Shareholder revolts are on the rise – here’s how they get results

Disaffected shareholders are making waves, and a company’s good performance won’t protect it.

Investors are becoming increasingly active when it comes to voting at company annual general meetings (AGMs). Nearly one-third of the votes cast at WH Smith (LSE:SMWH)’s recent AGM were against the remuneration policy resolution. And it is not just main market companies that are affected, as there are dissenting shareholders in AIM companies as well.

Remuneration policy is one of the major areas where there have been significant minority votes against motions. How well pay and performance are aligned tends to be the main concern, although other bugbears can also play a part. Covid-19 is likely to bring up additional investor issues.

The resolution for the remuneration report is advisory, so arguably not as important as the other resolutions that involve re-electing directors or enabling the issue of more shares. Even so, it is something that boards need to take note of, and the dissenting vote can build up over the years.

In some cases, the issue is not the amount of pay but the disclosure levels of the company and its responses to the concerns of shareholders.

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Performance is no protection

Even some of the better-performing AIM companies have dissenting shareholders. Robotic software provider Blue Prism (LSE:PRSM) had 13.2% of the votes cast against approval of the 2019-20 remuneration report, which was higher than the 10.9% the previous year. In the case of online clothing retailer ASOS (LSE:ASCthere were 18% of the votes cast against the remuneration report, up from 14.6% one year earlier.

The Financial Reporting Council (FRC) Code of Corporate Governance suggests that the board of a company should consult major shareholders if there is a vote of more than 20% against a resolution. This helps the company to understand the problem that the shareholders have with their policies.

Activist investor company Crystal Amber (LSE:CRS)had significant votes against five of its resolutions at its most recent AGM. That includes 25% voting against the remuneration policy. This led the board to point out that the overall level of director remuneration was lower than the previous year and that there will be no increases this year.

However, the reason there was a fall in the total for last year was that that director Nigel Ward resigned in November 2019, so his pay declined from £37,500 to £15,761 as a result of being employed for part of a year. The other three directors were paid £128,000, up from £117,500 the previous year.

There was a 21.5% vote against the remuneration report of veterinary practices operator CVS Group (LSE:CVSG). The previous year there was a 11.1% vote against same resolution and the year before it was 0.69%. The vote against the re-election of non-executive chairman Richard Connell has also increased over the years, reaching 24.9% last year. He is a member of the remuneration committee, as well as the audit and nomination committees.

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There was a 23.86% vote against the healthcare and industrial products supplier Scapa Group (LSE:SCPA) remuneration report, up from 14.15% the previous year. The board said that it had developed a clear understanding of what concerned the shareholders, but it did not outline in the AGM results statement what these were. That is of little use to the wider investing public.

Scapa is the subject of a 210p a share cash bid from Schweitzer-Maudit International Inc. The bid is less than 50% of the share price three years ago, although it is double the price at which money was raised in May 2020. Admittedly, Scapa did lose a significant contract in June 2019, which hit performance and the most recent votes were after that.

Tristel: voting against resolutions can be effective

Disinfection products supplier Tristel (LSE:TSTL) won AIM Growth Business of the year at the 2020 AIM Awards but it has upset shareholders in relation to remuneration and incentives.

All the AGM resolutions were passed, but more than 20% of the votes cast on resolution seven were against the reappointment of David Orr as a non-independent director. The problem was his membership of both the audit and remuneration committees. Tristel has taken note of this objection and he has stepped down from both committees.  

The other contested resolution relates to the 2021 executive management share option plan. The shareholders voting against the plan objected that there was no overall dilution limit set out in the details of the scheme, and also that a proportion of the awards under the plan were subject to absolute growth targets.

In response to the first gripe, Tristel says that any future executive incentive plans will disclose the dilution limits for participants.

One-half of the shares issued through the management incentive will be issued based on the growth of the share price – the rest are issued on the basis of profit growth. The base price is the average share price between 19 October 2020 and 13 December 2020 and the price used to assess the issue is the average of the last three months of the 2023-24 financial year.

There will be no issue if the share price does not rise by 15%. In order to receive all the shares, the share price has to rise by at least 50%.

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Tristel says that the views of institutions vary on this topic. Other institutions believe that the share price performance provides a clear target.

This shows that voting against resolutions can be effective. Tristel has taken time to consult with its larger investors even though the resolutions were passed. The board will bear these concerns in mind from now on. It is also good that Tristel outlined its response for all shareholders to see. This is in contrast to Scapa, whose published response was vague.

What the experts say

There are consultants and other advisers that provide guidance and advice when it comes to corporate governance.

Glass Lewis, which provides guidance to shareholders when they are voting at corporate meetings, recently published its ‘Approach to Executive Compensation in the Context of the Covid-19 Pandemic’ in which it outlines its amended approach. It points out that there is likely to be an increased interest in directors pay when companies are receiving government support and/or are laying off employees.

When assessing the appropriate pay levels, Glass Lewis says that in 2020-21 it will focus more than ever on specific areas as part of an overall assessment of comparative performance. If a company has cancelled or reduced dividends it would be expected that the board’s pay would also be affected.

References to significant layoffs, cuts in salaries and the furloughing of employees should be included in the remuneration report and there should be an explanation concerning how these were taken into account when assessing executive remuneration. Glass Lewis says, “we believe that there should be consistency between changes in the yearly disbursements for employee pay and executive pay”.

Long-term executive grants will be scrutinised in terms of the share price used. This is particularly relevant when a share price has not yet significantly recovered from its initial decline when Covid-19 hit the stock markets.

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Glass Lewis believes that the company should “explicitly address” the potential inflation in the final value of the incentive if the share price recovers to past levels. If there might be a large windfall gain Glass Lewis would expect the board to adjust the grant value and/or adjust other elements of an executive’s pay package to offset the effect.

A company should provide a direct explanation to stakeholders, such as government or investor associations, if they have brought up concerns about executive pay.

This advice is mainly aimed at larger companies, but it is relevant for AIM companies as well.

In the past, it was poorly performing companies that were hit by shareholder dissent. It appears that even the strongly performing AIM companies are not going to be immune from additional scrutiny and criticism. Boards of these companies will have to think more clearly about their decisions and how they communicate them to shareholders.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.