For Heads of Remuneration in ASX listed organisations, engaging with proxy advisors is a critical component in gaining shareholder votes for the remuneration report and, therefore, avoiding a strike. This is especially the case where a significant proportion of shareholders are institutional – where limited time and resources are available to independently research company policy. Even for those that do have the resources, these institutional investors often subscribe to two or more proxy firms to round out their research.
While the large institutional investors vote on their own accord, they are influenced by the advice of the proxy firms. In fact, the default position of these investors is often to vote in line with proxy advice unless there is a compelling reason not to (especially where these investors are based outside of Australia).
So with this in mind, I have spoken with a number of Heads of Remuneration in ASX listed companies over the past few months to understand how they engage with the proxy advisors and how to get the best out of that relationship. Here’s a summary of their advice:
- Take the opportunity to attend their governance forums and have informal chats with them at networking events
- Read up and get to know their ‘hot buttons’ – in each reporting season there will be some themes which are more important than others. It could be the issue of paying executive bonuses after receiving government subsidies (and let’s be honest, regardless of whether the bonuses were paid based on the previous financial year’s performance, it’s not a great look from the investors’ perspective), or maybe it’s about sustainability and the environment.
- Learn their formal voting guidelines, how they like to engage and how they do their research so you can get a better read on their position
- Understand your register and how each proxy firm influences your shareholders. Learn which firms your shareholders subscribe to and whether they are likely to vote in line with their recommendations
- Understand their appetite for more novel forms of remuneration – some proxies are firmly of the view that Total Shareholder Return is the best and only way to measure long term incentives. If you’re thinking of doing something different, bring them along on the journey as you explore what that means for your organization. You’re far more likely to win their approval if you involve them along the way.
When meeting with the proxy advisors, it pays to be well prepared and be really crisp on the key messages that you want to leave them with, so:
- Have an agenda and ask if they want to add anything
- Your meeting is likely to be broader than rem so ensure you have the right people attending with you (eg. Head of Sustainability)
- Acknowledge their point of view, even if it’s counter to what you’re proposing, and they explain the ‘why’ of what you’re proposing. It is important to help them understand your objectives, organizational challenges and elements you are trying to balance (ie. Your unique context)
- Take detailed notes (and refer to them in subsequent meetings so they know you’ve listened and taken what they said on board)
- Ensure your Chairman is fully prepared to set the scene in terms of what the Board is trying to achieve and the processes they are following; then you can be there to explain the technical aspects and clarify any comments if necessary (Chairmen are rarely deep remuneration experts, after all)
- Provide any reading material in advance (as you would with a Board meeting)
- If you aren’t able to answer any of their questions in the room, respond as soon as practicable after the meeting – if you’re not 100% sure of the answer, it’s best not to respond ‘on the fly’.
Work to create an environment of mutual respect
- Ask their thoughts / opinions on what’s going on in the market that they might find interesting
- Be prepared to respectfully hold your ground by going back to your rationale as to why your approach is right for your particular organization
- With a mutually respectful relationship built, it is possible to have a conversation that is ‘off the record’ but proxy advisors will not amend their reports or recommendation unless you put new information on the public record (and be aware that any emails you send to them may be included in their reports so consider what goes into them carefully!)
What if they recommend ‘Against’
- Firstly, it is highly unlikely that you’ll change the recommendation of the proxy advisors but it is possible to convince your investors not to vote in line with the proxy recommendations
- Approach the proxy advisor with the ‘against’ recommendation and ask for a copy of their draft report before it is published (Glass Lewis now allow you to respond through their portal)
- This way you can proactively address anything that is factually incorrect or misrepresented in the report and gives you a chance to correct it before it is published (though you may only have a couple of hours to respond, so be prepared!)
- This will also give you a platform to get on the front foot with investors – you can directly respond to the issues raised, putting forward the organisation’s reasoning for the decisions / directions it is taking
- Work on an engagement strategy with your Investor Relations team and Chairman – focus on getting in touch with your top 30-50 investors, preferably in person/video conference or on the phone. If your Investor Relations team has a strong relationship built with these key investors, it will make your job a lot easier.
- If investors don’t want a meeting, then write to them setting out your response to the proxy advisor’s report
- You can see investor’s voting intentions as they are lodged through the custodian by engaging proxy voting analysis. This will give you advance warning of any problems.
Even if they don’t recommend ‘Against’
- Reach out to the proxy advisors and offer a call in case they have any questions
- You should also ask them to contact you to discuss anything they might consider contentious – this places the ownership on them to engage with you and places you in the driver’s seat.
What if we get a first strike?
- Firstly, work with the Board to understand the key issues driving the strike – you need to focus on the big-ticket things (as you may have a long list of ‘issues’ which have been cited by the proxy advisors)
- The Board may want to undertake a full strategic review, or they may want to focus on the specific points raised. It’s important to note that some of the big-ticket issues raised by the proxies might not be remuneration-related at all; or they may be related to planned design changes as opposed to the past year. Be clear on these issues
- After a strike, you must formally respond to shareholder concerns in the subsequent Remuneration Report and explain what the organization has done to address the concerns or, if not, why they haven’t been addressed. You don’t have to address every minor point but be sure to cover off on the main issues that were raised
- It is a good idea to thoroughly research how other organisations have responded to similar issues and whether they have received second strikes or not – you may find an approach which works well for you
- If you’re thinking about making design changes, as stated before, bring the proxy advisors along on your journey by testing your ideas with them. Whatever you do, if you’re making significant changes, don’t surprise them with it after it’s already gone live!
- In the subsequent remuneration report, summarise the process you undertook and emphasise that you sought input from investors and advisors – this will assist with getting buy-in and show publicly that you have taking this considered approach
Proxy advisors form a critical part of the investor landscape and, for listed organisations, engaging effectively with them and helping them understand your logic and organizational context go a long way in avoiding negative recommendations. Hopefully these tips will help make your role just a little bit easier.
