Important highlights from upcoming meetings, provided by Glass Lewis’ global research team:
Basic-Fit NV
Euronext Amsterdam April 22 AGM
With votes on executive pay now more widespread than ever, the COVID-19 compensation fallout is a topic of interest for investors around the world (see our supplementary guidance for the United States, EMEA, and APAC). In the Netherlands the issue is complicated, for some public companies, by their participation in the Dutch government’s temporary emergency bridging measure for sustained employment (Tijdelijke Noodmaatregel Overbrugging Werkgelegenheid, or NOW). Take Basic-Fit NV, a fitness club operator in the “value-for-money” segment, which is seeking to amend its remuneration policy on a temporary and partial basis to comply with the terms of its participation in NOW 2.0 and 3.0.
To be clear, participating in NOW does not actually require any amendments to the policy – the company simply can’t pay bonus in respect of 2020 or 2021 (though based on 2020 performance, no short-term bonus would have been payable anyway). Instead, the proposed amendments would allow outstanding and future long-term awards to be calculated and pay out with 2020 and 2021 excluded – effectively measuring “long-term” performance on only the final year of the cycle, when the negative impacts of the pandemic are expected to have subsided; and to defer 2021 payouts until 2022. It may seem a bit odd to be protecting executive payouts in relation to a temporary emergency bridging measure for sustained employment, but to be fair NOW is technically intended to promote retention – though it seems unlikely that these are the employees Dutch politicians had in mind.
Shareholders will vote on the specific policy amendments, on a binding basis, and separately on a broader, advisory remuneration report proposal that covers the implementation of policy over the past year. And beyond those policy amendments, there are decisions regarding the in-year implementation of policy that bear consideration. In particular, 2020 LTI grants for the CEO and CFO included more than twice as many shares as the prior year. While it’s difficult to tell how these awards were calculated given the relatively opaque disclosure provided, it appears that, similar to the experience at Royal BAM Group, executives will benefit from equity grants made when the share price was at or near its lowest point, creating the potential for windfall gains as the market recovers – which, in Basic-Fit’s case, it has already done. Another wrinkle to consider: the CEO controls over 15% of the company’s share capital, raising questions about why, exactly, additional equity grants are necessary to align his interests with those of other shareholders.
Notably, Basic-Fit has already faced significant shareholder opposition to its approach to executive pay – though it’s not entirely clear that the company understands that. In its Annual Report, the board appears quite satisfied with receiving less than 80% support on both its remuneration policy and remuneration report at the 2020 AGM. 20% opposition is generally considered significant – all the more so given the company’s ownership structure, which means that the percentage of independent shareholders opposing the proposals was actually in the mid/high 30s. Another thing the board might not be fully aware of is the legal requirement for Dutch companies to describe a tangible link between the remuneration policy and “social acceptance” by relevant stakeholders, with no discussion on this topic provided in the company’s annual filings.
Carrier Global Corporation April 19 AGM
NCR Corporation April 20 AGM
New York Stock Exchange
When COVID-19 first impacted the U.S. market in the middle of proxy season 2020, companies made headlines by reducing or even withholding fixed salaries — for a few months, for the rest of the year, for the duration of the pandemic. What got fewer headlines were the complementary incentive and retention measures implemented at the same time. Companies took a wide variety of approaches, as (partially) illustrated by Carrier Global and NCR Corporation. One year on, the decisions taken by boards and compensation committees are now up for shareholder scrutiny as companies hold their say-on-pay votes.
Carrier, which recently spun off from UTC, went to great lengths to reflect the circumstances, splitting 2020’s short-term incentive plan into two distinct performance periods to cover the first quarter and the rest of the year. Goals for that longer second period were modified to reflect the anticipated impact of COVID-19, and the company put a bit more weight on free cash flow in recognition of changed priorities; in addition, the maximum payout was reduced from 200% to 150% of target. Anticipating the impact of a once-a-century (knock wood) pandemic is a difficult business, but Carrier appears to have been in the ballpark: actual performance would have yielded a 128% payout against the original target, vs. 142% against the revised. A good result but nothing crazy. Nonetheless, the compensation committee ultimately exercised some downward discretion and paid awards at 120% of target.
