatives and efforts of the business during the year in review. What companies report on is just as important as what they do not report on – robust and meaningful reporting provides investors and stakeholders with insight into the actions and outcomes of the companies’ governance and strategy, and its alignment with shareholders’ long-term interests.

However, in isolation, reporting doesn’t always provide the full picture. Direct engagement must also play a key role, with panellists noting that their preference is for face-to-face engagement with companies on important issues, rather than other methods of communication. Engagement provides additional context that may not be captured as appropriately through reporting. Often times, it may be easier to explain a difficult decision in-person, as opposed to through writing, and companies can benefit from taking on the opportunity to reach out directly to – at the very least – their major shareholders. Indeed, the regulatory expectations of the UK Code demand such practice.

Ensuring that Boards are equipped with the appropriate skills and expertise to contribute to strategy development, challenge management and represent shareholder interests came through as a key priority for institutional investors and proxy advisors. All panellists noted that there are skills that appear to be lacking from a number of Boards currently, in spite of their growing importance from a strategic and risk management perspective. These include climate risk, cybersecurity, and capital transformation expertise.

Climate change constitutes a significant investment risk, and the increase in cybersecurity threats combined with issues such as the war for talent significantly impact business and merit attention from company leadership. While shareholders may not expect every single potential skill to be covered by the Directors, Boards must be able to demonstrate that their experts are up to date on the issues that they focus on, and are able to upskill and/or bring in the appropriate knowledge and insight externally when required.

Holding companies accountable to their sustainability strategy goes far beyond say-on-climate and similar proposals. Institutional investors and proxy advisors review sustainability strategies and efforts in their overall review of a company, from the disclosures in their financial statements, to the structure of its executive remuneration policy to the composition of the Board. When setting out sustainability targets, panellists highlighted the importance of outlining the timelines for the achievement of these goals, who and why in the organisation is accountable for each workstream, as well as the technologies and tools needed to achieve these targets. Further, when setting targets that may take a decade to achieve, companies should provide regular updates on progress.

As sustainability moves up the agenda, companies may feel pressured to set ‘impressive’ goals, but what investors and advisors are looking at is how viable these goals are, the alignment with company strategy, the pathway to achieving them, reporting frameworks to map progress, and, most importantly, the level of buy-in and oversight from leadership to ensure that sustainability is being treated as a strategic priority within the company.