Masterclass Remuneration: ‘Take The Shareholder By The Hand’
F1 driver Max Verstappen, DJ Martin Garrix and top footballer Virgil van Dijk; with €55 million, €17.5 million, and €14.9 million respectively, top the list of best-earning Dutch (according to the Financieele Dagblad of April 13, 2023). These incomes are seldom a subject of discussion, while the remuneration of the CEO of Dutch stock exchange funds receives continuous attention, both from shareholders and other stakeholders and from the media. ‘Resistance is as high as ever,’ says Joyce Leemrijse, partner, and notary at Allen & Overy. The remuneration policy and report, as well as individual remuneration and bonuses, can still count on relatively many dissenting votes in shareholders’ meetings (AGMs). ‘Reports about excessive earnings in the corporate sector regularly make the front page. And will continue to do so.’
In the Netherlands, shareholders had a greater say in remuneration policy since 2004. This is now the case throughout Europe thanks to the say-on-pay shareholder directive; every four years the remuneration policy must be submitted to the shareholders’ meeting. Approval requires - usually - a minimum of 75 percent of votes. The remuneration report must be submitted for opinion annually. At many companies, the remuneration policy will be on the agenda in 2024. Reason enough for Management Scope to join Allen & Overy in discussing this topic with company secretaries. In a master class they discussed dilemmas and trends. What current developments should they consider and how can they help ensure that there is sufficient support for both the policy and the report?
In the past year, 33 companies proposed changes in remuneration policy. Most were given the green light. But there were also some narrow escapes, according to Leemrijse. Some companies barely achieved a 50 percent majority (some listed companies’ bylaws specify that adjustments to the remuneration policy can be made with a simple majority). Three companies finally got support for their remuneration policy in 2023, after it had been rejected three years in a row. According to Leemrijse, the important lesson remains to speak and listen to your stakeholders. ‘That is so obvious, but these companies clearly did not do it sufficiently.’
Explanation and more explanation
Christoph Van der Elst, a professor of corporate law and economics at Tilburg University and Ghent University, studied how remuneration reports and policies were voted on within 30 Dutch AEX and other companies over the past three years. To this end, he compared the votes cast during the AGMs of the relevant companies. ‘It is striking that at many companies the remuneration report was not well received. Often the report did get approved by many shareholders, but of all agenda items, the remuneration report was the agenda item against which ‘no’ votes were cast most often.’ According to Van der Elst, mainly institutional investors are very critical. ‘They find the transparency insufficient, for example, or are of the opinion that the Supervisory Board handles remuneration too discretionary.’
It is a difficult task for company secretaries to satisfy everyone. ‘It is necessary to take the shareholder by the hand and if necessary, explain the remuneration policy in three different places in the remuneration report. References to other sections in the annual report do not work; shareholders who may have to plow through 500 reports usually do not check those references and then come to the assessment that the relevant information is missing from the remuneration report. That can lead to a negative opinion and dissenting votes.’
Van der Elst notes that shareholders sometimes also vote against the remuneration report because they do not agree with (parts of) the policy. Several company secretaries present recognize this. However, most of them anticipate this by discussing this with the shareholders beforehand and explaining the policy and the report. ‘It sometimes results in the penny dropping on how we actually intended the policy and its effect in the report.’
Companies must currently present their remuneration policy to shareholders every four years, but that duty also exists if they want to make significant changes in the interim. ‘But when is that and what constitutes a significant change?’ Van der Elst finds that unclear.
Sharpened focus on sustainability as a KPI
Hanneke Bennaars, partner, and employment law attorney at Allen & Overy, knows what current legal developments company secretaries should take into consideration. She mentions as the first the increased attention in the corporate governance code for the relationship between the remuneration of the CEO and the rest of the company’s employees, and the explicit naming of sustainability as a measure for remuneration. Also important is the attorney general’s recent opinion on the so-called claw back in the financial sector. Bennaars: ‘Bonuses can be clawed back if it later turns out that they were not awarded on the right grounds.’ This case involved a bonus payment for which it was subsequently found that the recipient had not met the ‘appropriate standards of competence and proper conduct,’ a claw back ground under the Financial Supervision Act. According to the Solicitor General, that is only allowed if a company has properly defined in its policy exactly what those standards are. It is not yet clear whether the Supreme Court will follow this advice, but it is advisable for companies to critically examine their policies, Bennaars believes.
She also points to the stricter requirements within the financial sector for deviating from the bonus ceiling in the financial sector. Among other things, companies must report annually on deviations. Finally, Bennaars says the relatively recent ruling by the disciplinary judge on the remuneration of ING’s former CEO, Ralph Hamers, is also relevant. Both the CEO and two members of the Supervisory Board were reprimanded for allegedly being careless in making remuneration decisions. The disciplinary Board ruled, among other things, that the company had not paid enough attention to social support. ‘That is an important signal,’ Bennaars believes. ‘Companies need to more emphatically take account of how certain rewards are perceived in society.’
