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Board members, be prepared for the AGM season

Edna Frimpong

Prominent on the agenda for the board of directors, both executive and non-executive, is the annual general meeting of shareholders (AGM). Both supervisory board members and company secretaries have an important role in its preparation. With changing shareholder behaviour, it has become especially important to address  thorny issues in the months  prior to the AGM. How to be prepared.

Let us pinpoint four of the most important questions in the run-up to the AGM – and how to address them. If you haven’t already.

1. Is your board future-proof?

Safe to say, with all the changes happening in the world, executive boards need leaders with different skill sets than before. For example, does the board have sufficient knowledge for the digital transformation of the organisation? Is there sufficient strategic in-house insight on climate change and the energy transition? In short, is the board sufficiently future-proof? Through thorough analysis of both the future and of related knowledge gaps, the board is better prepared for questions from shareholders.

To prepare for a future-proof board, and for all issues that may arise at the AGM, it is critical to have a clear view on what skills your organisation needs at C-suite level. This then should be cross-referenced with how peers deal with the situation.

Diligent's analysis of executives' skills and professional backgrounds shows that, globally, talent with new skills is being added to boardrooms. Board experience seems to have become less of an issue in the last couple of years. The Diligent Modern Leadership Report shows that 35% of new directors bring professional experience in technology, marketing, sales, HR, ESG and legal expertise. Forty-six per cent of newly appointed directors have no previous comparable board experience.

Not only the current composition of the executive board is very important to shareholders. What is crucial for the continuity of a company is succession planning. Companies that can successfully explain how they teach and guide the leaders of tomorrow, and can preferably also present proof for that, will attract loyal shareholders.

What to do in run-up to the AGM

  • Map out how the capabilities of top executives align with the challenges the organisation faces in the coming year. Be prepared for questions about succession planning. 
  • Have a clear view on where the high potentials in the organisation are.
  • Know what skills these young leaders have.
  • Have a succession plan in place. At the very least, be able to show your shareholders how top talent is being groomed to take the next step within one to three years.
  • Do not be overly transparent about who these young leaders are. Your shareholders should understand that too much transparency will lead to these leaders being poached by other organisations.
  • Understand the capabilities of your current software system to support you with completing these tasks. Do you have the technology you need to create administrative efficiencies and reduce costs in sourcing diverse board member candidates?
  • Understand the capabilities of your current board portal – is it presenting the necessary data to the board for your members to make the necessary decisions that will drive impact?

2. Is ESG getting enough attention?

Listed companies globally – and definitely also in the Netherlands, Belgium and Luxembourg are increasingly taking long-term value creation into account in their strategies. In addition to criteria of financial performance, management is based upon non-financial criteria, such as sustainability goals and increased customer and employee satisfaction. Getting this right is highly complex for organisations and management teams alike.

Take for example ESG criteria. Just the E, for goals on the environment and sustainability, already poses huge challenges for businesses. Adding the S which deals with social and societal considerations such as diversity and ethics, and the G which deals with the conditions for good governance, make governance more complex still.

And it’s one thing getting the governance right. Convincing shareholders (at the AGM) how the chosen goals are relevant to the company's strategy and meaningful for customers and employees, is another daunting task.

Fortunately, there is a lot of data available to help map relevance, regulatory requirements and stakeholder expectations. This is especially true when it comes to executive remuneration. To measure whether strategic goals are sufficiently reflected in the KPIs for the remuneration of executives, a comparison with the competition and peers may be made, which will pinpoint strengths and weaknesses in the strategy. This also paves the way for new strategic decisions in the coming years.

What to do in the run-up to the AGM

  • Have a transparent, sufficiently substantiated and measurable set of ESG criteria.
  • Make sure these criteria are at least in line with those of competitors.
  • Indicate how the non-financial criteria in the strategy resonate in the remuneration of employees and that of top management.
  • Understand the capabilities of your current software system to support you with completing these tasks. Do you have the technology you need to create administrative efficiencies?

3. Is your executive pay a reputational risk?

Make no mistake, executive rewards will continue to cause major discussions during AGMs this year. Shareholders in Europe  do not hesitate to hold non-executive directors accountable on the remuneration policy for executive directors, according to Diligent's annual survey into voting behaviour trends.

A remuneration revolt poses serious reputational risk to any organisation. Institutional investors, for example, take a tougher stance against supervisory or non-executive directors who against the advice of the shareholders continue to reward the directors in a manner that is perceived as too generous.