NCR took a very different approach. Rather than guessing at what would be a fair set of goals under unprecedented circumstances mid-way through the year, it left its short-term incentive goals untouched. Executives ultimately received no payout under the plan. Harsh but fair … well, hold on. In response to the impact of the pandemic on those STI payouts and on the value of outstanding long-term awards that had been hit by a dip in stock price (just as investor holdings had), the company granted over $14 million (at the time) in retention equity awards. Those awards can pay out at up to 2x the target grant value based entirely on the company’s stock price performance, which thankfully for all concerned (not least investors) has already recovered from that temporary dip to its highest level in several years. Meaning that despite there being nothing to compensate for, with the original LTI awards now worth more than ever, the compensatory retention awards granted near the bottom of the dip are in a strong position to pay out, and pay out at a much higher value than originally calculated.
Shareholders voting on NCR’s say-on-pay have a lot to consider – including some notable improvements to the ongoing compensation structure, such as a shift away from premium-priced options and towards fully performance-based awards, a longer performance period on PSUs, and the integration of ESG metrics under the short-term incentive. On the other hand, there are about 14 million reasons (far more, given stock price appreciation) to question the company’s alignment of pay and performance.
Woodside Petrolum April 15 AGM
Santos Limited April 15 AGM
Oil Search Limited April 30 AGM
Rio Tinto Limited May 6 AGM
Australian Securities Exchange
Woodside, Santos, Oil Search, and Rio Tinto are the four most significant ASX-listed companies that hold their AGM’s in the first half of the year. Setting the stage for the rest of the year, all four have agreed to put up a non-binding advisory vote on their Climate Reports at the 2022 AGM. For Woodside, Santos and Oil Search, this decision followed a shareholder proposal requesting such a vote, which was subsequently withdrawn as the companies committed to the vote in 2022.
This ties in with the global say-on-climate trend and sets the scene for the majority of ASX-listed extractive companies who hold their AGM’s in the second half of the year.
In addition, all of these companies have received other climate related shareholder proposals that will go to a vote at their upcoming meetings. Shareholders of Woodside and Santos have been asked to vote on a proposal requesting the disclosure of capex planning that demonstrates consistency with the climate goals of the Paris Agreement. Controversially, these proposals are accompanied by the request that the companies also provide disclosure concerning their plans to manage down, decommission and close assets in a timeframe consistent with the Paris goals. Unsurprisingly, and in line with the history of E&S shareholder proposals at ASX-listed companies, the boards are recommending shareholders vote against these proposals.
Shareholders of Rio Tinto Limited have been asked to vote on non-binding advisory proposals that a) requests disclosure of short-, medium- and long-term targets for Scope 1 and 2 greenhouse gas emissions and b) review industry associations and suspend relationships with associations who are found to have engaged in advocacy inconsistent with Paris climate goals. However, unlike those previously seen at Australian AGM’s, the Rio board has recommended shareholders vote for these proposals, as these requests are consistent with the company’s practice and intentions.
Flow Traders NV
Euronext Amsterdam April 23 AGM
Remuneration matters in the Netherlands were already complicated even before the COVID-19 pandemic hit. The market was one of the first to offer policy votes – but until last year, those votes only applied when an existing remuneration policy was amended, and there was no corresponding remuneration report vote on the implementation of policy. The transition to more, and more regular, voting has been rough in some cases.
Flow Traders has long taken an unusual approach to executive pay, with extremely low fixed salaries and no long-term incentive schemes, instead relying on what is effectively an annual profit-sharing scheme. But then, there’s more than one way to skin a cat. In place of traditional long-term incentives, the company has actively implemented features such as a relatively high level and duration of deferral and strong recovery provisions to promote alignment with shareholder interests and a healthy approach to risk.
Nonetheless, there are certain aspects of its policy that stick out compared to peers, and the company has drawn the attention of Eumedion, the Dutch governance organisation, as well as shareholders, over 40% of whom voted against the remuneration policy at the 2020 AGM. In particular, the profit-based incentive structure, which is highly unusual for a firm of this size and development stage, and the absence of any individual award limits set as a percentage of base salary (instead, overall variable pay and the proportion going to the management board are subject to an aggregate cap) have raised concerns. Moreover, the structure makes it somewhat unclear how individual allocations are made to specific executives, suggesting that ultimate payouts may be largely discretionary.
Because the new remuneration voting structure requires 75% approval, last year’s policy proposal did not pass and the company retained its existing structure — a somewhat paradoxical result given that the failed 2020 policy included a number of improvements on that structure. Indeed, the company has been active in engaging with shareholders and responsive to their concerns, to a point. This year’s policy proposal includes several material changes that go further than 2020, including a requirement that 50% of equity payouts be held until cessation of employment, a pay ratio cap on management board members (set at 20x average employee), additional deferral requirements, and enhanced disclosure regarding metrics and performance.