Beware of excessive sustainability claims
According to Bennaars, it is not easy for companies to give substance to the heightened focus on sustainability in executive remuneration policy. ‘The corporate governance code states, on the one hand, that the Board must not only have an eye for the interests of the company, but also for ‘people and the environment’ - without an obligation to achieve results. On the other hand, the code prescribes that variable remuneration for directors must - in part - be linked to measurable ESG targets, thus making it somewhat more result-oriented. Herein lies a challenge, according to Bennaars. ‘You do not want to remain too vague and be accused of being unambitious about sustainability. At the same time, it is not advisable to publicize your ambitions too high. Not achieving them can then be fodder for liability claims.’
Another challenge for companies is the pay ratio, or CEO pay ratio. Ever since the introduction of the Harrewijn Act in 2006, companies with more than 100 employees had to inform the relevant trade union about the ratio of executive pay to the salaries of the rest of the staff, but since January 1, 2023, this has also been part of the corporate governance code. ‘In the Netherlands, depending on the sector, a maximum ratio of 1 to 50 is acceptable,’ said one of the attending company secretaries. ‘In other words, a CEO receives a maximum of 50 times the salary of a man or woman on the shop floor.’ By comparison, in America the differences are extreme. In 2022, the average salary ratio between an employee of an S&P 500 company was 1 to 272. ‘In addition to the absolute ratio, the increase in the executive salary relative to that of the rest of the company is also relevant,’ Leemrijse adds.
Creating support in advance
How often did shareholders in Europe vote down an agenda item during AGMs last year? That was reasonable, observes Kirsten van Rooijen, CEO continental Europe of Computershare, an international consultancy that supports companies in their relationship with shareholders. In seven European countries, the remuneration report was controversial the most often (42.9 percent), an increase compared to the previous year. This is according to the recently published annual report of Georgeson, a subsidiary of Computershare. This was followed by remuneration policies (29.2 percent) and Board member appointments (11.7 percent). In Switzerland, the most frequent opposing votes were against remuneration. In Germany, there were many negative votes on amendments to the bylaws to allow for a virtual meeting. ‘However, if you formulate this point correctly, present it and discuss it properly with shareholders and proxy advisors, it can certainly get approved,’ Van Rooijen tips Dutch companies considering virtual meetings, once the law hopefully changes as part of the modernization of the law on limited liability companies (NV in Dutch) at the end of this year.
Looking at the Dutch market, the number of negative votes decreased last year. According to Van Rooijen, this is because companies are more often communicating with investors, shareholders, and other stakeholders in advance. ‘This creates sufficient support to get agenda items approved,’ says Van Rooijen. The fact that fewer controversial agenda items were put to the vote this year also plays a role.
Shareholders’ advisors ISS and Glass Lewis are decisive in realizing or not realizing a majority of votes. ‘ISS and Glass Lewis issued negative voting advice 9 and 10 times respectively during the past AGM season in the Netherlands. ISS shares the draft report with the company. It is wise to go through this carefully and take up possible changes. In the event of a negative recommendation, the company can also have a paragraph added to the report to clarify management’s view.’ Of course, the alerts that Eumedion (the interest organization of Dutch institutional investors) sends out to its members are also important because they are often included in the advice from ISS and Glass Lewis.
Van Rooijen identifies some international trends that may have an impact on the Dutch market. ‘We see clear improvements in the retrospective disclosure of results achieved by companies in the remuneration report. This has been the case in neighbouring countries for years, but we are also in the Netherlands seeing more transparency. Shareholders currently react very negatively to the extra one-time payment of (share) rewards to top management and other ‘exceptional deviations’ from policy. We also see a trend of companies that increasingly add companies from the United States or companies with a higher market cap to their pay peer group. This possibly to thereby create a higher base salary for the Board. Shareholders are watching this closely and will possibly cast a negative vote if they see this happening. What also leads to severe criticism: incoming managers being awarded a remarkably higher compensation package than the departing CEO, especially if they come from a larger organization.’
In conclusion, Van Rooijen expects Dutch companies to adjust their remuneration policies in several areas during the 2024 AGMs. ‘More ESG targets will be formulated and linked to remuneration. In addition, companies want to engage with investors and other stakeholders more often through road shows. They want a more flexible remuneration policy, and they want to communicate the benefits to investors before presenting them at the AGM. Certainly also because in the Netherlands social support needs to be considered – something which is not always understood by foreign investors.’ Finally, Van Rooijen thinks that the Netherlands - following the example of France and Switzerland - will in future move to an annual binding vote on remuneration policy. ‘I see that lobby slowly getting underway.’
Remuneration policy at the 2024 AGM?
A key question discussed was whether the remuneration policy should be on the 2024 AGM agenda, also if there have been minor or major changes to the policy in the interim. The outcome of the discussion was not a simple yes or no. What did prevail was the idea that if this has happened without an assessment of the entire policy, or without having submitted the policy in its entirety to the AGM, the company will be asked to resubmit the remuneration policy to the AGM for adoption in 2024.
This article was published in Management Scope 08 2023.