Grok, AGL & Proxy Activism

A RENEWED FOCUS ON PAY AND PERFORMANCE IN THE ASX 300

The issue of remuneration again remained a significant point of contention in 2022, with 17 companies in the ASX 300 receiving more than 25% of the vote against their remuneration reports. This is down from a record high of 26 recorded in 2021. Of the 17 companies, 4 also had ‘strikes’ on their remuneration reports from the previous year, which resulted in spill motions being put to vote at their respective AGMs in 2022. That said, despite these results, no spill resolution was carried out for any company in the ASX 300 in 2022.

Furthermore, the annual meeting results for companies in the ASX300 this year showed a strong alignment with proxy voting intelligence, gathered by Orient Capital in the same period.

It was found superannuation funds that voted for remuneration reports increased from 72.94% in 2021 to 76.68% in 2022. This trend was also reflected in the voting outcomes of investment managers, who voted for remuneration reports in 93.20% of cases in 2022, up from 88.81% in 2021.

In 2022, as companies adjusted to a new post-pandemic environment, investors paid close attention to the interplay between performance and pay and developed a renewed focus on the effectiveness of targets set by boards. Any efforts by remuneration committees to deviate from best practice standards or peer benchmarks for fixed or variable remuneration were scrutinized.

Alongside investors’ scrutiny, proxy advisors were critical of companies adding non-financial measures into their short- and long-term plans. They believe that such moves potentially undermine the alignment between pay and performance and could be seen as a way for companies to reward management for “doing their job”, rather than truly striving for improvement to shareholder and stakeholder value.

Advisors expressed their significant concerns over the incorporation of non-financial (strategic, and even ESG) measures into long-term incentive plans. Particularly when such additions were accompanied by a reduction in the weighting of existing market-based or financial measures. In their reasoning for ‘against’ recommendations, the proxy advisors argued that in order to ensure that pay is truly tied to performance, such non-financial measures should be treated as complementary, rather than a replacement for financial measures.

RISING SUPPORT FOR PROACTIVE CLIMATE AGENDAS

While the number of retail shareholder activist resolutions targeting ASX 300 companies on climate transition, disclosure and planning decreased to 13 in 2022 from a record high of 19 in 2022, concerns about climate change continue to be at the forefront of many institutional investors’ minds. This year, saw the first major Australian company (AGL Energy) successfully being targeted by an institutional activist (Grok Ventures) in a sophisticated and sustained campaign to bring about greater climate action.

In conjunction with Canadian Asset Manager Brookfield, Grok Ventures (Grok), the private investment vehicle of billionaire climate activist Mike Cannon-Brookes made a takeover offer for AGL Energy in early 2022. It was swiftly rejected by the AGL Board. Undeterred, Grok returned to take an 11% stake in AGL, making the firm the largest shareholder in the company. they then sought shareholder support to derail the demerger.

Grok believed the demerger would destroy shareholder value and delay the closure of AGL's remaining coal-fired power fleets. A multi-pronged shareholder engagement campaign ensued with a progressive shareholder communication strategy, devised to actively engage key investors, beneficial owners, and proxy advisors. This ran parallel to an in-depth solicitation campaign targeting 40,000 retail investors run by Orient Capital. Grok was able to successfully defeat the demerger, which also saw the resignation of the AGL Chairman, Peter Botten, and AGL CEO, Graeme Hunt.

Grok then secured ongoing dialogue with the AGL Board but was unsatisfied with the strategic direction the company was taking on their green transition. In turn, Grok continued their campaign and nominated four new candidates to the board of AGL at the 2022 AGL Annual General Meeting (AGM). Another substantial shareholder engagement campaign was launched to focus on gaining support for Board renewal ahead of AGL’s 2022 AGM.

Advised again by Orient Capital, the subsequent proxy campaign encompassed shareholder analysis, proxy advisor outreach, institutional investor engagement and a retail solicitation program via email, SMS, print, and a mammoth outbound engagement component with over 75,000 calls.

Overall, AGL opposed three of the nominated directors, with the Board recommending other shareholders vote against their election. Regardless, the activist campaign was a resounding success with all new board nominations approved by shareholders at the AGM.

Several investment managers and passive investors publicly took a stance against AGL during the high-profile proxy contest, including HESTA, which publicly opposed the AGL Demerger and encouraged the renewal of the AGL Board. Emboldened by the success of Grok, and Engine No. 1 before it, institutional activists will continue to demand more proactive agendas on climate action within company boardrooms, nationally and internationally.

WHEN INSTITUTIONAL INVESTORS AND PROXY ADVISORS DISAGREE

Institutional investors, pension funds and investment managers are increasingly becoming the key players in driving corporate governance of publicly traded companies globally and nationally. These investors often use proxy advisors, such as ISS, Glass Lewis, and Ownership Matters to provide timely proxy voting research and recommendations to drive ESG outcomes at shareholder meetings.

A proxy campaign analysis, run by Orient Capital in 2022, identified a 12.4% increase in the number of cases, where superannuation funds voted against the recommendations of their proxy advisors when compared to 2021. Similarly, 2022 also saw a 5.5% increase in investment managers voting against the recommendations of their proxy advisors as compared to the previous year. The results imply that investors and investment managers are increasingly taking discretion away from their proxy advisors.

There may be many reasons why this has occurred. One reason could be the impact of direct engagement, which enables institutional investors and investment managers to gain a different perspective on individual issues. For example, the proxy advisors may recommend against a director’s board nomination due to a perceived lack of relevant experience, without ever meeting them. Unlike an investor, who would develop a deeper understanding of the candidate’s character when engaging directly with the nominated member.

Furthermore, investors may believe that the recommendations are inconsistent with their own investment philosophy or goals. For example, an investor with a strong focus on ESG issues, like climate action, may vote to approve a proposal they view as in -line with their ESG objectives, irrespective of their advisor’s or management’s recommendation. This was epitomised in 2022 when witnessing the growth in voting support amongst institutional investors (such as Northern Trust, Schroders & Realindex Investments) for shareholder-proposed climate action resolutions in the ASX 300, even when opposed by management and all four major proxy advisors in Australia.

It is important to recall that proxy advisors do not generally have authority over the voting discretion of their clients, and their recommendations, while respected are typically not binding. Investors are ultimately free to make their own decisions based on their own analysis and perspective on the issues of the companies in which they are invested in.

Over the coming years, focus on how listed companies either help or hinder climate change will be placed under the spotlight by investors, proxy advisors and, in some cases, the media. As witnessed in Grok, institutional activism could be the new method in which stakeholders pressure businesses to reflect internally on their ESG and make noticeable changes that reflect the shareholders’ goals, morals, and margins.

To learn more about our insights from the 2022 AGM season, click here to read our 2022 AGM Snapshot.