7 3月 2024 Wilma Rix Corporate Governance - Diversity and Inclusion - Employment and Incentives - Environment and Climate Change - ESG - Climate change - Environmental issues - Risk and governance - Risk and Compliance

Updated AGM voting guidance focusses on cybersecurity, sustainability and diversity

Updated guidance on how to vote at annual general meetings of UK-listed companies has now been made available by a number of prominent proxy advisors, including Glass Lewis, Institutional Shareholder Services (ISS), and the UK's Pension and Lifetime Savings Association (PLSA). Key themes emerging from the three updated sets of guidance include a focus on cybersecurity and climate-related risks and the need to take account of biodiversity and to promote diversity.

Background  

Glass Lewis and ISS, the two most globally influential proxy advisers, have started to apply their updated policy recommendations and voting guidelines for general meetings of listed companies held in 2024. This guidance is typically used by, and on behalf of, institutional investors and asset managers to inform voting in listed investee companies during the AGM season, including within the UK market.

The UK's PLSA has also recently published updated Stewardship and Voting Guidelines for 2024. This guidance advises pension fund trustees, investment managers and other institutional investors on how to carry out their stewardship responsibilities, including through the exercise of their votes at annual general meetings of listed companies. 

A summary of the new approaches from each guidance and voting recommendations for investors to consider and which may affect UK-listed companies, is set out below.

Glass Lewis

Glass Lewis’s 2024 Benchmark Policy Guidelines focus on director accountability for climate-related issues and cyber risk as well as director remuneration and share ownership requirements. Key changes in this latest update include:

  • Cyber risk oversight: Glass Lewis has expanded its guidance on cyber risks so that where a company has been materially impacted by a cyber-attack, shareholders expect periodic updates from the company. Such updates should include details such as when the company has fully restored its information systems and what resources the company is providing for affected stakeholders. Glass Lewis may recommend votes against directors if they find that the board's response or disclosure relating to a cyber-attach was insufficient.
  • Director attendance: The guidance on director attendance levels has been clarified so that Glass Lewis will recommend a vote against a director who has not attended: (i) at least 75% of board meetings; or (ii) 75% of the board and key committee meetings.
  • Nomination committee performance: In relation to the nomination committee's responsibility to disclose the board's policy on diversity, Glass Lewis has added ethnicity as one the factors the committee should specifically reference, alongside gender. 
  • Interlocking directorships: Glass Lewis typically recommends that members vote against the re-election of a director who has “interlocking directorships" as it considers that these pose a conflict of interest. Glass Lewis has clarified that this policy applies to both public and private companies. Glass Lewis will also assess interlocks with close family members of directors, within group companies and multiple board interlocks among non-insiders (i.e. multiple directors serving on the same boards at other companies).
  • Board responsiveness: Glass Lewis has added a further factor that it will look at when evaluating a board's responsiveness to shareholder concerns following a vote of 20% against a resolution – any modifications made to the company's capital management powers such as share issue authorities and buyback programmes.
  • Director accountability for climate-related issues: Glass Lewis has clarified that it will carefully examine the climate-related disclosures provided by FTSE 100 companies as well as companies with heightened exposure to climate risks or stakeholder scrutiny on such matters. Glass Lewis will also scrutinise whether the company has explicitly disclosed board-level oversight responsibilities. 
  • Accounts and reports: Glass Lewis has clarified that it may recommend voting against a company's accounts and reports in cases where a company's auditor has not provided an unqualified opinion on the financial statements. Glass Lewis has noted that it will consider the reasoning provided by the auditor as well as any relevant public disclosure from the company in its assessment.

ISS

ISS’ 2024 Proxy Voting Guidelines will be effective for meetings on or after 1 February 2024. There are no proposed changes to the remuneration section, and only minor changes are proposed to the corporate governance sections, including:

  • Board diversity: ISS has updated its policy language in relation to board diversity to remove transitory provisions and apply the diversity targets set out in the Listing Rules. 
  • Board independence: In relation to when ISS will consider that a board director is not independent, ISS has confirmed that it defines a significant shareholder as one that holds over 3% of shares in the company. This is consistent with other market policies.
  • Share allotment authorities: ISS has updated its share capital policy to reflect the Investment Association's existing Share Capital Management Guidelines (as updated in 2023). 

PLSA

The PLSA’s Stewardship and Voting Guidelines 2024 note that the Government is currently focussed on growth and reform of the financial markets but urges that these objectives should be achieved alongside a continuing focus on responsible investment.

