Voluntary and advisory resolutions – why would a board consider them?

On the 27th of February, Guerdon Associates and CGI Glass Lewis hosted their 18th annual Remuneration and Governance Forum.

This paper summarises the discussion panel points on voluntary and advisory resolutions at Australian shareholder meetings.

The definitions of advisory and voluntary resolutions are below:

  • Advisory resolution: a non-binding resolution that enables shareholders to voice their opinion (by voting for or against the proposal) on how the directors of a company should manage the company’s affairs.
  • Voluntary resolution: a resolution which is not required under listing rules or corporations law.

The panel discussion on advisory resolutions emphasised their significance for investors seeking deeper insights into company operations. They were considered to enhance transparency and facilitate investor engagement, allowing companies to better articulate their perspectives and strategies.

Proxy advisors consider advisory resolutions as instrumental in shaping shareholder meeting agendas, by (i) addressing issues that might not otherwise be discussed in depth, and (ii) in some cases being useful to boards by directing shareholder dissent to the advisory resolution instead of against the director re-elections. However, a drawback to these resolutions is that numerous interpretations exist as to what exactly an advisory vote result means, thereby requiring significant engagement efforts on behalf of the issuer to unpack the messages being sent by shareholders.

When discussing remuneration report votes, the panel noted companies implemented distinct remuneration strategies for executives prior to 2005 and the mandatory remuneration report vote. Since the remuneration report vote, the panel noted a trend towards more standardised, one-size-fits-all approaches driven by regulatory constraints and shareholder guidelines. This has contributed to incentive plans being designed in an common format irrespective of strategy, balance sheet, volatility, asset life, and risk adjusted rates of return required. On the plus side this has resulted in fewer egregious pay outcomes, but on the negative it also has resulted in structures being less of a bespoke fit for a specific company’s industry, strategy and circumstance.

Shareholders can dissent against board proposals by either voting against the remuneration report or by voting against individual director re-elections. Some members of the panel expressed aversion towards the latter approach. One of the fundamental principles of Australian corporate law is the joint accountability of the board; voting against individual directors, in protest of decisions that are collectively made, goes against this principle.

One panellist suggested that a vote on accelerated director succession could serve as a suitable new resolution for future shareholder meeting agendas. This would act as a means of holding the board collectively accountable without resorting to strike votes or votes against whomever is unlucky enough to be up for election at the time. Another panellist added that, with so few levers at their disposal, shareholders are often left with director votes as a last resort.

On say-on-climate (SoC) resolutions, the panel acknowledged their rarity in Australia but recognised their potential for fostering engagement on environmental issues. One panellist added that mandatory climate reporting policies will likely become more prevalent in the coming years, rendering SoC resolutions an increasingly pivotal agenda item in shareholder meetings.

Unfortunately, SoC votes are not without their drawbacks. One panel member described their time-consuming nature, with time spent on advisory SoC votes being almost ten times that spent on say-on-pay resolutions. Another panellist pointed out that many companies (e.g., firms managing a high diversity of asset classes) are simply not able to provide meaningful yes-or-no SoC votes. Having a black-and-white view on agricultural emissions, for instance, would be nearly impossible in the current market. These issues highlight that more discussion is needed regarding emissions reduction as measured through highly diverse portfolios, such as those managed by banks.

The panellists also debated the merits of annual director elections, as practised in the UK. While recognising the increased transparency and accountability these elections could offer, concerns were raised about potential risks, such as the complete turnover of a board during times of crisis.

When asked whether annual director votes might foster short-termism in boards, the panel largely disagreed, with one panellist mentioning that capital allocations may become focussed on short term returns where it has not been the case. Another panellist added they were not convinced these votes would increase short-termism, while emphasising that their effects would be fairly case-by-case for each company.

For CGI Glass Lewis’ seasonal review of proxy voting trends, see HERE. For our article covering the panel on short-termism in executive pay, see HERE.

© Guerdon Associates 2024
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