One way for these investors to become more vocal is through the Dutch organisation for institutional investors Eumedion.  Eumedion has already stated that supervisory directors of Dutch listed companies did virtually nothing last year with the advisory vote of shareholders on the remuneration policy. This attitude will have consequences, says Eumedion. When a supervisory board member is up for reappointment, Eumedion will point out to institutional investors whether or not this specific supervisory board member has ignored the investors’ voice previously. This can lead to messy reappointments.

Ignoring shareholders can in many ways generate a lot of negative attention for companies, as was the case, for example, with ING, Tesco and Vodafone. So this is all the more reason for a well-considered remuneration policy. Companies are well-advised to gauge in advance the expectations of key stakeholders such as investors and proxy advisors regarding remuneration. Information about the executive rewards within the sector also provides a lot of insight.

In run-up to the AGM

  • Study the evaluation report of the AGM season 2022 published by Eumedion, the organisation for institutional investors, or equivalents for other markets. Find out whether your organisation’s remuneration policy has sufficient support.
  • If the remuneration policy does not seem to have full support, consider whether the chosen policy can be explained. For example, is the board sufficiently prepared for questions about the ratio between the CEO's salary and that of the average employee?
  • If the remuneration policy quite likely leads to a stand-off between shareholders and the board, the time has come to start convincing them that the organisation is working on a sound remuneration policy.
  • Understand the capabilities of your current software system to support you with completing these tasks. Does your organisation have the technology you need to evaluate and vote on executive remuneration?

4. Does the diversity in the organisation add up?

Shareholders are expected to have diversity and inclusivity of management teams high on the agenda. Thanks to their different backgrounds, diverse teams are a better reflection of the diversity of customers and other stakeholders of the organisation.

Such teams see opportunities in the market earlier and respond better to them. Non-diverse boards must be prepared for an annoyed response from shareholders and other stakeholders. For example, in 2021 Diligent saw an unprecedented increase – of 37% - in votes against supervisory board appointments in Europe. The resistance of shareholders mainly targeted the composition of the board and the lack of diversity.

How diverse is your organisation? The level of diversity can be disappointing, according to the recently published Diligent Modern Leadership Report, which maps the diversity in companies worldwide. For example, the gender gap is still an issue that needs to be addressed in many companies. In the Netherlands, women occupy 26% of the boardroom positions. For comparison: in France (42%), Italy (41%) and Belgium (37%), this share is higher.

Additional research into the Dutch situation shows that many Dutch companies still miss opportunities in the composition of boards. The diversity in experience, age category, cultural background and education could be improved. Whichever your country or board, determine your priorities: what steps does the board need to take to resolve gaps in diversity? A non-diverse team can even pose a reputation risk.

In run-up to the AGM

  • Have a clear view – and presentation – of how diverse your organisation and your board are, compared to peers and preferably also society-at-large. Note that not only gender is of interest to shareholders. Diversity in experience, in background and in education (of new directors) also attracts attention.
  • In most sectors, inclusivity is still fairly new as a topic, but it is becoming more and more important. To what extent is your company’s board the reflection of modern society?
  • Understand the capabilities of your current software system to support you with completing these tasks. Do you have the technology you need to create administrative efficiencies and reduce costs in sourcing diverse board member candidates?

Graphic of the 4 most important shareholder annoyances (described below)

Most important shareholders annoyances

  1. The board isn’t future-proof
    1. Board not equipped to take on ESG challenges
    2. The board needs external strategist to make the energy transition happen
  2. ESG isn’t getting enough attention of the board
    1. ESG goals aren’t clear and quantified
    2. Executive pay doesn’t reflect the ESG goals in the strategy
  3. Executive pay doesn’t match the performance of the company
    1. The advisory vote on the remuneration was ignored
    2. the CEO pay doesn’t align with that of peers
  4. The organisation is not diverse enough
    1. There is a gender gap of more than 15%
    2. All top executives have the same education and tenure
    3. The board doesn’t have an action plan to enhance the diversity of the company.

Source: Diligent

Are you preparing for the AGM?

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Edna Frimpong
Edna Frimpong
Edna Frimpong is Head of International Research for the Diligent Institute, the governance think tank and research arm of Diligent Corporation. In her role, Edna leads corporate governance research projects and partnerships across the globe. She joined Diligent Institute after six years as Head of EMEA Research at CGLytics, the corporate governance analytics firm acquired by Diligent in 2018.