Dan Jones, Shareholder Analytics & Investor Relations

With results and subsequent investor roadshows behind them, many companies have turned their attention to their upcoming AGM. Along with considerations such as shareholder presentations, Q&A preparation, requirements of shareholder analytics and/or proxy solicitation support, etc. thought should also be given to how the voting landscape is continuing to change. As well as reporting sound financials, it is becoming increasingly important for a company to deliver an impressive Environment, Social and Governance (ESG) scorecard.

The Voting Landscape

Proxy Advisory firms have traditionally been the key instigators of recommendations on or changes to voting tendencies. Today however institutional shareholders and asset owners are taking more individual voting responsibility.

Proxy Advisers

Proxy Advisers research and provide recommendations with respect to voting on resolutions at shareholder meetings. The stated goal of all Proxy Advisers is to recommend what, in their opinion, reflects the governance policies of their clients and is in those clients’ best interests. For the most part, Australia’s big three Proxy Advisers – CGI Class Lewis, Institutional Shareholder Services (ISS) and Ownership Matters – will invariably end up at similar conclusions.

Institutions

Institutional shareholders are the major users of Proxy Advisers’ research, as many institutions do not have sufficient internal resources to commit to researching each resolution for every company they hold shares in. Some institutions outsource research to multiple Proxy Advisers and will only conduct independent research in the event of a contentious resolution. Where the research findings are unanimous institutions will generally lodge their votes in line with Proxy Advisers’ recommendations.

Contrastingly, other institutions (particularly larger ones) will use research from Proxy Adviser’s as guidance only, to assist them in expediting their own decisions. When asked about shareholders’ reliance on Proxy Adviser reports, Karin Halliday, Senior Manager of Corporate Governance at AMP Capital Investors, recently stated:

“…I think some shareholders are overly reliant because they just don’t have the resources to do their own voting and own engagement with companies. To be able to vote, they then rely on proxy advice… even though we [AMPCI] use proxy advice and gather information from their research, it’s just an input into what we’re doing.”

In this instance we see the investors moving away from blindly following recommendations. Instead, Proxy Advisers’ recommendations are only part of the factors (albeit ones that carrying significant influence) contributing to an ultimately independent decision by the institution.

Asset Owners

A significant move, which should not be discounted within proxy voting, is the growing trend for beneficial owners, such as superannuation funds, to withhold their voting rights from their externally appointed investment managers. It is in these instances where recommendations made by the Australian Council of Superannuation Investors (ACSI), which provides “research, engagement, advocacy and voting advice” to its members, are of particular importance. ACSI’s current subscribers include 31 Australian superannuation entities collectively managing A$450 billion in assets – much of which is invested in listed equity.

ESG and its impact on shareholder voting

Today, a ‘tick of approval’ from a Proxy Adviser or shareholder voter requires a company to have not only sound financial management and a demonstrable ability to create and maintain shareholder value, but also an appropriate (sustainable) focus on ESG-related matters.

This commitment to ESG-related outcomes is evidenced in CGI’s partnering with Sustainalytics in 2016. This firm specialises in sustainable analytics research and the production of environmental and social advisory reports. In future this will allow CGI to incorporate ESG research into its ratings and proxy advisory reports. CGI has stated it will consider recommending against the responsible director(s) where they feel particular social and/or environmental issues have been ignored or inadequately addressed in Board decisions, regardless of resulting financial gains.

ACSI also aims to “provide a strong, collective voice on environmental, social and governance (ESG) issues on behalf of its members”. The collective voice is used to “achieve genuine, measurable and permanent improvements in the ESG practices and performance of the companies their clients invest in.” With some A$450bn funds under management, companies should no doubt be consciously competing for their capital.

Investors themselves have growing concerns about ESG impacts as evidenced by the growth in sustainable investing (SRI). The Global Sustainability Investment Alliance 2016 Review suggests the value of SRI assets in Australia and New Zealand more than doubled to US$516 billion between 2014 and 2016. Many funds now have mandates which only allow them to invest in companies actively seeking to prioritise ESG factors, which from their perspective serves to reduce downside risk.

Reflecting the changing views and increasing interest of various market participants, many companies now report comprehensively on their ESG practices and responsibilities.

Gender Diversity and its impact on shareholder voting

Gender diversity has rightly been a focus point within ESG for many proxy firms, investors and other advisers. This may be partly because, compared to environmental impacts, for example, it is relatively quick and easy to observe (and quantify) progress on gender equality and the governance around this.

In the recent update of its Australia and New Zealand Guidelines Paper, CGI Glass Lewis noted its focus on initiatives to increase the number of females on boards of ASX300 companies. Specifically, it indicated:

“If a board has a poor record on the issue of board diversity… we will consider recommending voting against the Chair of the Nomination Committee, or the equivalent.”

Compared to CGI’s 2014 Guidelines, where it was recommended that entitles “establish and disclose a policy for board diversity”, its recent guidelines appear to have evolved to a call for action and implementation, rather than monitor and plan.

In 2015, ACSI stated its gender diversity target for women to make up 30% of ASX200 company board seats by 2018. As this deadline approaches, ACSI recently reported it will “recommend its members vote against the boards of ASX200 companies with poor gender diversity, on a case-by-case basis.”

Investors, too, have moved with the times. ISS – the world’s largest proxy advisory firm recently released its Global Policy Survey, which highlighted that 69% of surveyed investors believe a company with zero female directors on the board was problematic. By contrast, only 8% of respondents did not see a lack of female directors as problematic.

Takeaways

There is an undeniable movement towards more socially and environmentally responsible practices. Slowly this trend is influencing the voting patterns of investors and it would seem as though market participants – whether it be Proxy Advisory firms, Institutional Shareholders or Asset Owners – are increasingly looking to demonstrate their support (whether it be through voting or investing) for companies able to show progress and commitment to best-practice ESG. It is up to listed companies to ensure they are working towards shareholders’ best interests on all fronts as strong financials alone may not be enough to deter a negative voting outcome.