  • Cybersecurity: investors are advised to ensure that companies are managing increasing cybersecurity threats appropriately, by encouraging companies to explicitly disclose the governance and oversight structures in place to identify and manage these risks, as well as through timely reports on any breaches and the measures taken in response. PLSA advises investors that they should consider voting against the Annual Report and Accounts and perhaps also the Auditor and/or Audit Committee Chair if such disclosures are particularly poor and/or cybersecurity risks or responses are not being sufficiently well managed.
  • Artificial Intelligence: The PLSA stresses that AI may generate significant opportunities but also risks for businesses, including the amplification of discrimination, proliferation of misinformation, privacy violations and disruptions to employment practices. Investors should ensure that companies are accountable for their social impacts by aligning with evolving industry good practice and new standards and requirements in the future. Investors are also advised that they should consider voting against the re-election of a director (including re-election of the chair) if there is evidence of “egregious conduct” attributable to a particular director around the development and deployment of AI.
  • Audit: The audit section now specifically recommends that good company behaviour includes looking to apply the Financial Reporting Council’s new Audit Committees and External Audit: Minimum Standard on a voluntary basis. In line with the 2024 UK Corporate Governance Code, the Annual Report should set out how the board establishes and maintains an effective risk management and internal control framework. Investors should consider voting against the authorisation of Auditors’ remuneration if there are extreme concerns or persistently poor disclosure with regard to “sufficient auditing of the company”.
  • Remuneration: Also in line with the UK Corporate Governance Code, companies are expected to include in the Annual Report a description of their provisions for malus (reducing bonuses before payment) and clawback (recovering bonus after payment). According to the PLSA, these might apply to payments based on erroneous or misleading data, or cases of misconduct, misstatement of accounts, serious reputational damage and corporate failure.
  • Climate change and sustainability: According to a recent PLSA survey, more than two-thirds of pension funds have a commitment to net zero alignment in place, up from just over half in May 2022. In the 2023 proxy voting season, results for ESG-focused resolutions were mixed, with more shareholder proposals but lower support for them, and regional variations due to filing rules for shareholder resolutions and anti-ESG sentiment. However, the PLSA argues that shareholders are considering a wider range of issues when voting on director elections and factoring in ESG oversight in voting decisions. Investors are reminded that smaller and medium sized companies should be allowed some discretion and flexibility regarding their choice of framework, approach and timescales (although all companies are still expected to focus on climate change issues reporting).
  • Biodiversity: The PLSA notes that pension schemes should begin to pay attention to biodiversity issues in the same way as climate change concerns. This can mean including biodiversity and natural capital impacts in assessments of a company’s transition plans. Schemes can also consider voting to support resolutions that seek to encourage companies to address direct or underlying drivers of biodiversity loss. Votes against directors may also be considered, where efforts to address drivers of biodiversity loss are deemed insufficient, for example, in relation to the company’s efforts to mitigate agricultural commodity-driven deforestation. 
  • Social factors and workforce: A new section stresses the importance of social issues, including modern slavery assessments. The guidance acknowledges that it is difficult for investors to model the impact of social factors because schemes normally use asset and liability modelling, which focusses on “traditional” factors. However, whilst it is hard to measure the impact of social factors, the PLSA argues that there is a range of data that could be standardised and compared across investment portfolios. Investors should look at investee companies’ Annual Reports to gather data on employees, payment of a living wage, turnover and the use of “zero hour” contracts. 

When it comes to voting, the PLSA advises that investors should start by engaging in these topics and promoting best practices which companies should follow. Due to the lack of a global framework of principles, data and metrics, and standards on social factors, voting against a company on this topic should be a decision taken only if all engagement avenues have been exhausted.

  • Equity market reforms: Investors are advised they should consider voting against the Governance Committee Chair (or equivalent) if a company has a dual class share structure without a sunset clause of seven years or less.

Other stewardship developments

For more information about stewardship and sustainability issues which are relevant to institutional investors, including pension funds and their trustees, see also our separate Sustainable Futures briefing. 

This includes commentary on other developments, alongside the new PLSA recommendations, including guidance from the Financial Markets Law Committee (FMLC) on the fiduciary duties of pension fund trustees, concerns about the misalignment of interests between asset owners and asset managers raised by the UK Asset Owner Roundtable, and comments made by the Pensions Regulator (TPR) about the importance of schemes engaging with the transition plan guidance of the Transition Plan Taskforce (TPT) and the recommendations of the Taskforce for Nature-related Financial Disclosures (TNFD) and the Taskforce for Social Factors (TSF).

More information

The revised ISS Proxy Voting Guidelines for UK-listed company meetings in 2024 are available here and the Glass Lewis Proxy Voting and ESG Guidelines for 2024 AGMs here and here.

The PLSA Stewardship and Voting Guidelines 2024 are available here.

The FRC’s Audit Committees and the External Audit: Minimum Standard is available here.