UK continues to lead way on governance amid increasing investor pressure
Growing trend of investors holding companies to account
UK companies continue to lead the way on governance standards globally, despite an uptick in shareholder rebellions in 2019 as investors continue to ramp up pressure on investee firms, data suggests.
Investment Association data released last week (20 February) revealed 158 FTSE companies had been added to its public register, which tracks any vote of more than 20% against a resolution, up from 120 in the previous year.
The IA said this reflects a growing trend of UK investors "holding companies to account", with executive pay and director re-election continuing to top the list of concerns driving shareholder rebellions.
There is growing evidence that the rise in governance-related rebellions is already forcing change, with an increase in the number of companies altering policies on areas like executive pensions and pay.
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Director for stewardship and corporate governance at the IA Andrew Ninian explained that investment managers "will be paying close attention this year when companies bring their pay policies to the table to see whether they have heeded the high levels of dissent".
While there are growing levels of shareholder action on company resolutions in the UK, the country's reputation for governance standards still outweighs global counterparts.
Allianz Global Investors' proxy voting record for 2019, released earlier this month, highlighted a stark difference in UK corporate governance culture to markets across the world.
The firm voted against just 5% of management proposals from UK firms in 2019, compared to rates of 38%, 34% and 29% for Japanese, US and Hong Kong companies respectively.
The starkest difference was seen on director-related proposals, with Allianz GI voting against just 6% of such proposals compared to rates of 57%, 41% and 35% in Italy, Japan and Hong Kong respectively.
Hong Kong and the US represented by far the biggest targets of votes against compensation related proposals, with Allianz voting against 93% and 70% of proposals respectively.
Similarly, AXA Investment Management's recently published engagement report shows the firm voted against management on at least one resolution at 46% of all company annual meetings in 2019, identifying North America as the market it challenged firms most.
More to be done
Speaking to Investment Week, Allianz GI's global head of ESG research Eugenia Jackson said there has been notable improvement in UK companies' willingness to engage with investors, on areas such as board diversity and other governance issues.
She explained: "It is fantastic to see progress on board diversity because that is something that we engage with companies on a lot.
"We are also very pleased with the progress on the pension side, where we have been pushing for executive pensions to be proportionate to staff, based on salary.
"There is also a growing trend of companies increasing shareholder requirements for directors, which is again very positive. We want executives to have as much skin in the game as possible."
However, Jackson identified executive compensations as an area where the firm "would like to see more progress".
"We need to see compensation that is aligned with business strategy and an understanding of how it translates into value creation."
Jackson noted that this is not unique to the UK, with "many cases like this all over the world".
Stewardship director at Rathbone Investment Management Matt Crossman agreed that "generally, companies are more open to engagement than ever before", driven by such trends as potential reputational damage in a social media world and passive investors beginning to up their own engagement efforts.
However, he said while progress on board diversity and other issues "is moving in the right direction", the pace has been slow.
Crossman explained: "Although women now make up 31.5% of FTSE350 board directors, there are still lots of companies falling short. And some argue that the pool of senior women serving in these roles is too narrow.
"More needs to be done on the crucial issue of talent development. More diverse boards do better, and we want to see how companies are planning to make this a reality. Sadly, progress on the wider concept of diversity, beyond gender, needs more support."
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Similarly, the IA's Ninian said that while there had been "good progress" on some areas such as executive pensions, "shareholders want companies to ensure that their pay policies are justifiable in the last year on executive pensions, shareholders want companies to ensure that their pay policies are justifiable".
He added: "2020 is an important year, which will see the majority of companies seek shareholder approval for their remuneration policies for the next three years, and they will want to see that CEO pay is proportionate and aligned to performance."
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