Shareholder engagement

Obtaining shareholder approval is a critical step in the successful implementation of executive remuneration proposals, particularly in listed companies where shareholder interests are represented by an independent board of directors. The engagement process is not always straightforward, and often time constrained; particularly if proposals are unusual and/or highly tailored to company (or individual) circumstances. This Time to Think addresses some of the common questions that arise in relation to consulting effectively on remuneration matters.

Do shareholders need to be consulted?

On the FTSE Main Market, shareholders expect to be consulted on:

• remuneration policy proposals (unless minor) ahead of these being put to a binding shareholder vote; and
• material changes to implementation within Policy limits, e.g. quantum, performance measures and/or their weightings, a material (prospective) reset of targets, etc.

On FTSE AIM, there is no requirement to consult shareholders on remuneration but it is best practice to do so under recognised corporate governance codes (such as the UK Corporate Governance and QCA codes).

Which shareholders should we consult?

The scope of the consultation should be determined by the shareholder register and the significance of the proposed changes. This typically covers at least 50% of the issued share capital, or preferably more as the trend has been toward broader engagement in recent years. This target is challenging if the register is fragmented, but enlisting the support of corporate brokers – or a proxy solicitation service – may help.

Should we ‘stress test’ proposals with a handful of our largest shareholders first?

This approach is often used for unconventional or controversial proposals before extending the consultation process more widely. It is particularly relevant if share ownership is heavily concentrated in the hands of only 2-3 shareholders.

Who should we approach?

The most effective consultations involve both the corporate governance team (where there is one) and the portfolio manager. Votes are usually cast by the governance team, but the portfolio manager can be highly influential in the voting decision. This is important to bear in mind when consulting on unconventional proposals that may run counter to generally-accepted ‘best practice’ principles, as success often relies on a deeper understanding of the business context for these (which the portfolio manager is likely to possess).

When should we start the process?

We recommend allowing at least 6-8 weeks if timing permits, likely longer for more unusual proposals where increasingly, a two-stage consultation process is being adopted. The first stage involves engaging with the largest shareholders (typically the top 5-10), followed by a second wave of consultation that extends to a broader segment of the share register. The timescale of the process is also impacted by the time of year, especially from March to June when shareholders and proxy bodies are busiest.

Who should represent the company?

Investors expect consultations to be led by the RemCo Chair, with minimal input from management (and often without advisors present). However, in our experience it can also be helpful for the Board Chair to participate in the process, in order to respond to (sometimes unconnected) matters that are frequently aired during meetings/calls.

What about consulting proxy advisors?

Proxy advisors play an important role by informing the voting intention of shareholders further down the register. Their assessments/recommendations are ultimately based on publicly disclosed information only, but advanced consultation may provide useful input on the likely views of their subscribers/members.

A large shareholder is opposed to our proposals. How should we respond?

Feedback from the largest shareholder(s) is often disproportionately upweighted during the consultation process. However, we advocate considering all feedback in the round, ahead of amending/finalising proposals, recognising that the views of individual (albeit large) shareholders may not always reflect the views of the majority of the register. If large shareholders remain unsupportive (e.g. to align with in-house voting policies), engaging the portfolio manager directly may help gain support for the proposals on an exceptional basis.

Feedback indicates significant investor opposition. Should we pull the proposal?

Occasionally, proposals may be subject to consistent and material pushback during the consultation phase. In such cases, it may be necessary to consider revising the proposals (sometimes fundamentally), or withdrawing them altogether. In our experience, it is often possible to modify proposals to adequately address feedback and thus gain sufficient support from shareholders. However, when this is not possible (often due to time constraints), the preferred course of action may be to pull the resolution ahead of the shareholder vote to give more time to consider next steps.

Note: a resolution that is withdrawn after the Notice of Meeting is published, is captured on the Investment Association’s Public Register.

What are other key factors for success?

Be clear about the purpose of the engagement, e.g. is it to inform on decisions already made, or consult on proposals (which companies should avoid presenting as a fait accompli).

Be clear about what is changing, to assist the reader with focussing on the key points. Consider also tailoring the content to each shareholder, for instance by comparing the proposals to disclosed in-house voting policies.

Underpin proposals with compelling rationale centred on the company context, not market practice. Ensure that this rationale is transparently and fully laid out in relevant public disclosures, to ensure that shareholders who weren’t consulted benefit from the same context to frame the proposals and inform voting decisions. This disclosure should extend to providing details on the consultation process. Companies have seen greater success when they share not only the method of consultation but also how it influenced decision-making. This creates a clear paper trail of the company’s actions and demonstrates their commitment to actively listening to shareholders.