Why remuneration teleconferences don’t really work
Teleconferences have been singularly unhelpful as a means of engaging with shareholders over pay policies
It’s difficult to know how things got to where they are, but most people believe Shoprite started it all.
There is no obligation for a company to host a teleconference when more than 25% of its shareholders vote against its remuneration policy or remuneration implementation report. But in the "monkey see, monkey do" world of executive remuneration, once Shoprite went this route, it was quickly treated as an obligatory part of the corporate governance box-ticking process.
Recent pushback from shareholders and companies, however, suggests the remuneration teleconference might be a short-lived attempt to deal with the increasingly prickly issue of executive pay.
Nine months after Shoprite engaged with its dissenting shareholders, almost everyone believes feedback by teleconference does not work.
The problem is nobody knows what to replace it with. Until somebody figures that out, companies are likely to continue reporting back on their engagement with a few stragglers who participate in disconcertingly one-sided teleconferences.
MTN, Sanlam, PSG, Barclays Africa/Absa and Remgro are just some of the big names that have tried the teleconference route.
"We did a lot of preparation for our teleconference," says Piet Mouton, CEO of PSG, which got only 68% support for its remuneration implementation report. "Only three shareholders, who actually hadn’t voted against the report, participated. They asked to phone in to merely listen to the discussion."
Mouton says it’s often difficult for the company to speak to the person who made the voting decision. "It’s not always the portfolio manager — often it’s somebody who doesn’t necessarily understand the nuance of your business."
He believes that, as responsible investors, shareholders who vote against something have an obligation to engage with the company.
"We asked shareholders to send us their questions and concerns beforehand. We received only three responses."
Mouton suspects some of the shareholders who voted against the remuneration policy didn’t read the entire report.
"Some said they voted against the implementation report because we didn’t explain the basis for short-term bonuses. But we no longer pay short-term bonuses to the CEO and CFO as a result of amendments introduced in the previous year."
This hints at box-ticking and reliance on shareholder voting advisory firms. In its recent executive remuneration report, PwC takes aim at shareholder advisory firms, such as Institutional Shareholder Services, that are used to guide AGM voting decisions.
"Investors need to take ownership of their decisions and realise that unthinkingly following voting recommendations does not amount to fulfilling their stewardship responsibilities," says PwC.
Robert Lewenson, head of environmental, social & governance (ESG) engagement at Old Mutual Investment Group, describes the outcome of the few teleconferences he has attended as "quite abysmal".
One of the challenges is dealing with the wide variety of shareholders — local, international, active, passive, large and small.
"Getting them all into an effective grouping to engage with a corporate team that is often disgruntled about being challenged was never going to be easy," adds Lewenson.
He says it’s relatively easy to engage with the top five shareholders on a one-on-one basis, but the smaller shareholders also have a responsibility to engage.
"Surely in a digital age there’s something better than a teleconference — perhaps a private chat forum," suggests Lewenson.
An ESG analyst at a large institutional investor says he participated in six teleconferences before abandoning the idea. "The teleconferences were a complete waste of time. Most big institutions engage behind closed doors. Even when we participated in the conferences we also engaged with the company directly," says the analyst, who spoke on condition of anonymity.
He says airing concerns in public is not very efficient. "There are a lot of unstructured voices giving conflicting views."
The requirement to engage with shareholders in the event of a 25%-plus "no" vote became effective on June 19 2017, following the release of the King 4 code of corporate governance. It is an attempt to compensate for the fact that SA lags behind most major jurisdictions due to its nonbinding advisory voting on remuneration, which means there are no real consequences for boards.
King 4 merely requires that if there is 25% or more opposition to the remuneration or implementation report, the board should engage with the dissenting shareholders to ascertain the reasons for dissenting votes, and disclose with whom it engaged and the manner and form of engagement. It must also disclose the nature of steps taken to address "legitimate and reasonable objections and concerns".
Nowhere in the code is there mention of a teleconference.
At the end of October 2017, after 30% of shareholders voted against the remuneration policy at its AGM, Shoprite issued a Sens statement inviting all the shareholders who had voted "no" to participate in a teleconference a week later. One small shareholder said the invitation was so hostile, it sounded like a dare.
After the teleconference Shoprite issued another Sens, informing investors that five shareholders, holding about 18% of the company, had participated and raised five areas of concern to which Shoprite provided "appropriate explanations".
And so the ineffectual teleconference tradition began.
Unless the process is dramatically upgraded, it may not last much longer.