A spotlight on the United Kingdom

Overview

Changes to FCA Listing Rules took effect on 29 July 2024 this year with the aim of boosting the attractivity of the UK market whilst maintaining investor safeguards and transparency expectations. Areas of these changes have sparked controversy, in particular the newfound ability to have multiple voting rights and the looser shareholder oversight of related party and/or significant transactions. In the land of "1 Share, 1 Vote", this important new direction of travel is ironic. Many fear a dilution of the very prestigious best-in-class standards that made the UK the Corporate Governance global leader, noting in particular that the business case for a delisting to the US for example is not a particular value creative threat for most issuers in the first place. Governance purists will find such changes even harder to digest given the 2023 momentum towards reforms that would on the contrary strengthen governance safeguards.

In terms of diversity at UK listed companies. we are currently less than two months away from the December 2024 Parker Review target deadline for FTSE 250 companies to each have at least one ethnic minority director on their board. As of the last data reported by the review in March but dated December 2023, 70% of companies had already reached this target. Companies that have not been able to meet this target by the 2025 AGM Season should reasonably expect investor scrutiny on this topic and should pre-emptively review and disclose what they might be able to do to meet the target. Targets for ethnic minority representation in senior management by 2027, a new challenge set by the Parker Review, will also animate investor engagement. The FTSE Women Leaders Review. the third and successor phase to the Hampton-Alexander and Davies Reviews. published in February this year, provided positive news, with more steady gains, but continued space for progress. The number of women in the Combined Executive Committee & Direct Reports has increased by 1% for both the FTSE100 (35.2%) and FTSE 250 (33.9%) The number of All-Male Executive Committees in the FTSE 350 was also reported to have dropped to just nine. an astounding result when compared to the 54 in 2017. Whilst the focus for this topic is now often on women in leadership roles, it remains worth noting that board representation continues to progress with an all-time high 42.1% women on FTSE 350 boards.

To conclude our introduction, and as already alluded to when referencing the UK's world class governance standards, 2024 has been an exceptional year for FTSE 100 AGM approval rates. Impressive progress on remuneration topics continues almost reaching the spectacular 95% bar on average (94.26%, +1.39% y-o-y), AGM participation is up+ 0.27% to 75.66%, director elections have reached 98.02% on average (+0.61%), and all other broad categories of resolutions see increases. As discussed in our Market Expert Interview with the Lazard Shareholder Advisory team, the UK also continues to top UK & European Markets from an activism perspective, arguably another indicator that shareholder democracy is flourishing.

Average AGM attendance

AGM Participation rates, remain strong and increasing

Participation rates at FTSE100 AGMs remain healthy and continue to improve, reaching 75.66% (+ 0.27%), ranking the UK market second highest in key UK & European markets examined by D.F. King, slightly behind France (76.86%) Quorums were wide ranging from Scottish Mortgage Investment Trust pie's 29.23% all the way to Antofagasta pie's 93.30%. It is the same two companies as last year that form top and bottom ranked AGM participation, but it is noteworthy and in line with the general market trend that both quorums have increased.

Board of Directors

Support in favour of director elections remains extremely strong, climbing back above the 98% bar which was last reached in 2021. Only four director elections failed to secure over 80% votes in support of the proposal, a reduction from seven items last year. Among these director elections. only one proposal has received such dissent in both 2023 (7393%) and 2024 (76.27%). The election of Antoine de Saint-Affrique at Burberry Group pie. Indeed, despite consistently receiving the support of ISS, Glass Lewis and a range of investors with stricter over boarding guidelines continue to flag a potential risk of overcommitment due to Antoine de Saint-Affrique's additional CEO mandate at Danone and NED mandate at Barry Callebaut. Elsewhere, Sherry Coutu’s election at Pearson pie was the most contested election of 2024 (7180%). Whilst Glass Lewis supported the proposal, ISS (and clearly a significant portion of their client base) considered that as Chair of the Remuneration Committee, she should be held responsible for what was considered to be insufficient responsiveness to shareholder dissent on remuneration topics. As a reminder, Pearson's remuneration policy scraped through last year with only 53.61% approval and the remuneration report at this year's AGM received only 69.80% support. At AstraZeneca pie. Marcus Wallenberg's re-election received only 77.86% support seemingly due to excessive mandates (five including two Chairmanships). It is significant that despite the number of mandates both ISS and Glass Lewis were able to recommend in favour given the mitigating context: his presence on these boards is linked to managing the investments of a holding company he represents Finally, the last election falling under the 80% approval bar was the re-election of Gregory Fitzgerald at Vistry Group pie (7845% FOR) Interestingly, the dissent stemmed from a notable departure from UK market standards through the combination of CEO and Chair roles. This practice seen more commonly in neighbouring France or across the Atlantic in the US, is frequently viewed by the investor community as generating unnecessary risk through the concentration of power in one individual that reduces board oversight capabilities over management and the strategy. ISS unsurprisingly recommended against the proposal in line with their policy. Glass Lewis was able to support the proposal, choosing instead to hold the Nominating Committee responsible for poor succession planning.

Whilst we provide figures on changes in approval rates for director discharge votes, these relate to a handful of companies (only two this year. and three in 2023) and are not representative of the market as a whole. Support remains very high approaching the 99% mark.

