CNBC Report: More activist investors to focus on corporate governance and executive pay

This week CGLytics CEO discussed the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals that activist investors are broadening their focus.

07.20.2020

CGLytics CEO, Aniel Mahabier, discusses the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals the growth in the number of activist campaigns and how activist investors are broadening their focus.

Increase in activism

The CGLytics report Activist Investors Broaden their Focus analyzes the number of activist campaigns carried out over the previous four years and deep dives into the increasing areas that are attracting activism.

During the interview with CNBC, Aniel notes that shareholders are beginning to focus on areas such as diversity and performance. And, even though there has been an overall increase in the number of activist campaigns this year, not all of them have been successful.

The changes we are seeing during the pandemic, are that activists are focused on improving corporate performance. Having the right board composition and board diversity are the areas activists have been focusing on. Culture is another area where we have seen activists putting more focus on to improve corporate performance. – Aniel Mahabier, CEO of CGLytics

Regional shift in activism

The research report notes that now activist investors are finding a lot of opportunity in APAC, but not so much in continental Europe. The question is, do we expect this trend to change, and if so, when?

Social, cultural, and economic factors play a big role, along with the European market being highly regulated. This doesn’t provide a lot of opportunity for activists to play a role. I expect to see a marginal change taking place over time. – Aniel Mahabier, CEO of CGLytics

Executive pay

On this topic of executive pay, CNBC recalls that there has been a lot of focus from activists. Shareholder have objected to senior salaries in the past, even so companies have continued to pay out. During the pandemic, these senior salaries have been cut, and in some cases, granted in stock options. What are activists going to do with compensation?

A focus area of activists is to make sure executive pay is in line with the company performance. The median of CEO pay has risen, regardless of companies’ CEOs and Directors taking a pay cut. This is on both the S&P 500 and FTSE 100. We expect to see more focus on CEO pay in the upcoming proxy season. When it comes time for the AGMs in 2021, reflecting the 2020 performance year. – Aniel Mahabier, CEO of CGLytics

Source: CNBC Street Signs Europe

Board diversity

CNBC mentions about the motivation to change the makeup of boards, and that the representation of women on boards on the FTSE, is abysmal (still remaining below 30%). Will boards be motivated to improve diversity, due to the pandemic and the Black Lives Matter campaign?

The activist landscape is changing. We used to have the traditional activists playing a big role. Now you have passive institutional investment managers changing their style and becoming more active.

If you look at the BlackRocks and the Vanguards of the world, they are focusing on boards being composed with the right mix. Diversity plays a big role. Not only from a gender perspective, or a race perspective, but making sure you have the right skill set in place, the right tenure, and the right age diversity. It’s a number of things that make a board very effective, and I expect diversity to continue to be a focus going forward. – Aniel Mahabier, CEO of CGLytics

Companies need to be prepared for activist investors and engage with shareholders on a more timely basis. Proactive engagement between investors and companies will prevent activist campaigns going forward. Companies need the right information and tools to ensure their corporate governance risks are reduced and any deficiencies are quickly resolved.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

 

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise, and skills.

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AGMs: Tactics for a Plague Year

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible. What are the best options for running AGMs during a plague year?

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible.

Postponing them may also not be a good option. Advisors, analysts, shareholders, investors, employees and all other stakeholders are all eager to understand their companies’ way forward in such troubled times, and the AGM offers the best way to address this. Postponing the AGM, even for good reasons, sends a bad signal to the markets at the very time when addressing investor and broader social concerns is critical.

For example, many companies are considering reducing dividends due to the challenging economic conditions, yet CEO pay reductions are not on the AGM agendas. CEO pay continues to rise, regardless of performance. The top 35 highest-paid CEOs on the S&P 500 received a combined Total Realized Compensation (TRC) of almost $3 billion in 2019, yet pay-for-performance alignment is badly skewed at nearly half of the companies on the index as our statistics show.

If postponing is not an option, companies do have two other options at their disposal: Running a ‘hybrid’ AGM, which would combine physical presence with virtual communications, or making the entire AGM virtual. Most companies don’t have such options included in their Articles of Association, but the first step at the hybrid or virtual AGM would mean voting on such changes. The London Stock Exchange is currently pushing for emergency legislation to change the companies act to allow all companies to stage virtual shareholder meetings. 

The hybrid option means that either board members are physically present at the AGM, while shareholders communicate with them via virtual links, or that shareholders send representatives to physically attend the meeting while board members communicate via video or audio communications. Voting ahead of meetings is also an option, working with proxy advisors.

Swedish telecoms and networking firm L.M. Ericsson has chosen the former hybrid option for its 2020 AGM on 31 March. The President and CEO Börje Ekholm will not attend in person, but will participate via links (it is not clear whether other board members will attend in person). A live webcast of the meeting will be available to shareholders.

