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The changing face of AGMs
The Annual General Meeting (AGM) season in Australia is becoming more of a forum for companies to update shareholders on the outlook for earnings, and for shareholders to push the ESG agenda, according to Martin Currie Australia, an active equity specialist investment manager.
Reece Birtles, chief investment officer, and Will Baylis, portfolio manager, at Martin Currie have provided an analysis of the recent reporting season and detail how AGMs are seeing a shift:
1. IMPROVED GUIDANCE ON ECONOMY REOPENING AND ONGOING DEMAND
First and foremost, we have seen a generally positive tone across the outlooks provided at AGMs. Companies that depend on their customers being ‘on-premise’ have provided the most upbeat outlooks and guidance. This is particularly prevalent in the housing (Stockland, Mirvac) and construction (Fletcher Building), bricks-and-mortar distribution retail channels (Super Cheap Retail, Wesfarmers Bunnings and Kmart divisions), while companies in the so called COVID “winner” sectors, such as consumer staples (Coles, Woolworths), and areas of discretionary retail that had done well through the lockdown (JB Hi-Fi, Harvey Norman), have also continued to provide very robust trading outlooks.
However, companies exposed to the external economy, especially China, have expressed more caution. It remains unclear how the China trade issues will be resolved, and what the duration of trade embargoes for Australian products will be. New lockdowns in Europe and the US are also leading to more pessimistic guidance for exporters.
2. KEY THEMES REVOLVE AROUND ESG
Our team of fundamental analysts and portfolio managers have looked at the proxies, the AGMs themselves, the guidance and commentary provided, and have undertaken pre-AGM engagements with the boards and management of individual stocks. This allows us to do a deeper dive into the key themes coming out of the AGMs, most of which we have found to have an ESG undertone.
3. FOCUS ON A ‘REASONABLE’ REMUNERATION MEASURE
Leading into the AGMs, boards have in several cases announced performance rights as part of the long-term incentives for the CEO. These have been based on a very low share price, often associated with the trough in earnings due to COVID 19. This does not appear to have resonated well with the market, given many have shown markedly improved earnings and higher share prices as the economy begins to reopen. We note that after pre-AGM engagements with investors, some boards have adjusted these incentives to a more appropriate share price which reflects improved trading conditions and outlook.
Boards have also caused controversy when declaring executive team bonuses while the companies receive Government support, such as JobKeeper.
4. INCREASING REGULAR SUSTAINABILITY REPORTING
Something we are seeing more of in the Annual Reports prepared in advance of AGMs is information on the risks and actions taken to deal with climate change and waste. Many companies now publish detailed reckoning of Scope 1, 2 and 3 carbon emissions, and examples of how they are improving their recycling efforts.
Almost all companies are also now submitting a Sustainability Report as part of their Annual Report. Many companies have dedicated sustainability teams, and are providing detail on issues around waste, climate change, employees’ health and safety during COVID-19 etc.
Some companies are now also highlighting plans for their energy transition to carbon neutrality. AGL Energy was targeted this year by impact investors around its transition planning disclosure. Aurizon Holdings also launched its first climate strategy and action plan to be net zero (in terms of carbon dioxide emissions) by 2050.
5. INDIGENOUS HERITAGE
Following the events with Rio Tinto and the Juukan Gorge, indigenous relations has become a significant theme for investors. However, we do note that activist resolutions related to cultural heritage at BHP and Insurance Australian Group have subsequently been withdrawn following company engagement.
We have engaged with both the board and investor relations department at Rio Tinto. Our key concerns related to poor communication and a lack of board accountability for the actions, which has impacted Rio Tinto’s ‘social licence to operate’ in the Pilbara.
We had two recent meetings with the management of BHP on the topic. The company has reviewed its heritage management and processes post the Juukan Gorge destruction and have set up a Heritage Advisory Council in conjunction with Banjima People, to provide mine planning input at its South Flank iron ore mine in the Pilbara. BHP also has an in-house process for escalation for senior management sign-off if BHP discover heritage sites subsequent to Section 18 approval, and prior to commencement of mining. BHP has had input into, and supports, changes to Western Australia’s Aboriginal Heritage Act, currently being reformed, that gives traditional owners more say in the protection of heritage sites in the state.
We have also met with Fortescue Metals Group to understand the differences in its approach to indigenous communities. Fortescue is a relatively new entrant to iron ore mining in Australia and appears to operate with a greater awareness of local indigenous needs and concerns.
6. FOCUS ON STAKEHOLDER RIGHTS AND SHAREHOLDER ACCOUNTABILITY
The topic of shareholder rights and responsibility to stakeholders is becoming more heated, and we have also engaged with several companies on the issue.
Most chairpersons that we have engaged with on this issue describe that their board’s responsibility is to the company and its shareholders. That said, all companies are also aware of their broader stakeholder obligations, especially to employees, customers, suppliers and regulators.
We see good governance being aligned with the long-term financial returns to shareholders, which will in part depend on the treatment and experience of the broader group of stakeholders.
Corporate actions, recapitalisations and acquisition decisions made during COVID-19 have been significant. We have looked closely at directors who have protected shareholder interests in these deals. Badly structured placements/equity issuance, or badly priced incentives, have been notable, such as a selective placement by Cochlear at a large discount to share price, and IOOF, which made a very large and dilutive capital raising to fund the MLC acquisition; impairing shareholder returns in the short and medium term.
7. TREND TOWARDS VIRTUAL AGMS
A final evolving theme worth noting is the push by companies for virtual-only AGMs in the future. While we understand that in 2020 it was unavoidable, we recognise that it can limit smaller shareholders’ abilities to engage with corporate officials, raise questions, and hinder the transparent expression of views.
As a large institutional investor, we have very good access to company management. As such, it is less of a concern for investors like us, but we would advocate for a hybrid model to help avoid anything that results in reduced transparency to the governance process.
