Preparing for the 2021 AGM season | a time for change?
Published on 24th Mar 2021
Move to virtual and hybrid meetings
At present there is statutory flexibility in the format of AGMs, allowing companies to hold fully virtual AGMs, pursuant to the Corporate Insolvency and Governance Act 2020 (CIGA). The current long-stop for the flexibility under CIGA is 30 March 2021 and legislation would be required to extend this but, to date, the government has not given any indication as to whether this will be extended (although previous extensions have been very last minute).
The current relaxation of the rules around AGMs allows for:
- Meetings not needing to be held in a particular place and companies being able to hold closed meetings.
- Companies having the ability to decide how shareholders vote at meetings, be that electronically, by a show of hands or by proxy.
In addition to the uncertainty of the extension of CIGA, investor sentiment towards 'closed' meetings has changed since the early days of the pandemic and shareholder engagement at AGMs is expected. The Financial Reporting Council has further backed up the change in investor sentiment by noting in its AGM guidance that 'closed' meetings do not support shareholder good shareholder engagement.
In light of the government's 'roadmap' out of lockdown, some form of social distancing measures will likely be in place until at least 21 June 2021 in England. We therefore envisage there for the 2021 AGM season there will be a wider adoption of 'hybrid' meetings – where a small number of shareholders meet physically to make a quorum but wider participation is permitted through electronic means – alongside an increase in fully virtual AGMs.
Whether or not 'hybrid' meetings are possible for a company (without the flexibility of CIGA) will depend on the provisions in its articles of association, which could prohibit some companies holding AGMs in this manner without the extension of CIGA. When deciding on the format of the AGM for 2021, companies should keep shareholder engagement front and centre of those considerations.
In light of the impact Covid-19 has had on the traditional running of AGMs, many companies are looking to amend their articles of association to include flexibility to hold hybrid and, in some cases, fully virtual meetings. Investor views on amending the articles to allow for hybrid meetings have changed over the last 12 month and it is generally accepted that this is a prudent step for listed companies to take. However, there is still resistance from investors and investor groups (for example, the Investment Association) to holding fully virtual meetings. Where a company is considering amending its articles to allow for fully virtual meetings it would be prudent to discuss this with key shareholders ahead of formally proposing a resolution.
In February 2021, the Chartered Governance Institute (ICSA) published guidance about company AGMs and the impact of Covid-19 which can be accessed by registering as a free subscriber.
The guidance helps clarify expectations regarding company meetings scheduled to be held after 30 March 2021. Given the ongoing Covid-19 pandemic, it recommends companies offer as much electronic engagement as possible.
The main points in the guidance are that:
- Companies should adopt a flexible approach, looking at the options available at the time of the notice and the meeting itself.
- If CIGA is not extended then closed meetings will only be possible after 30 March if legislation and guidelines preclude gatherings of more than a limited number.
- Requirements for social distancing mean that venue capacity will be reduced.
- Unless there is national lockdown legislation in place at the time of the meeting, then companies will not be able to preclude shareholder attendance but could strongly recommend that shareholders do not attend in person.
- Hybrid meetings can be held even if this is not expressly permitted in the company's articles (provided that there is nothing in the articles that prevents them from doing so).
The following themes and topics are likely to feature in the 2021 AGM season:
Scrutiny of executive remuneration is likely to be a key theme during the 2021 AGM season. In particular:
- Impact of Covid-19: The Investment Association advises companies that they should 'sensitively balance' the remuneration of executives against the wider impact of the pandemic and its impact on its employees and stakeholders.
- Pensions: as with 2020, the Investment Association's guidelines are that the pension contributions for executive directors should be aligned to those of the wider workforce. As such, any remuneration policy for any new director should have their pension contributions set at this level. If the pension is not set at this level, the Investment Association is effectively recommending a vote against such policy. In respect of all directors (including incumbent directors), the Investment Association is pushing for all pension contributions for directors to be aligned with the majority of the workforce as soon as possible. In addition, in determining whether to approve the remuneration policy, Institutional Shareholder Service (a US proxy adviser) will have regard to the extent to which pension contributions are aligned with those available to the wider workforce and, separately, whether the company has an appropriate post-employment shareholding requirement in place.
- ESG: although there is no specific requirement on linking Environmental, Social and Governance (ESG) metrics to executive remuneration, we envisage shareholders will increasingly expect ESG factors to be considered in the compensation framework for executive directors.
A focus on ESG matters will continue to increase throughout 2021. A number of investment and proxy advisers have increased their focus on ESG matters and this is likely to continue. Whilst an objective standard for ESG reporting and a position on benchmarking is in its infancy, we expect there to be an increased emphasis on ESG matters in annual reports in 2021. The Institutional Shareholder Service has gone as far as recommending a vote against directors where there have been material failures in governance, stewardship or risk oversight of environmental and social issues.
Pre-emption Group guidelines
In the early days of the Covid-19 pandemic the pre-emption group updated its guidance to allow additional flexibility for issues of shares, permitting issuances up to 20% of a company's issued share capital free from pre-emption rights. This flexibility came to an end on 30 November 2020.
The guidance from the pre-emption group is that authorities sought after 30 November 2020 for non-application of pre-emption rights should revert to a position that is consistent with the Statement of Principles (5% for general purposes and 5% for specified acquisitions/investments).
There is an expectation by investors that companies will take action to improve the diversity of their boards. Where companies have not taken any steps to address any diversity concerns, as measured against the various investor and proxy advisers' diversity targets, they can expect to have votes against the chair of the nomination committee (or chair of the board).
Osborne Clarke comment
This AGM season, like the last, will be difficult to plan. Boards should start thinking about their arrangements well in advance and make contingency plans if government coronavirus restrictions change."