To keep the numbers of attendees down, Euroclear Sweden will offer shareholders who are individuals the option to vote via proxy, and other opportunities to work with proxies are made available to shareholders. “No food or refreshments will be served,” the official invitation warns.

Ericsson’s official invitation offers links to Nomination Committee proposals as well as to some shareholder motions.

But, in this hybrid approach to the AGM, is it clear that board members will be able to fulfil their fiduciary responsibilities in communicating with shareholders? Will it be possible to hold a dynamic discussion of the company’s affairs? Will shareholders be able to work with proxy advisors on such short notice – how will policies be communicated? Will a shareholder wishing to pose a complex question to the CEO get sufficient airtime?

The alternative hybrid approach to running AGMs would mean that board members are physically present, while shareholders communicate with them entirely via audio, video and messaging. And there is the further alternative, in which all communication takes place virtually.

Each of these alternatives poses many of the same questions that we’ve raised above. One of the virtues of the physically-attended AGM is that a shareholder can follow up on questions, or insist on attention to specific subjects. Can shareholders be sure this will happen online?

The even larger question being asked at some companies will be whether all shareholders have had access to sufficient information to vote before the AGM. For example, under current conditions, it may not be possible for the audit of financial statements to be concluded. Some companies are opting to work with financial reporting that is incompletely audited. This poses a serious corporate governance challenge that the board would have to address at the AGM.

The diffusion of extensive financial and non-financial information to shareholders and their representatives ahead of the meeting is also critical for these virtual or semi-virtual AGMs to succeed. Given that shareholders must accept somewhat limited access to the board, they must be certain that all of the information relevant to decision-making on matters such as executive compensation, director election, Stock Purchase Plan has been provided in advance.

Boards that take all the necessary steps to ensure that shareholders have the information they need ahead of the AGMs will be fulfilling their fiduciary responsibilities to shareholders. At the same time, Shareholders will need to step up and leverage technology and information to support their engagement. The AGM will provide the basis for the company to move forward even in a Plague Year.

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The increasing popularity of linking equity compensation to socially responsible practices

Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

Historically, the primary concern of shareholders and company executives has been to deliver returns on investments and ensure that the company meets or exceeds their quarterly earnings expectations. Inevitably this led to a more short-term view with any projects that didn’t contribute to the present quarter / yearly results being at risk of cuts.

However, as some of the leading shareholders continue to embrace their roles in ensuring that companies are held accountable for their impact on both the environment and society, a growing trend has emerged of remuneration committees coming under pressure to link equity and compensation awards to sustainable environmental and socially responsible business practices (E.g. Alphabet 2019 Proxy Statement – Proposal 13).

A number of studies [Project ROI] have been carried out that link social and environmental impact to attracting and retaining customers, increasing revenue and building a vibrant corporate culture, whilst also having significant brand impact in a landscape where simply achieving results may become secondary to the “how” they were achieved.

Linking social impact to executive compensation

One of the most significant hurdles of linking the social impact of a company to the equity based compensation of senior executives and directors has been the attempt to identify  quantifiable measures for what can be a very subjective definition of success.

As the topic has come under more scrutiny there has been a visible appetite for businesses to provide more reporting and demonstrate measures that have been taken to ensure they partake in socially responsible practices. This can include:

  • Auditing suppliers to ensure that they and their subcontractors adhere to the values that they wish to demonstrate,
  • Allocating employee time and resources to positively impact society, or
  • Specific metrics regarding health and safety at work.

An example of this trend is Alcoa. In their 2019 proxy statement Alcoa links 30% of incentive goals to non-financial measures such as safety at work and diversity in the workforce, up from 20% in 2018.

In addition to the individual metrics defined by organizations, there has also been a growing trend of executive compensation being linked to the performance of a company on a corporate responsibility index (e.g. Dow Jones Sustainability Index). By linking elements of incentive multipliers to performance against a wider set of peers and the index, companies are able to not only create quantifiable targets to base awards on but are also focused on ensuring that they take a long term view in order to outperform competitors.

Gathering momentum

By defining these criteria and linking to long term incentives, businesses are more able to demonstrate their roles in a socially responsible business world. The positive financial impact of a socially responsible business is only a relatively recent trend. However, with a growing number of large investors taking an active role in the stewardship and engagement of their assets (Blackrock letter to CEOs), it is a trend that is likely to continue to gain traction.

Conversely, organizations that are perceived to be failing to meet their obligations to society will increasingly impact the brand, reputation, and ultimately the bottom line. Hence companies that traditionally have been focused on their financial results are exploring how they can adapt to the new criteria.

The Glass Lewis Equity Compensation Model

Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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