Big US fund managers are getting tough on company bosses. UK peers must do the same.
Shareholders have been told to use the power of their AGM votes to ensure companies are held accountable for their commitment to board diversity.
They are being urged to cast votes against the nomination committees of companies lacking diverse leadership, including where the board has fewer than two women.
The message from US fund manager Calvert, whose investments include Unilever (LSE:ULVR), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), highlights the increased scrutiny on ESG (environmental, social and governance) issues and benefits that diversity can have on financial performance.
John Wilson, director of corporate engagement, said Calvert intended to raise its standards for proxy voting in relation to board diversity this year, including for companies in the UK.
He added: “This year, expectations for corporate diversity are rising, and we are more aware than ever of the value of diverse leadership for long-term corporate performance.”
Wilson noted evidence that companies with at least two women on the board outperformed when compared to those with fewer women on the board.
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US large caps with more than two women saw even greater improvement, levelling off at four women. In the US and elsewhere, similar results were seen for ethnically diverse boards.
Last month, we reported that the Investment Association has urged shareholders to step up pressure on companies to improve the ethnic diversity of Britain's boardrooms. It noted that three-quarters of FTSE 100 companies failed to report the ethnic make-up of their boards ahead of annual meetings last year.
It has vowed to issue amber-top alerts on companies that fail to do so this year or don't show a credible plan for achieving Parker Review targets of having at least one director from an ethnic minority background.
The organisation also wants progress on gender diversity, with boards comprised of 30% or less female directors receiving a ‘red-top’ alert – an increase on last year’s 20% threshold.
A red-top alert denotes its strongest concern, followed by amber, which shows a significant issue to be considered by shareholders ahead of the meeting.
Next week's line-up of annual meetings includes companies holding their AGMs behind closed doors for the second year in a row.
Crest Nicholson (Tuesday, 23 March)
The £650,000-a-year salary of Crest Nicholson (LSE:CRST) chief executive Peter Truscott came in for criticism at last year's AGM, as some shareholders questioned a big jump on the pay packet of his predecessor.
Despite 20% of votes being cast against the remuneration report, the company told major shareholders at subsequent meetings that it had paid no more than was “absolutely necessary” to secure a high quality chief executive for its turnaround. Truscott, who spent 30 years with Taylor Wimpey, joined the housebuilding from Galliford Try (LSE:GFRD) in September 2019.
This year's salary has stayed the same, and the company noted that directors had also shown pay restraint by waiving bonuses even though some of last year's targets were met, covering thresholds on net cash, customer service and forward sales.
Annual profits fell 62%, however, and the pandemic also meant shareholders missed out on the final dividend for 2019 and any award from 2020. Payments are set to be reinstated with June's interim results, with Truscott telling shareholders in January that Crest had started 2021 in better shape thanks to the difficult restructuring decisions taken over the previous year.
Crest Nicholson's annual report also highlights a change to its long-term incentive plan. It is replacing earnings per share as one of three benchmarks in favour of total shareholder return set against a peer group including Barratt Developments, Bellway and Taylor Wimpey.
Shareholders, who can listen to the AGM via conference call, have until 2pm on Friday to submit their proxy votes. The deadline to ask questions for published answers prior to the proxy deadline has already passed.
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Micro Focus International (Thursday, 25 March)
Former FTSE 100-listed software firm Micro Focus International (LSE:MCRO) was given a much easier ride by shareholders at its 2020 AGM than the previous year, when the remuneration report saw a 50.4% vote against.
Concerns were raised in 2019 about the structure of incentive arrangements, including the use of single performance measures for the annual bonus and long-term incentive plan and a perceived lack of stretch in targets.
The Newbury-based company went back to the drawing board, with its new pay policy securing the support of 95% votes cast at last year's meeting.
This year's report shows that chief executive Stephen Murdoch received a base salary of £850,000 and variable pay of £283,000, having achieved 22% of the maximum bonus opportunity due largely to individual performance objectives.
Adjusted earnings for last year were lower, with the pandemic forcing the company to cancel the 2019 final dividend and to suspend the 2020 interim award. It has pledged to pay a 2020 final dividend as the business did not furlough any of its workforce or ask for government support. It did not make any redundancies, either, other than those already planned in the period.
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Murdoch is a third of the way through a three-year turnaround under which he hopes to achieve margins towards the mid-forties percent and annual free cash flow of at least $700 million.
While last year's vote on remuneration proved to be much less controversial, some 11.5% votes were cast against the re-election of senior independent director Karen Slatford.
She has been on the board since 2010, which is longer than the nine years recommended in the Corporate Code. Micro Focus chairman Greg Lock said in this year's report that Slatford not only retained her independence but also provided valuable experience. She is also on the board of Softcat (LSE:SCT), chair of AIM-listed Draper Esprit (LSE:GROW) and a director at accesso Technology (LSE:ACSO).
SSP (Thursday, 25 March)
SSP Group (LSE:SSPG) shareholders last voted on the airport and railway station catering firm's remuneration policy in 2018, meaning another vote must take place at this year's AGM.
The biggest change to the policy concerns a new Restricted Share Plan, which gives executive directors more modest award levels relative to the outgoing plan, and is subject to performance underpins to ensure there is no payment for failure.
Other changes include the requirement for 33% of any bonus to be deferred into shares for three years, plus an increased minimum shareholding requirement of 250% of salary.
The 2020 financial year was a particularly challenging one for the Upper Crust and Ritazza business, having been forced to close about 2,500 units and furlough more than 22,000 staff at the peak of the pandemic. Sales were down 95% in April and May of last year.
The board agreed to take a pay cut on their 2020 salaries, while chief executive Simon Smith waived his bonus entitlement after meeting certain strategic objectives under the annual plan.
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Remuneration policy chair Carolyn Bradley said uncertainty over the recovery in passenger numbers made setting financial targets for bonuses particularly hard this year.
Underlying earnings and net debt are likely to be the key measures for management in the short to medium term, but Bradley adds that the committee will have to apply a greater than normal level of judgment and discretion when considering outcomes for the year.
SSP is due to stage a further meeting on 6 April, when shareholders will be asked to give their approval to a rights issue. The £475 million fundraising will significantly improve SSP's balance sheet and give it more protection in case the travel sector recovery takes longer than expected.
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