In our recent article, we discussed some of the key points of potential contention between boards and shareholders. As a follow-up, we have prepared a case study to demonstrate some of the questions a board may face when a significant increase in directors' remuneration is proposed at an annual general meeting (AGM).
A company is proposing to increase executive directors' remuneration by more than 20% (by means of bonuses, salary increases or equity plans) in circumstances where a company's profit targets have been missed (or where profits have increased by just 5%).
Questions that the board should be prepared to answer if raised against this proposal at the AGM
1. What benchmark was used?
The board should expect that more detailed information will be sought. For example, where peers are used as comparators, they should be clearly disclosed.
Shareholders are seeking better explanations of how executive remuneration and any chosen performance metric is aligned to the company's purpose, values and strategy, rather than a statement that "it just is linked" or that "a benchmark was used".
Proxy advisor firm, Glass Lewis, has criticised the overreliance on remuneration benchmarks and recommends that remuneration policies should be subject to "relevant and challenging performance targets".
2. What targets did the executive directors achieve? Did they actually meet these targets or were the targets reduced or waived?
Shareholders in Morrisons and Informa voted down pay reports in circumstances where targets were missed and/or reduced.
If any discretion is to apply, any exercise of discretion should not only ensure the outcomes of executive pay schemes properly reflect overall corporate performance and the experience of shareholders, but in addition the general market environment.
3. What government supports were claimed during the Covid-19 pandemic and were they repaid?
Companies in the UK have seen shareholder rebellions against resolutions approving bonuses in circumstances where government supports were availed of by the company during the pandemic, but not repaid.
The reputational issues associated with such proposals should be considered in advance of the proposals being tabled. With a greater focus on environmental, social and governance (ESG) factors, other societal considerations are coming to the fore for further scrutiny.
We have seen the negative reaction to dividend payments where government supports were claimed, so a similar reaction may result where substantial increases to directors' remuneration are proposed.
4. Did workers lose jobs or take pay cuts and have these been reinstated?
Earlier this year, 30% of investors in a large UK company voted against the company's pay policy where large share awards were allocated to executives while many workers suffered without pay during the pandemic.
Companies need to remain sensitive to the impact of the pandemic on shareholder sentiment with regards to remuneration, particularly for those companies which have been negatively impacted by the pandemic.
5. Have the interests of all stakeholders been taken into account in making this proposal?
In its shareholder priorities for 2022, the Investment Association advises companies to engage with stakeholders and report back on the engagement, the views heard and how they have impacted on board decision making.
One of the criticisms levelled at the board of publisher Future, when it put forward proposals to increase directors' pay, was that it hadn't responded sufficiently to the concerns of shareholders ahead of the AGM.
6. Have climate targets been set and are they achievable? How will this proposal impact on the targets?
Are achievement of climate targets built into the remuneration proposal or equity plans?
Will there be an ongoing assessment of these climate targets?
In 2021, large corporations, such as ExxonMobil, Chevron and BP faced shareholder demands for tougher climate policies. At Exxon, three of its board members were replaced with "climate-competent" board members.
The January 2022 Director Sentiment Monitor, produced by the Institute of Directors in Ireland, found that 83% of business leaders believe there is an onus on business organisations to "lead from the front" with regard to implementing more ambitious environmentally friendly practices and Net Zero targets.
Shareholders want more substance surrounding proposals; they are expecting more information and justification from companies as to how and why companies structure particular incentives and arrangements in a particular way.
Companies can expect shareholders to continue to scrutinise executive incentives through the lens of the broader workforce and stakeholder groups in the year ahead.
Just because a company has the numbers based on proxies to be voted on by the chairperson, a company should never underestimate the reputational damage and long term consequences of having unhappy shareholders publicly voice and demonstrate their dissatisfaction.
Extra preparation and detailed information to justify proposals will assist in alleviating concerns.
For further information, please contact Keavy Ryan, partner and Michelle McLoughlin, Knowledge lawyer, or any member of A&L Goodbody's Corporate and M&A team.