The future of the AGM

An extract from Dr Rhona Sim’s winning submission for the Tom Morrison Essay Prize

'… To enable shareholders to make informed decisions on how to cast their votes on director elections, it might be helpful if more information on board evaluations were made available to them. Section B.2 of the UK Corporate Governance Code requires the board to undertake a ‘formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.’1 Although there is some reporting on the process of board evaluation in annual reports, investors are concerned that it ‘is often too boilerplate, with little insight into what the issues are or how the board is going to address these going forward.’2 In terms of accountability, can a closed circle of internal review (albeit one that must be facilitated by an external party at least once every three years) whose major findings are not disclosed to shareholders really be optimal? Although directors’ rights to confidentiality need to be respected, if shareholders are to play the meaningful role in ensuring accountability, then they need a better understanding of individual directors’ contributions to the unitary board.

This is not to suggest that director evaluations should be placed in the public domain. But it seems anachronistic that a significant proportion of directors admit in private that some of their peers are performing at an unacceptably low level and should be replaced, whilst shareholders are kept in the dark. In the US, a recent survey conducted by PwC found that 35% of directors believe at least one person on their board should be replaced (for reasons of unpreparedness, lack of expertise or ageing) and there is little reason to suppose that the figure would be much different in the UK.3 So it is worth considering whether – subject to the same shareholding and tenure qualifications as proxy access – major shareholders should be able to obtain summary reports on directors’ performance so that their votes on election and re-election resolutions put forward at AGMs can be more informed ones.

Turning now to another key area of shareholders’ AGM voting powers, there are a large number of binding votes on pay policy due to be held by FTSE 350 companies during 2017. The proposed policies will show how responsive directors have been to concerns recently expressed by major asset managers over the dislocation between executive compensation and company performance. Such concerns are, of course, nothing new as this is a problem which now has a very long history. Executive compensation has been an issue which has flared up at regular intervals ever since Cedric, the 20-stone pig, made an appearance as part of a shareholder protest against CEO pay at the British Gas AGM in 1995. Despite plenty of research conducted in the interim showing little or no positive correlation between levels of executive remuneration and long-term company performance, there has been an inexorable rise in levels of compensation which shareholders have failed to stem, with average CEO pay increasing from circa £1 million in 1998 to circa £4.3 million in 2015.4 A study published last year found that ‘big company bosses enjoyed pay rises of more than 80% in a decade, whilst performance as measured by economic returns on invested capital was less than 1% over the period.’5 By contrast, average earnings fell 9% from 2008 to 2015 and average wages are not expected to regain 2008 levels until 2021.6

AGM pay policy votes will be subject to a great deal of press coverage this year because of public interest in spiralling CEO/median pay ratios. Politically, it lies at the heart of the UK Government’s corporate governance agenda; the very first question asked in the recent Green Paper is: ‘Do shareholders need stronger powers to improve their ability to hold companies to account on executive pay and performance?’ Unfortunately, it’s the wrong question to ask. Just as on the issue of director re-election, the problem is not the weakness of their existing powers, but how supine shareholders have been about using them. Despite the extraordinary inflation in levels of remuneration, since the introduction of the pay reforms in 2013 ‘only one company has lost a binding vote on pay policy and six have lost advisory votes on their remuneration report.’7 If AGMs are to be relevant in the future, shareholders’ rights to vote on pay policy resolutions must be exercised more critically and productively.

There are two possible reforms which may aid in this. The first is to research the link between the growing complexity of remuneration policies to see if evidence exists linking this to increasing shareholder value. If not, then mandating a reversion to simpler, more transparent policies with standardised and generally comprehensible linkages between compensation and total shareholder return as part of the next revision of the UKCGC should be considered. Secondly, and also as part of an updated UKCGC, binding votes on pay policy presented to the AGM should be subject to special resolutions requiring a 75% (or possibly even 85%) majority. To ensure shareholder dissent carries meaningful consequences, if resolutions fail there should be a requirement in the UKCGC to hold another vote within three months on a revised policy with only base salary to be paid out to directors while the board is in dispute with shareholders. Currently, the consequences of shareholder dissent from passed resolutions are too weak. For example, in 2016 amongst FTSE 350 companies, 60 AGM pay-related resolutions were passed with more than 20% votes against but in 29 cases, companies did not even ‘make any statement about how they intended to engage with shareholders after the vote’.8

The AGM has a long history as the annual congregation of the members and directors of UK listed companies. However, as a recent ICSA report concluded, as a meeting ‘the value of the AGM is questionable in its current form, when few shareholders participate and the votes have already been decided in advance’.9 In terms of the substance of the votes, the proposals suggested here may offer some scope for improvement. However, the bottom line is that with equity ownership so fragmented, internationally diversified, and frequently short term, to have shareholders perform the accountability role assigned to them in the corporate governance framework is coming to seem increasingly anachronistic. The evidence from the last decade, following the global financial crisis of 2007 to 2008 and soaring levels of executive compensation, suggests that their report card might read ‘could do better’ and quite certainly ‘must try harder’. But perhaps the real problem is that they are tasked with a duty that changes in the ownership structure of UK equities mean they are no longer equipped to carry out. With the outcome of the Government’s Green Paper awaited and with the FRC planning a fundamental review of the UKCGC in 2017, the time to think afresh about the relationship between boards of directors and shareholders is now well and truly upon us.'


1 The UKCGC Section B.6 covers director evaluation and Section B.7 director re-election. Shareholders are provided with some basic biographical information and committee memberships etc.

2 Practical Law, Annual Reporting and AGMs 2016 (London; Thomson Reuters, 2016), p.8.

3 PwC, 2016 Annual Corporate Directors Survey: Board Composition and Diversity (accessed at

4 DBEIS, Corporate Governance Green Paper (London; DBEIS, 2016), p.17.

5 CFA, Executive Remuneration Report 2016 (accessed at

6 G. Tetlow, ‘British workers face worst decade for pay in

70 years’ (London; Financial Times, 24 November, 2016).

7 DBEIS, Corporate Governance Green Paper (London: DBEIS, 2016), p.20.

8 FRC, Developments in Corporate Governance 2016 (London; FRC, 2017), p.18

9 ICSA, The Future of Governance; Untangling Corporate Governance (London: ICSA, 2017), p.17.

Tom Morrison Essay PrizeThe Tom Morrison Essay Prize, set up in memory of Tom Morrison FCIS, is the brainchild of ShareGift, a charity which specialises in accepting donations of shares to generate funds for charities, and The Chartered Governance Institute UK & Ireland. Computershare, ex-employer of Tom Morrison, sponsored a celebratory dinner for the competition. Essays demonstrating an original perspective were sought on the following topic: ‘With particular reference to governance, discuss the relevance, future development and challenges of the AGM.’
To find out the story behind the Tom Morrison Essay Prize, as well as to read the winning and runner-up essays in full, visit the CGIUKI website.
*Photo from left: Tom Morrison Essay Prize runner-up Nicholas Cottrell and winner Dr Rhona Sim

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