Important highlights from upcoming meetings, provided by Glass Lewis’ global research team:
FuelCell Energy, Inc.
NASDAQ April 8 AGM
From adjusting performance criteria on incentives to reflect changed economic circumstances, to the potentially disparate treatment of management vs the wider workforce, how public companies approach executive remuneration has been one of the most salient topics for engaged investors in the United States and around the globe during the COVID-19 pandemic. In particular, the exercise of discretion in assessing outcomes is likely to face scrutiny.
Take U.S.-listed FuelCell Energy. Like many companies, last year it understandably reduced and removed certain short-term performance criteria for revenue, new orders, and gross margins, reflecting the economic landscape, as well as legal issues with a strategic partner. Actual performance against the adjusted goals earned a payout at approximately 69% of target. But having already made changes to the program, the compensation committee exercised additional discretion to allow the plan to pay out at 100% of target.
The outcome raises questions about just how understanding boards (and shareholders) should be about the circumstances when assessing executive performance. It’s worth noting that FuelCell already received lackluster support for its Say on Pay at the 2020 AGM, with just over 80% of votes in favor. That said, it’s also worth noting that the 2020 vote took place in the context of the first wave of the pandemic, and after two years of declining share price performance – which has subsequently spiked, albeit leveling out in the past month. Will shareholders be willing to support generous payouts for executives so long as their own returns match?
Rio Tinto plc
London Stock Exchange April 9 AGM
The alignment of executive pay with company performance is always a salient topic for investors, regardless of the pandemic. Rio Tinto has faced public outcry and scrutiny from regulators and investors in the wake of irreversible damage to the aboriginal heritage site at Juukan Gorge in Western Australia. Several top-level executives have resigned, including former CEO Jean-Sébastien Jacques, and the uniquely structured twin UK/Australian companies remain subject to an ongoing parliamentary inquiry.
With the UK-listed Rio Tinto plc’s AGM on the horizon (the Australian company, Rio Tinto Limited, will hold its AGM on 6 May), votes on executive remuneration provide another potential lightning rod. The remuneration committee made pay reductions in response to Juukan Gorge, including a £1 million malus reduction on the former CEO’s 2016 LTIP awards, due to vest in 2021, and no short-term incentive payout for 2020. Stakeholders have already expressed concern that these financial penalties were insufficient, contributing to executive turnover. However, Mr. Jacques will nonetheless be treated as an eligible leaver under the LTIP program, with outstanding awards continuing to vest subject to achievement of performance and time-based pro-rating, and his 2020 total pay was still more than 33% higher than the prior year (largely as a result of share price appreciation since awards were originally granted).
Shareholders will have advisory votes on the UK and Australian remuneration reports, as well as a binding vote on the forward-looking remuneration policy as provided under UK law.
SBM Offshore NV
Euronext Amsterdam April 7 AGM
Sometimes pay concerns don’t stem from specific decisions or outcomes, but from the underlying structure. SBM Offshore NV received nearly 30% opposition to its management board remuneration policy in 2020, largely due to an unsual long-term incentive program whereby executives received “Value Creation” awards worth 175% of base salary annually subject to a five-year holding period and a clawback mechanism, but no performance conditions.
In response to the vote outcome and subsequent engagement, going forward the awards will be subject to an underpin at the time of grant – but the underpin sounds more like a clawback provision than the performance conditions typically applied to long-term awards, with grants subject to reduction in the case of material safety events, compliance issues that prevent the company from operating in its primary markets, or “significant project impairment due to insufficient oversight or gross negligence or deliberate omissions”.
Some hiccups are perhaps understandable – last year marked the first round of votes for Dutch companies following the implementation of the Shareholder Rights Directive II (SRD II). Whereas the Netherlands previously only required pay votes when changes were made to the policy, under the new regime companies are now required to hold a binding vote on their executive remuneration policy at least every four years, in addition to an annual advisory vote on how the policy has been implemented. Yet SBM had plenty of warning – when the company amended its policy in 2018, the proposal received similar opposition and only passed due to a simple majority threshold. By contrast, policy votes now require 75% supermajority approval. Having not reached that threshold in 2020, the policy approved back in 2018 continues to apply, and shareholders will get another binding policy vote at this year’s AGM.
UBS Group AG
SIX Swiss Exchange April 8 AGM
Of course not everything in corporate governance is focused on executive pay. UBS Group appointed a new CEO last year, Ralph Hamers. And while Mr. Hamers is not a director and his appointment is not on the AGM agenda, shareholders may nonetheless wish to consider that he is under investigation by Dutch authorities in connection with a money-laundering scandal that resulted in €775 million in fines for his previous employer, ING Groep. That said, the investigation is at an early stage and Mr. Hamers was vetted by the Swiss Financial market Authority prior to appointment.
UBS itself is no stranger to large financial penalties. The upcoming AGM will take place in the wake of the company’s appeal of a 2018 ruling that found the group guilty of “unlawful solicitation of clients on French territory and aggravated laundering of the proceeds of tax fraud” and its French subsidiary guilty of “aiding and abetting unlawful solicitation and laundering the proceeds of tax fraud.” In connection with the initial investigation, UBS was required to post bail of €1.1 billion, and following the ruling the court imposed aggregate fines on the Group and its French subsidiary of €3.7 billion, along with €800 million in civil damages to the French state.
Ahead of last year’s AGM, the company published documentation explaining its position on the matter, along with insights on how the 2018 ruling and penalties were determined. Based on its rationale, which reflects a distinction between total regularized assets vs the actual unpaid taxes on those assets, UBS has set aside a €450 million provision in relation to the case. The appeal was heard de novo at the Court of Appeal from March 8 to March 24, and a ruling is expected later this year. That ruling may not be the end of the story – a subsequent appeal to the Cour de Cassation is also possible. The legal dispute will not be the subject of a shareholder vote – as was the case last year, it was specifically excluded from the proposal seeking shareholder ratification of board and management acts.
Bangkok Dusit Medical Services
Stock Exchange of Thailand April 9 AGM
In non-remuneration news, Bangkok Dusit (ticker: BDMS) shareholders will vote on whether to re-appoint former CEO Prasert Prasarttong-Osoth as a director following a two-year ban from board service. To be clear, the ban didn’t reflect his performance at this company, and was instead the result of share price manipulation at Bangkok Airways Public Corporation Limited (where he also served as CEO).
That said, BDMS has a raft of other potential governance concerns to consider, not least the overall composition of the board. While the company views eight of the eighteen directors as independent, five of those eight have professional relationships that could present conflicts or have served on the board for more than nine years (Thailand’s 2017 Corporate Governance Code recommends that the tenure of an independent director be limited to a total of nine years, with rigorous reviews after that point). As such, shareholders may question just who is in control at BDMS, and whether the independent cohort of the board is providing sufficient discipline, or instead simply submitting to management.
Vinci
Euronext Paris April 8 AGM
Vinci’s upcoming AGM includes the standard multiplicity of pay, equity, and capital authority proposals common at French companies. In addition, the company, which has announced a net zero emissions target, has submitted its environmental transition plan to an advisory shareholder vote. This comes as part of a broader movement where companies in a variety of different markets, including France, Spain, Australia, Canada and the United States, are putting their climate plans up for a vote. It’s the first proposal of its kind in France.
In its rationale for the proposal, Vinci has been clear that shareholders are not being asked to approve or disapprove the company’s environmental approach, as this responsibility rests with the board and management. Instead, Vinci has stated this proposal will allow shareholders a general understanding of how the company is approaching this issue and will provide the company with an opportunity to gauge shareholders’ general impressions of this approach.