The latest PLSA and ISS voting guidelines on directors' and auditors' resolutions
Last month we started reviewing the 2018 AGM voting guidelines issued by Institutional Shareholder Services (ISS) and the Pensions and Lifetime Savings Association (PLSA). This month, we complete the review and consider policies on the appointment or reappointment of directors and auditors.
Chair re-election
Last December saw investors vote against a resolution called for by The Children's Investment Fund to remove Donald Brydon as chair of the London Stock Exchange, after a row over the departure of the chief executive Xavier Rolet.
There was much press coverage of the clash, with the board firmly protesting that the decision that Rolet should move on earlier than originally planned had been a collective one. Brydon described the fund's action as 'a major distraction' which had disrupted the succession planning process.
Similarly in September, Keith Hellawell survived an attempt to vote him out as chair of Sports Direct, after retaining the backing of the firm's majority shareholder and founder Mike Ashley.
Elsewhere, Peter Hambro was less fortunate, as he and three independent NEDs were ousted from the board of Petropavlovsk in June by a major Russian investor that wished to appoint its own nominees to the board. In this instance, M&G and Sothic, two other major investors, also succeeded in having two of their nominees appointed.
Large votes against the board chair are rare, and it is rarer still for them to succeed. As with the London Stock Exchange, issues may arise outside of the AGM. Company secretaries should be aware of the voting guidelines on this particular point.
A vote against the chair usually indicates significant shareholder unrest, and engagement, usually between the senior independent director and investors, can head off a public battle.
PLSA guidelines
Even considering the above, there are occasions when the PLSA guidelines suggest a vote against the chair should be considered. The list is longer than you might expect.
The PLSA recognises that there are broader implications to a vote against the chair and the need for extensive dialogue between companies and investors in such circumstances.
The PLSA suggests that investors should consider voting against the chair when:
- The chair's role is combined with that of CEO without a convincing explanation, or the chair covers the CEO role on an interim basis for more than a year, or the CEO goes on to become chair
- There is evidence of poor succession planning or a disclosed and reassuring succession plan is absent
- The chair declines a legitimate investor request for a meeting or unduly delays arranging it, or an investor concludes during engagement that the chair should not be supported
- There are issues around the chair's independence and this is insufficiently explained, taking into account the individual's calibre and the board's overall balance
- There is no diversity policy or diversity targets are not successfully implemented, or sufficient progress is not reached in achieving satisfactory board diversity
- A board evaluation process is absent or there is limited or boilerplate disclosure about board evaluation and corporate governance arrangements
- It is perceived that the chair lacks time to commit to the role
- There is not a move to annual director elections, unless there is an acceptable explanation
- Investors believe that key stakeholder relationships are neglected
- A company does not provide detailed risk assessment and response on climate change's effects on the business, and there is not appropriate expertise on the board in this area, if applicable.
Director re-election
AGM results in 2017 saw more votes against individual directors. This may be due to poor performance in the business, specific issues at the company, dissatisfaction with an individual's performance or objections to something done by a committee on which they serve.
Sometimes it is down to 'overboarding' or investors perceiving the director lacks time to commit to the role.
The voting guidelines advise investors to consider voting against a director's re-election when:
- Engagement with a director has informed a judgment on their effectiveness
- There is no supporting statement from the board
- There is poor meetings attendance, with no satisfactory explanation. The ISS guidelines give 75% attendance for two consecutive years as a guide to the limit below which a vote against should be considered
- There is unsatisfactory reporting, in which case there may be a vote against the relevant committee chair.
Overboarding
Concerns about overboarding remain. The detail between the voting guidelines differs slightly, with ISS suggesting a vote against a director's re-election where they have more than five 'mandates' at listed companies.
For this, one NED role equals one mandate, one NED chairmanship is two and one executive director role is three.
Additionally, an executive director in one company who is a non-executive chair at another will be classified as overboarded, even though on the scoring system above, they would have five mandates, which is the limit.
The ISS guidelines clarify that a vote against would not be used in relation to their executive role, but for their non-executive chair role.
The PLSA guidelines suggest that for complex companies it may be appropriate to vote against the election or re-election of an NED with more than four appointments. A stricter view may be adopted if the director chairs a key committee or the company is heavily regulated.
However, this is an area where investors should apply judgment, based on a thorough assessment by the boards in question, about the director's capacity to fulfil their roles effectively.
Box ticking based on a formula is unhelpful, as there can be huge differences in the time required to serve on the boards of particular companies and there will be several factors to consider.
The guidelines also suggest the need for a relationship agreement to be in place where there are controlling shareholders, which has been a listing rule requirement since 2014.
Independence
The guidelines also focus on issues around board independence. Re-election of non-independent NEDs should generally be supported if the overall board and committee composition meets the provisions of the UK Corporate Governance Code and they are not members of the audit or remuneration committees.
On tenure, ISS and the PLSA consider that an NED is not independent if they have served concurrently with an executive director on a board for nine years. Otherwise, an NED is not regarded as independent after 15 years on the board – contrasting with the nine-year standard in the UK Corporate Governance Code.
Even so, the PLSA advises a pragmatic approach on tenure. The purpose of the guidance is to drive board refreshment, rather than to mark a limit on the value offered by an individual.
This does not totally align with the Financial Reporting Council's view, as expressed in the consultation on proposed amendments to the code.
Contested director elections
The following factors will be considered in contested director elections:
- Company performance relative to peers
- Strategy of incumbents compared to dissidents
- Independence of directors
- Experience and skills of board candidates
- Governance profile of the company
- Evidence of management entrenchment
- Responsiveness to investors
- Whether incoming candidates seek minority or majority board representation.
- Investors should consider if change is needed, and whether the candidates will improve things and maximise long-term shareholder value.
Company secretary
Investors generally expect this role to be undertaken by a non-board member, although this is unlikely to be a voting issue.
Auditor resolutions
There is no major change to the guidelines on this subject. Votes against the auditors' reappointment should be considered when there are serious concerns about the procedures used by the auditors or there is a change of auditor with no explanation.
Following several high profile company collapses and issues over accounting and reporting, this area might receive more focus in future, and it is likely that none of the big four firms will remain completely unscathed.
When the auditor has been in office for 10 years and there has not been a recent tender process or mention of one, investors may decide to vote against reappointment of the auditors and the audit committee chair.
In addition, the PLSA guidelines suggest that if the auditor has been in office for more than 20 years investors may consider voting against the reappointment of the auditor and the audit committee chair.
Both sets of guidelines state that any resignation letter from an auditor should be put on the company's website, which should also explain any proposal to change auditors.
Resolutions authorising the directors to set audit remuneration should normally be supported unless fees for non-audit services routinely exceed the audit fee. The guidelines encourage full disclosure of the amount and nature of such fees.
Under the ISS guidelines, if non-audit fees are greater than audit fees for more than one year and the company appears unwilling to address the issue, investors may consider voting against authorising the directors to set the auditor's pay and against the re-election of the audit committee chair.
The PLSA guidelines suggest investors may vote against if the non-audit fees are greater than half the audit fee or a material monetary sum (£500,000) in consecutive years.
The voting guidelines can be found via the websites of the Pensions and Lifetime Savings Association (plsa.co.uk) and Institutional Shareholder Services (issgovernance.com). The AGM review can also be found on the PLSA website.
Lorraine Young is a partner at Shakespeare Martineau
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
