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Yay or nay on directors’ pay? Diligent study shows that executive remuneration is an exceedingly complex domain, which should have the board of directors’ full attention – especially in the shareholders’ meetings season.

Directors of the Low Countries, be prepared! Executive remuneration is a hot topic around the globe – and this is certainly also true in Belgium and Luxembourg. According to Diligent’s local annual survey of voting behaviour (2022), investors are increasingly expressing their dissatisfaction with remuneration policies.

Shareholders worldwide are increasingly speaking out against proposals regarding the remuneration of directors. This is also the case in Belgium and Luxembourg, according to one of the findings in the recently published Corporate Governance and Executive Pay Report by Diligent and PwC Belgium.

Diligent has been tracking and analysing  a variety of governance data for more than 15 years. In this specific report, Diligent, in collaboration with PwC Belgium, tracks the voting behaviour of shareholders at the annual general shareholders' meetings (AGMs) of listed companies in Luxembourg and Belgium.

Proposals rejected

Detailed information about the voting behaviour of shareholders is becoming increasingly important for supervisory directors. First of all, directors must take into account in their own decision-making that different types of proposals concerning the remuneration of directors are rejected by a substantial proportion of the shareholders.

Second, the underlying goals of the remuneration components are increasingly the subject of discussion. In both cases, investors analyse and understand ever more data themselves.

Upcoming AGMs

Diligent data – as indicated in the graphic below – show the exact percentage of shareholder discontent executives and non-executives of listed companies have had to deal with during annual general meetings of shareholders since 2009. All evidence  suggests that this will also be the case during the upcoming AGMs of Belgian and Luxembourg companies.

In 2009, 2% and 0% of the shareholders of the Belgian and Luxembourg companies respectively voted against proposals regarding  directors' remuneration. In 2022, 11% and 12% of shareholders voted against these proposals.

AGM Shareholders: Graph showing the proportion of for and against votes on remuneration

Source: Diligent 2022 Corporate Governance & Executive Pay Report.

Between performance and remuneration

What is triggering shareholders to vote against remuneration packages? What is clear is that the remuneration of directors – in particular the link between performance and remuneration – is increasingly part of social debate. This is reinforced by the introduction of say-on-pay guidelines worldwide.

Historically, corporate remuneration policies were determined by the board of directors, since the board also has a fiduciary duty to take into account the company’s interests. However, the feeling among many shareholders and other stakeholders these days is that remuneration policies have been incentivizing excessive risk-taking and short-term thinking.

In several countries this has led to rules or legislation on the matter, the aforementioned say-on-pay guideline. These often considerably strengthen shareholders’ ability to vote against renumeration policies.

Moreover, the most recent European Rights Directive (SRD II) forces companies to provide clear, comparable and comprehensive information on remuneration policies and how they have been put into practice. This forces companies to become more transparent on remuneration policies.

More transparent

Not only are shareholders showing their discontent more often, but, specifically for Belgium and Luxembourg, the number of remuneration resolutions put forward at AGMs has also been steadily rising. Diligent data suggests that the number of remuneration-related items on the agenda of AGMs has increased for 12  years in a row. In 2009, there were on average only seven remuneration-related resolutions on the AGM agenda, which increased to an average of 115 in 2020. In 2022 the average number of remuneration-related resolutions on an AGM agenda is 94 in the region, an increase from an average of 89 in 2021.

To a certain extent, all this has to do with companies being forced to be more transparent. It may also have to do with companies becoming more alert on remuneration issues. This in turn is largely driven by shareholders’ activism and scrutiny on the topic.

It is clear that more and more shareholders are having their voices heard when it comes to remuneration. In addition, local and international say-on-pay rules and regulations are empowering shareholders. But how does this work out for each individual company?

A Diligent survey of 26 Belgian listed companies shows that nearly a fifth of companies faced more than 20% votes against remuneration-related proposals in 2022. More than a third received between 10% and 20% votes against. Only half of the companies surveyed in the sample could count on more than 90% yes votes on their remuneration proposals.

These results are obviously important for executive directors, non-executives and investors. A substantial percentage of no-voters increases the reputational risk for the company. This in turn can lead to a negative effect, such as a drop in turnover or stock price. This in turn affects shareholders. For that reason, proxy advisory service Glass Lewis emphasizes that when there is a significant share of dissenters (more than 20% of the minority shareholders), this is cause for serious concern at the level of the board.

As a final element, what are shareholders looking at specifically when it comes to renumeration? In 2022, it is not only the fixed and variable remuneration elements that are important. Surely, Diligent data shows that, as in previous years, the performance of directors is still largely measured by financial criteria.

Eye on non-financial criteria

However, shareholders and other stakeholders also pay attention to non-financial criteria underlying the remuneration. . Therefore, there is an increase in the number of companies that also take ESG key performance indicators (KPIs) into account when rewarding directors.

Various studies show that linking the remuneration of directors to ESG goals in the field of environment, society and good governance increases shareholder value. It helps explain why a growing number of shareholders expect companies to integrate ESG goals into executive pay.

Diligent advises executives and supervisors to enter into an open and transparent dialogue with shareholders about remuneration and governance based on the data. This is crucial to gain insight into shareholder requirements and to take relevant forward-looking action.

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.