STUART THEOBALD: Investors and boards have some way to go to find each other on the issue of remuneration

AGM season this year continues to see significant shareholder votes against remuneration. Unhappiness is expressed through “nonbinding” votes on remuneration policies and implementation of those policies.

According to JSE listings rules, if a company gets less than 75% support from shareholders, it must “engage” with those shareholders to discuss the issues.

With the present raft of AGMs, sharply negative views have been expressed. For example, shipping company Grindrod could muster only 48% support for its implementation report and gold miner Sibanye 53%. But the unhappiness wasn’t over the quantum of the payments — indeed, others such as Kumba Iron Ore (99%), Old Mutual (96%) and MTN (95%) have been getting the nod from shareholders despite often paying more.

It is also hard to see in the voting pattern a clear link between pay and performance. Grindrod’s share price doubled in the relevant year, for example. Rather, the problem shareholders seem to have is with the level of discretion that boards and management have in determining the variable pay components of packages.

This might strike you as an odd thing to get so hit up about. Discretion is what you should endow a board of directors with if you want them to be empowered to run a company. However, given the risk of “management capture” of boards, governance trends have been to strip discretion back as much as possible. The remuneration policy should set out that incentives are tied to objective outcomes. The implementation report should make clear how those outcomes were achieved and how they translated into remuneration.

However, I assure you that few, if any, fund managers sit down and study the remuneration reports in detail to come to a view on whether to endorse them. Indeed, fund managers are much more interested in the detail of the performance of the business. Instead, proxy advisers, a type of consulting firm, tell shareholders what they say best practice is and how the company complies with it.

If a company is found lacking on any of the technical requirements of best practice, in the view of the proxy adviser, they get a red mark. Some shareholders then mechanically vote their shares accordingly.

Some shareholders are more active. In the chaos of the Covid-19 crisis, a lot of remuneration rules books were torn up and some shareholders got upset about it. Several performance indicators suddenly became impossible to hit, and for a period it was all about survival.

Flight risk

Some companies faced considerable flight risk, especially in industries such as banking where the battle for talent is acute. As a result, discretion made a comeback and new incentives were suddenly created to compensate executives with performance now tied to trading through the Covid-19 period. That meant trouble for some companies that felt executives should instead be feeling the pain of shareholders.

This period seems to have marked the beginning of a more activist role by shareholders on remuneration. Until then, it was virtually unheard of for shareholders to vote against remuneration. There was wide shock when negative shareholder votes became more frequent in 2020. The engagements companies were required to make were done urgently and treated as hallowed affairs for directors to entreat shareholders to understand the wisdom of their remuneration approach. But some companies were shocked to find that shareholders often couldn’t be bothered to show up.

For example, after Capitec got a rather bruising 53% vote on its implementation report in 2022, it invited shareholders to engage, but the invitation was not taken up. This has become routine — and the response has been increasing cynicism from companies. When votes fall short of requirements, there is now a boilerplate invitation added to the AGM results announcement inviting shareholders to email in their issues of concern. Companies don’t often comment when nothing follows.

Indeed, when Foschini Group publicly protested in 2021 about shareholders engaging in meetings with it then voting against the policy, it found itself even more in shareholders’ bad books.

Engagement, however, does sometimes help. Capitec last month managed to scrape through its 2023 shareholder vote with just over 75% support, a considerable improvement. Despite shareholders not taking up its offer to engage, it went out proactively and discussed the issues with its biggest shareholders and made changes to its approach. Those amounted to stripping out discretion and making the performance targets more challenging. Capitec made the effort, but increasingly companies are seeing the votes as irrelevant, to be met only by going through the motions of engagement.

Some shareholders advocate greater clout and amendments to the Companies Act to provide that have been contemplated. But shareholders should take seriously their role in engaging with companies where they vote against remuneration reports to explain what it would take to earn their votes. Until then, it would seem reckless to make the votes binding, substantially disrupting the board’s ability to manage the business.

So while we are seeing some improvement this AGM season, we have some way to go for investors and boards to find each other on remuneration.

Stuart Theobald is chair of Intellidex. This article first appeared in Business Day