While AGMs are still some months away, the engagement season is underway as preliminary results and annual reports are released during August. Remuneration reports will soon be out, and engagement meetings will be held with investors and proxy advisers.

Directors will have their company’s specific issues to address and will be well placed if they are prepared for the range of proxy adviser and investor concerns as they lead up to the AGM.

The following is a brief checklist directors might like to test against their particular company issues.

#1: Fixed pay increases 

Despite inflation, fixed pay increases will be modest. Hence companies with significant fixed pay increases should have something other than good financial performance and positive TSR to serve as justification. That reasoning never held water in the past, and will not this season. If anything, proxy advisers and investors may be more hawkish as they seek out fixed pay increases in companies trying to find a way to keep them satisfied given a poorer incentive vesting outlook in FY23. While in the past, some proxy advisers referenced “inflation”. This will change. Rather it will be the extent to which the executive pay increases are in line with, or greater than that for the company workforce. Be ready for that question.

The rational and better method is to reference independent peer benchmarking. Even then, one of the proxy advisers will not support significant fixed pay increases even if there is the threat of executive turnover because pay is significantly under median levels.

#2: Retention

Many boards have been concerned about increased flight risk because of the cyclical downturn, impacting growth stocks and some cyclicals. It is a similar position to that companies found themselves in following the onset of the GFC and COVID-19, respectively, on company performance and, consequently, the lower probability of both short- and long-term incentives vesting.

Proxy advisers in particular, and some investors have a predisposition not to support executive remuneration with retention incentives. So, if the company has granted, or is contemplating grants of service contingent equity be prepared to fully rationalise the need for such. Much will depend on the company’s particular circumstances, its performance, management experience and incentive outcomes for the last three years.

#3: Positive discretion

Boards will be currently working through their processes for the finalisation of incentive outcomes. This will involve whether there may be the exercise of discretion to adjust the incentive outcomes positively or negatively.

The rationale for positive adjustment may be, like above, a consequence of the cyclical downturn impacting growth stocks. It is similarly like companies’ responses following the onset of the GFC and COVID-19 on company performance and, consequently, the lower probability or level of incentives vesting.

If the board is looking to apply discretion by “moving the goal posts”, i.e. re-setting performance requirements lower, they will not get a good reception from the proxy advisers.

Equally, if the level of vesting is positively varied a similar negative response is likely.

#4: ESG

There will be increased focus by investors and proxy advisers on boards’ attention to the company’s sustainability disclosures. They will be keen to test the potential for greenwashing – companies saying much about the company’s sustainable practices that misrepresent what it is actually doing in respect of being sustainable, ethical or environmentally friendly.

ASIC’s Information Sheet INFO 271 has already put companies on notice of its focus and attention.

They will be interested to understand the company’s ESG metrics in executive incentives and the extent to which they are measurable and robust. Investors are focussed on the company’s financial performance and will still want to see that its sustainability and ESG practices contribute to the bottom line.

Industry superannuation funds (represented by ACSI) and US passive investors will be focused on how well the company has addressed its ESG obligations. See our article on ACSI’s recent release of its review of ASX200 climate disclosures HERE.

If the company has had any significant ESG concern in FY22, proxy advisers and institutional investors will want to know how and to what extent that has been addressed in executive pay outcomes.

Directors who are up for election will want to ensure the company’s sustainability disclosures and practices are not lacking in any respect that may leave them open to challenge. Think board and senior management diversity, employee wage growth vis-à-vis profit increases and the like.

#5: Non-financial measures and incentive disclosures

There continues to be pressure on companies to disclose their incentive targets and outcomes, notwithstanding the clear concern this may be seen as guidance. Directors can expect a greater focus on the extent to which the targets are growth on FY21  and the achievements are in line.

Of major concern to many investors and some proxy advisors is the use of non-financial measures in incentive plans. They will not be supported if they are perceived as reward for doing the executives’ “day job”. For example, “implementing plans” of any variety may be seen as part of the job. If there are non-financial measures be careful to focus during engagement on how robust these measures are, and the extent that they will be value accretive, and aligned with purpose and strategy.

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