By Chloe Horne, Rosie Farr, Tom Barron, the PRI’s stewardship team
The COVID-19 crisis has had a profound impact on communities, companies and wider society, with its effects expected to continue for the foreseeable future.
The pandemic has not only highlighted the importance of companies tackling issues around poor working conditions and economic inequality. It has also reinforced the need for good governance structures as companies re-focus their efforts on crisis management and business continuity. Now, more than ever, it is important for investors to engage with companies on these matters. Whilst we may see some instances of company engagement reprioritised in the short term to focus on COVID-19, the climate emergency and other pressing issues will not patiently wait for this crisis to be over – and so must not get lost in the turmoil of the pandemic.
AGMs present a crucial opportunity for investors to engage with their portfolio companies. It is a chance for investors to speak directly with companies and hold them to account, as well as providing a platform for proponents of shareholder resolutions to communicate their expectations to management. The PRI encourages investors to feel empowered and use these forums to engage with companies on these critical matters. Our recent joint guidance document goes further and equips investors with ESG-related questions to ask companies at AGMs in response to COVID-19, published in collaboration with CalSTRS, APG and the Business & Human Rights Resource Centre.
However, the pandemic has shaken up this AGM season, limiting the ability of companies to hold meetings in person. We are seeing some meetings being delayed, held behind closed doors and conducted virtually. Whilst this is a necessary measure to slow the spread of the virus, it must not harm the ability of investors to exercise their rights as owners.
So, the question stands: at a time when it is more critical than ever for investors to hold companies to account, can they actually engage with companies or will they struggle to make their voices heard in this new normal?
Alternative AGM structures
Against the backdrop of restrictions on in-person gatherings globally, companies are trialing alternatives to traditional AGM structures, subject to local legislation and companies’ Articles of Association (Articles) – which set out how companies are run and governed.
A small number of companies (whose Articles permit it) have opted to delay their AGMs. Typically, the company may decide to postpone the meeting until more people are able to participate in person. However, companies risk running out of time if they have to postpone the meeting again, which means this option is often unattractive. It is also not feasible in many jurisdictions where local legislation requires companies to hold their AGM within a specified period after their financial year-ends - although, meeting extensions have been granted in some jurisdictions. There are also other issues to consider when it comes to delaying meetings: the ability of investors to update their resolutions if AGMs are delayed for a substantial period of time; the impact on dividend payments to investors; and the potential pressure on stewardship teams if AGMs are concentrated into an even shorter time period than normal.
Other companies have opted to hold events behind closed doors where only a few people are present, to meet the minimum number of participants to be quorate (a valid proceeding). This is a popular approach in the UK, where two thirds of FTSE 100 companies plan to conduct their meetings privately. It is not difficult to imagine why many investors are opposed to this type of format, and may expect at the very least for companies to offer a shareholder event later in the year where investors are given a forum to interact with the company’s board and management.
Virtual AGMs (conducted entirely electronically with no physical location) have become a common practice and more frequent – especially in the US. Due to the pandemic, virtual AGMs are becoming more popular globally as regulators have issued guidance to allow regulatory flexibility over how meetings are held. However, virtual meetings are less common and typically untested in certain countries. These meetings are also often not permitted in a company’s Articles because they do not constitute a valid meeting. A popular solution to these restrictions is to hold a hybrid meeting where investors can participate virtually, in conjunction with a physical meeting that meets the number of participants required to be quorate. For example, in Japan, virtual-only AGMs are not allowed under normal circumstances, but a hybrid meeting structure has been accepted to restrict in-person attendance.
Even though hybrid AGMs seem to be a good solution to allow shareholder participation – and indeed may become the ideal set up in the future - it is important that the set-up replicates the interactive nature of an in-person meeting, to allow investors to have a meaningful interaction with investees – otherwise the entire purpose of the AGM is undermined.
Virtual/hybrid AGM challenges
Against the backdrop the disruptions to this year’s AGM season, it is critical that companies do their best to afford investors the engagement and interaction that they would traditionally expect. This AGM season should be remembered for its ability to foster an open dialogue between investors and investees when it is arguably needed the most, rather than putting a spotlight on technical barriers that inhibited the rights of investors to engage meaningfully with companies.
Whilst many meetings have run smoothly, and some processes have been left nearly unchanged (such as the ability to vote in advance by proxy), some investors have been left feeling frustrated by technical barriers to participating.
Often only those presenting, and proponents of shareholder resolutions (and their representatives) are granted access to participate virtually in real time, with other investors being required to submit written questions in advance of the meeting. In certain instances, even proponents are not afforded this right and are asked to submit a written statement. This proves problematic as proponents often rely on their ability to present at the AGM to garner support for their shareholder resolution.
Even when investors can participate and ask questions, there have been reports of the online system being abused to escape questioning. Investors have expressed their concerns when multiple questions are summarised by management to suit their agenda – which doesn’t allow investors to specifically scrutinise companies as they would typically like to.
Similarly, investors have raised concerns of companies cherry picking and moderating their questions. It is important that companies are transparent with their process for answering investor questions. There is a fine line between reasonably summarising questions (without losing the essence of the question) and answering those most appropriate for the AGM; with avoiding showing preferential treatment over which questions are selected and read out to avoid scrutiny.
The future of AGMs
This pandemic has changed the future of office working significantly, with a shift to remote working longer term - so can we expect virtual AGMs to become the new normal too? Will we see companies making proposed amendments to their Articles to expressly permit virtual AGMs? Some investors have supported the move to virtual meetings - and they do have some benefits including the ability to reach far more investors, the time saved usually spent travelling, as well as the positive impact on global emissions. But clearly not all investors are entirely ready for the move to virtual meetings, as seen last week when shareholders of Standard Life Aberdeen rejected its proposal to amend its Articles to enable virtual AGMs.
The various challenges that have been highlighted this AGM season, from technical access issues to the inability to present questions to the company, proves that the industry hasn’t fully considered the implications of virtual AGMs. Companies, along with regulators, need to ensure that shareholders can exercise all their rights before they start to consider proposing any permanent changes as we all grapple with this new reality.
Even if the wider investment community is not ready for full virtual AGMs we do see some potential solutions, such as moving to hybrid AGMs. This could work well beyond the current pandemic, not solely as an interim measure, and serve the best of both worlds for shareholders.
We would like to hear from you. What has been your experience of AGMs this year, and how do you think they can be improved? Have you been asking investee companies specific questions in response to the COVID-19 crisis? Do you have any concerns for the future? Participate in our discussion forum on the Collaboration Platform to hear from other investors, find useful resources, and keep up to date with the PRI’s work to help you to navigate this AGM season during these uncertain times.
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