Yet despite polishing the edges, the company is sticking with its unusual structure, and refraining from implementing individual pay caps as a percentage of salary. It will be interesting to see if there is a version of Flow Traders’ pay philosophy that a supermajority of shareholders are willing to support, or if the fundamental differences are simply unbridgeable.
Parken Sports & Entertainment A/S
NASDAQ Copenhagen April 19 AGM
The implementation of SRD II has led to remuneration votes all across Europe, and the Netherlands isn’t the only market that is still adjusting. Whereas Dutch companies had some experience, the whole business is entirely new to Danish companies, as Parken Sport & Entertainment Illustrates. Last year the company submitted its first remuneration policy vote, and this year shareholders will consider an advisory report on how that policy has been implemented. But while shareholders are getting a vote, there isn’t much to consider – the company pays salary, and offers a cash-based short-term incentive, subject to clawback, but there is no deferral applied, no long-term award structure or other equity-based remuneration, and no share ownership guidelines in place. Of course, the standard purpose of equity mechanisms and long-term awards (to promote alignment of executive and shareholder interests) is perhaps less of a concern at Parken – devotion to FC Copenhagen, the company’s football club, is presumably more than enough to keep everyone on side.
However, given the sporting and broader social aspects of the company, which also operates waterparks, its approach to gender diversity may stick out as somewhat curious. The board is wholly male, and discloses that it “has chosen not to have a diversity policy for the company’s board of directors and management” on the basis that because its “activities are conducted exclusively in Denmark, the company has not identified any significant risks related to diversity that could negatively affect the opportunities for the company to grow.” Meanwhile, clubs and football associations around the world are taking steps to boost inclusion, and waterslides generally appeal to people of both genders.
The AGM agenda also includes a somewhat unusual shareholder proposal, asking the club to demand that the Danish Football Association boycott the upcoming 2022 World Cup in Qatar due to the treatment of migrant workers building stadiums and infrastructure in the country. The human rights issues related to the tournament have been widely debated, with Denmark’s Culture Minister putting the onus on national and international football associations to determine whether participation is appropriate. Whether shareholders will agree that the club, as a member of the national association, should take a position is perhaps academic at this point, but it’s an interesting question.
Johnson & Johnson
New York Stock Exchange April 22 AGM
Last autumn, Johnson & Johnson attempted to draw a line under the opioids scandal by agreeing to pay $1 billion to an all-in settlement amount to resolve related lawsuits (that amount being in addition to the initial $4 billion settlement announced in October 2019). Yet the company’s involvement, and that of subsidiary Janssen Pharmaceuticals, remains a factor for shareholders voting at the company’s upcoming AGM, as does the company’s exposure to other litigation regarding the safety of talcum powder and Janssen’s anti-psychotic drug Risperdal®.
For one thing, there’s the say-on-pay vote. Whereas the company and its shareholders have been forced to pay billions on the legal and regulatory front in relation to these cases, it appears that executives have been somewhat insulated: performance targets and resulting payouts under both the short- and long-term incentive plan are based on EPS figures that reflect billions of dollars of financial adjustments relating to talc- and opioid-related litigation expenses. On the other hand, the enterprise free cash flow result used for the short-term incentive was adjusted downward due to the impact of budgeted litigation-related payments that did not occur in 2020 as well as other adjustments. Shareholders will have to consider whether the board’s decisions provide an appropriate alignment of pay and performance.
Then there is the continued presence of Charles Prince, who is the longest serving director on the board and has chaired the company’s regulatory compliance committee, which has oversight of product safety, for years. He will pass that responsibility on to the newly appointed Marillyn Hewson at the AGM, but remain on the committee. There’s something to be said for continuity, but it’s also worth noting that Mr. Prince has quite a history with risk management oversight — see, for example, his service as chairman and CEO of Citigroup in the run-up to the 2007 global financial crisis.
The agenda also includes a range of non-litigation-related shareholder proposals to consider, covering governance (the company continues to employ a combined chair and CEO), compensation (pushing for bonus deferral, a common feature worldwide that is still gaining traction in the United States), human capital management (a racial impact audit has been requested), and access to the company’s COVID-19 products.