A call with Edwards Lifesciences was arranged to discuss several shareholder proposals being put forward at the company’s AGM in early May. The majority of the call was spent discussing the shareholder proposal that would require the company to adopt a policy to include non-management employees as prospective director candidates. As is often the case with shareholder proposals, what might seem on first glance as a sensible and uncontentious idea, warrants further discussion with the company to understand its position and approach to the same broad issue, be that in terms of current or planned policies or steps.
Edwards is aware that employee representation on boards is common across Europe but explained why management are against this particular governance structure. Management feel that are there are already numerous channels of effective communication between employees, management and the board. Management also believe that open communication is very much part of the company’s existing culture and to add employee representation to the board would reduce board independence to the detriment of the best interests of shareholders. Whilst we are not opposed to employee representation on boards and recognise that it can be appropriate in some instances, in discussion following this call we agreed to accept the stance of Edwards’ management and vote against this shareholder proposal.
In advance of The Walt Disney Company’s AGM in early March, we held a meeting with company representatives to discuss some of the media giant’s existing governance arrangements. We began the meeting by highlighting certain areas that we felt were particularly worthy of praise, notably the Board’s increased engagement during the pandemic; its decision not to pay annual bonuses to executives; and the better quantum and structure of the new CEO’s remuneration, although this latter point was something on which we were keen to get further insight.
Back in 2018, we voted against the then CEO’s remuneration package, believing that it was excessive and did not fully align with the best interests of shareholders. While the current CEO’s package is far more appropriate, we stressed the need for ongoing restraint. While we recognise the importance of attracting and retaining executive talent, the quantum of the CEO’s remuneration is still significant and there is a risk that the company could damage its standing with employees, customers and investors if it fails to act in a disciplined manner going forward. Our concern over executive pay is not limited to Disney, however, and we stressed that we also find compensation practices at some of the company’s peers less than ideal.
Another topic of discussion was the role of chair. Normally, we favour the appointment of an independent chair, believing that non-executive leadership facilitates greater boardroom challenge and oversight. At present, Disney’s chair is the Executive Chairman and ex-CEO and we expressed the view that the next chair should ideally be an ‘outsider’, consistent with the company’s own corporate governance guidelines. Overall, this was an encouraging and constructive meeting, conducted in a genuine spirit of collaboration. Disney engaged with all the points we put across, were supportive of many and offered further insight, explanation, and clarification on others.
Smith & Nephew
The new Smith & Nephew CEO, Roland Diggelmann has several outside commitments. He is a non-executive director at publicly listed, Accelerate Diagnostic Inc., and is also a non-executive director of two smaller companies. We decided to support the vote on his position on this occasion but contacted the company to reiterate our concerns around what we view to be excessive outside commitments.
A vote on board positions at the LVMH AGM in June was an example of our concern over the attendance record of non-executive directors. However, having raised our concern with the company ahead of the AGM and having been satisfied by the response, we voted in favour of his re-election.
LVMH’s board reports showed that non-executive director, Diego Della Valle, had attended only 67% of meetings, with no explanation for those absences. Whilst, clearly, we would not demand 100% attendance by every member of the board 100% of the time, such a low attendance rate demands explanation. However, having engaged with the company, we were informed that some Board meetings last year relating to LVMH’s proposed acquisition of Tiffany had in fact been called at very short notice, which would have made it difficult for Mr Della Valle to attend.
We concluded that this was an acceptable explanation removing any need to vote against board appointments this year. His attendance will however be monitored going forward.
Ahead of Nike’s AGM in September 2020, the Research team took time to review proposed changes to the company’s remuneration arrangements, in particular the Covid-19 related adjustments to its LTIP metrics. Having previously been based on revenue and EPS, the metrics are now based on relative total shareholder return. The company was proactive in contacting us to explain the rationale for these changes which, after discussion amongst the team, we accepted and voted for, in line with the management recommendation.
With the financial impact of Covid-19 so significant and widespread, we expect changes to executive remuneration targets to feature frequently in the roster of AGM items. We recognise the need to reward and incentivise management whilst also ensuring that there is proportionality and that any targets are aligned with the interests of all stakeholders. This isn’t an exact science and so very often a vote in support will belie discussion, often over time, with individuals from the company’s remuneration committee and amongst the Research team.
Following discussion with Starbucks ahead of the AGM in the first quarter of 2020, we decided to vote against a shareholder proposal to require a report on the risks of omitting viewpoint and ideology from the company’s EEO (equal employment opportunity) policy. Whilst recognising the importance of reporting, we are also alert to the fact that more information and reporting doesn’t necessarily provide greater value or clarity, and so we will typically judge such proposals from a standpoint of pragmatism and reasonableness.