Remuneration

In 2023, a 'policy year', in line with the three-year remuneration policy cycle, we wrote about how 'UK pie' had many reasons to be proud on the remuneration front, with soaring increases on average remuneration policies (+354%) and reports (+1.10%). This year, the remarkable results and progress continue with further improvements on remuneration policies (+1.18% to g2_94%) and reports (+3.40% to g4_5s%). Stronger support may not be a surprise to those that recall the fairly limited changes to key proxy advisor and institutional voting policies on the remuneration front in the build up to last AGM season. Greater stability of course facilitates an issuer's ability to align with investor expectations However, it is also important not to forget the lifting by the UK regulator of the 2:1 variable/fixed pay ratio for financial institutions at the end of last year and the burgeoning discussions around the need for more competitive pay packages in the UK to rival the US market. These last two points put governance professionals on high alert for potential unacceptable pay practices and quantum during the 2024 AGM season. It was quickly recognised however within the asset management world that the topic had to be viewed pragmatically, and that global competitiveness is not just an excuse used by greedy executives to inflate pay packages. Fears of a chaotic disconnect between a widespread race to the top on pay quantum from UK pie's and investors voting down pay packages due to a focus on social acceptability within the constraints of their domestic market were quickly extinguished. This does not however mean all companies got it right.

Of the 29 FTSE 100 remuneration policies presented for shareholder approval this year, only two received substantial dissent, both on the grounds of excessive quantum. In the case of AstraZeneca which received 62.60% of votes FOR, both key proxy advisors recommended against the policy despite recognising the calibre of the CEO, the truly global scale of the business and its competition, and the growth of the business. Indeed, the increase of the maximum LTIP opportunity from 650% to 850% of base salary, combined with increases to the bonus, historic increases in recent years and previous shareholder dissent on remuneration increases, led a significant portion of investors to vote against the policy. The most contested remuneration policy was proposed at Smith & Nephew pie and received only 56.63% support. This proposal perfectly illustrates the complexity of balancing global competitiveness with other governance standards and safeguards, given that the key proxy advisors did not come to a consensus in their recommendations. ISS decided to oppose the resolution, in part due to a perceived disconnect between pay and performance Indeed, whilst the proxy advisor recognised the merits of the company's arguments around executive stability for example, they noted a deteriorated share price compared to 2019 and a lagging relative performance versus certain reference indices. Other considerations included insufficient disclosure of peers used for benchmarking, widening of the gap between lead executive and wider workforce, insufficiently long holding periods for long term pay and insufficient evidence that the increase in variable pay quantum was accompanied with an increase in the stretch of targets. Interestingly, whilst Glass Lewis also flagged a number of concerns, they were able to support the item on the grounds that the rationale for change was deemed compelling, the increases applied only to the CEO and the fact certain safeguards such as shareholding requirements were strengthened. Finally, whilst we have frequently praised the quality of issuer and investor engagement on topics such as remuneration in recent years, the statements released by Smith and Nephew, in line with the provisions of the UK Corporate Governance Code following a contested vote, suggest the flow of information in both directions is not always optimal. The issuer describes that the investors originally consulted pre-AGM confirmed during the post-AGM consultation that they understood the rationale for the proposed changes and that no additional feedback was provided from other shareholders that had voted against the policy. In terms of remuneration reports, Pearson pie saw the most contested vote, securing only 69.80% of the vote. This is not particularly surprising given last year's remuneration policy narrowly scraped over the approval bar with 53.63% support. In 2023 the company proposed a significant increase in maximum bonus and LTIP opportunity that was judged not to be sufficiently justified, further aggravated by the existence of a historic significant one-off investment award that had not yet come to fruition and had been a source of contention since its grant. ISS recommended AGAINST the remuneration report this year on the grounds that no material changes to pay arrangements had been implemented following last year's dissent. Glass Lewis was able to support the proposal on the grounds that the Remuneration Committee was sufficiently transparent on the engagement that had occurred with shareholders since last year's vote. Impressively, all other remuneration reports in the FTSE100 received over 80% shareholder support.

Capital Increases

Average approval rates for resolutions relating to capital have increased slightly year on year (+0.42%) to 95.71% but remain below pre-2023 levels (9702% on average in 2022) As described in our review last year, this drop that has not yet recovered coincides with significant changes to the Pre-Emption Group ("PEG") Principles that serve as the best practice authority for many investors on the topic of capital issuances in the UK. Indeed, prior guidance authorised up to 10% without pre-emption rights subject to any amounts above 5% being linked to an acquisition or specified capital investment. The new guidance essentially doubled those thresholds (with a further 2% now being allowed in the context of a follow-on offer) to 20% and 10%. Certain investors have taken a stance against this shift in the PEG guidance. Issuers wishing to make the most of new thresholds should undertake a mapping of their shareholder base to identify in advance of their AGMs to measure the relative weight of shareholders that have stricter dilution expectations.

Conclusion

As highlighted extensively throughout this chapter, it is clear comparing both over time and cross market that 2024 has been a stellar year for UK pie, through the lens of corporate AGMs at the very least. Looking forward to 2025, what remains to be seen is if global pressures (in particular competition between markets but also political and macro-economic in the context of a new US administration for example) combine to dilute further the prospering frameworks in place and the corresponding impact on governance and ESG practices 2025 is expected to see a host of further reform including the potential (overdue?) creation of the Audit, Reporting and Governance Authority ("ARGA'') and a new Stewardship Code

 

¹ This content was published November 2024 in D.F. King’s General Meeting Season Review

² D.F. King is MUFG Pensions & Market Services’ specialist shareholder engagement team in the UK