Company Annual General Meetings (AGMs)
With mass gatherings discouraged or banned in many parts of the world, in-person company AGMs will largely no longer be possible. We have been speaking with companies about their contingency plans, with options including delaying or postponing the meeting, moving to a hybrid (part physical, part virtual) AGM, or where permitted, a virtual online-only AGM.
We have already seen multiple AGMs cancelled in Finland and postponed in Germany, with further announcement pending in the coming days and weeks. This also means that dividend payments and capital raising authorities which require AGM approval will be delayed.
There are legal challenges in some jurisdictions to these changes, such as in France where companies are obliged to offer the option of in-person attendance; some governments have already waived this obligation. Some individual company by-laws may also make certain options difficult. Guidance is starting to emerge, such as a UK joint publication based on advice from law firm Slaughter & May setting out the legal position for companies1.
In normal circumstances we have discouraged companies from holding online-only meetings, as this undermines the opportunity for interactions between shareholders and Boards. With virtual meetings a necessity now, we encourage companies to ensure where possible that there are still opportunities to allow shareholders to ask questions to the Board. Once this crisis passes, we will encourage companies to move back to normal in-person AGM arrangements, whilst maintaining the virtual option as part of a ‘hybrid AGM’. This leverages technology to allow maximum access, whilst retaining the ability to hold boards to account by providing physical attendance.
Many companies will miss short-term and long-term incentive plan targets given the market and economic conditions. This will have significant implications for pay awards granted to executives.
We recognise that pre-AGM engagement on this topic may not be a priority for many companies, but our team remains available for guidance or questions. We would encourage investee companies to consider the following:
- Shareholders will not generally look favourably on executives receiving generous bonuses following a year where shareholders have lost out, even though the impacts of the virus are outside of companies’ control.
- We recognise that remuneration committees may make adjustments to schemes to permit rewards to executives who demonstrate exceptional skill in navigating their company through the difficult period ahead. We will pay close attention to individual company circumstances, including whether companies are consistent in their treatment of staff and executives. For example, if companies make it difficult for their workers to self-quarantine, we would look extremely unfavourably on any attempts to compensate executives for their lost bonuses.
- For companies seeing an exceptional increase in demand for their services as a consequence of the virus and of related government measures, we generally expect remuneration committees to treat this as a windfall effect and be prepared to adjust pay downwards if appropriate.
Some executives in heavily-impacted sectors such as aviation have voluntarily taken pay cuts, including a few cutting their base salary to zero. Whilst as investors we would not require such a move, if CEOs are able to make these gestures in extreme circumstances, it is likely to engender greater staff loyalty in the longer term.
One of the central pillars of corporate governance is capital allocation, and where companies decide to focus their funding. Over recent years we have seen companies using increasing amounts of cash to re-purchase stock rather than investing in their businesses or bolstering up their balance sheets. In the S&P 500, 50% of all free cash flow is now used to re-purchase stock.
At a time when balance sheets are under immense pressure and companies face significant unexpected costs, including how they dedicate resources to ensuring the welfare of their staff, management should review the appropriateness of their share buyback programmes both at this time and in the longer term.
Although there is an expectation that certain sectors will receive government assistance, the most likely outcome for distressed companies will be the use of emergency capital raising through deeply discounted rights issues or placings. In these circumstances, we would like companies to minimise the dilution of existing shareholders by honouring their pre-emptive rights and giving them the right to purchase further shares before others in the market.