The activities asset managers undertake to promote the long-term success of companies are collectively known as ‘stewardship’. This involves working with company management and Boards, holding them to account, and voting at company AGMs (annual general meetings). With 75% of UK households using the services of an investment manager (because they invest people’s pensions), ensuring the companies they invest money in are run well is a key role of an investment manager. 

 

The AGM season

Each year, AGMs provide shareholders with an opportunity to express publicly (and use their voting power to show) their satisfaction or otherwise with how a company is managed, and with the people who run it.

The IA’s new guide to the AGM season – the Good Stewardship Guide 2019 – highlights key topics we expect shareholders to scrutinise and vote on at this year’s AGMs.

Our members have shown that taking action on corporate governance issues can achieve positive and lasting results, improving company behaviour for the better. In 2019, we’re supporting our members in these stewardship activities by focusing on three key issues. Issues they’ve identified as critical for companies to make improvements on in 2019: diversity, executive pensions and quality of audit.

 

IA guidelines for listed companies

The IA also produces guidelines for listed companies on numerous areas of corporate governance, setting out investor expectations of their behaviour. Institutional Voting Information Service (IVIS) provides corporate governance research to shareholders to help their voting decisions during AGM season and assesses companies against these guidelines. A ‘red top’, the highest level of warning IVIS issues, is reserved for companies where shareholders should have significant and serious concerns.

 

Policy work

By responding to policy consultations we provide key industry insights and help shape the corporate governance and stewardship reform agenda. All of our consultation responses are included on the IA's Responses and Representations page, with recent work including:

 

Our key 2019 campaigns:

1. Executive pensions

The 2018 Corporate Governance Code requires companies to aim for parity in the pensions contributions of their directors and their workforce. Our own 2018 Principles of Remuneration endorse this expectation. Our members think it’s only fair that executive pension contributions should be aligned with most of the workforce. 

2019 approach

In February 2019, we announced our approach to executive pension contributions for the 2019 AGM season. Under this approach IVIS would ‘red top’ companies which pay newly-appointed directors pension contributions that are out of step with most of their employees. IVIS would also ‘amber top’ any existing executive director receiving a pension contribution of 25% of salary or more on the remuneration policy and remuneration report.

Following the 2019 AGM season, the IA provided an update on the impact IA members have had on reducing pension contributions. We found that following the 2019 campaign, 30 companies in the FTSE 100 made significant changes to their executive pension arrangement. This included:

  • Seventeen companies that committed that any new Director will be given a pension contribution in line with the majority of the workforce.
  • Four companies that reduced pension contributions for incumbent Directors immediately.
  • Three companies that appointed new directors with a pension contribution in line with the majority of the workforce.
  • Six additional companies that made multiple changes during the 2019 AGM season – reducing contributions for both existing and future directors.

2020 approach

On 27 September 2019 we announced our approach to for 2020. This will continue to meet the underlying aim set out in our Principles of Remuneration: for pension contributions for executive directors to be aligned with those provided to the majority of the workforce. Following our 2019 campaign, it is now expected that any new directors will have their contribution rates aligned with the workforce. However, some 'incumbent' directors continue to receive contributions above the workforce. As such, from 2020 we will be expecting companies to disclose a credible plan to align all directors' pension contributions with the wider workforce, including incumbent directors, by 2022.

The full approach taken by IVIS from the start of the 2020 AGM season is as follows:

  • Amber top any company with an existing director who has a pension contribution over 25% of salary, as long as they have set out a credible plan to reduce that pension to the level of the majority of the workforce by the end of 2022.
  • Red top any company with an existing director who has a pension contribution over 25% of salary, and has not set out a credible plan to reduce that contribution to the level of the majority of the workforce by the end of 2022.
  • Red top any company who appoints a new executive director or a director changes role with a pension contribution out of line with the majority of the workforce, or seeks approval for a new remuneration policy which does not explicitly state that any new director will have their pension contribution set in line with the majority of the workforce.

As with our 2019 campaign, following our 2020 campaign we will be producing an update assessing the level of impact. 

2. Diversity on boards campaign

In 2018, we wrote to FTSE 350 companies that had no women on their boards or which had low gender diversity among their senior management teams. This had a big impact, particularly on companies with no female board representation. Of the eleven all-male boards we wrote to, ten have now appointed at least one woman.

Investors have been consistently clear they want to see greater diversity in the boardroom. There’s also compelling evidence that boards with greater gender balance outperform their less diverse peers. 

In 2019, we’re focusing on board diversity as a part of a wider campaign. We’ve written a joint letter with the Hampton-Alexander Review to companies with no women on the board or to the ‘one and done’ companies with only one woman on their board. We’re asking them to show how they’ll reach the Hampton Alexander Review targets (women representing 33% of their boards) by 2020. 

IVIS will also ‘red top’ companies with no or only one women on their board. For Boards with female representation of 25% or less, IVIS will issue an ‘amber-top’ to signify they’re not on course to meet the requirements of the Hampton-Alexander review, for 33% of women on their board by 2020.

3. Audit quality

Investors would like audit committees to give more insight in their audit committee reports into the steps they’ve taken to ensure a quality audit. If there’s been a tender, then the committee should be open about why it recommended a particular auditor and why that firm would provide a quality audit.

Every year, audit committees should declare whether they think the auditor has provided a quality audit, been challenging enough, looked at and questioned the detail of key accounting issues, and how the auditor challenged management’s judgement and assertions, and exercised professional scepticism.

 

Front cover image of Shareholder Votes paper

Shareholder votes on dividend distribution in UK listed companies

The case for a Distribution Policy
May 2019
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IA Stewardship Survey - November 2018
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A Guide To The UK AGM Season - March 2018
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