Getting Ready for the Next Proxy Season 2018 FTSE 100 Proxy Review Getting Ready for the Next Proxy Season In preparation for the forthcoming 2019 proxy season, CGLytics is releasing its third consecutive annual FTSE 100 proxy review, providing boards with key takeaways and drawing from the 2018 season to ensure companies are adequately prepared to engage. The 2018 proxy season saw an increasing focus from investors on key governance matters such as Total Number of Resolutions disclosure quality, director election, board Opposing Director Re-election effectiveness, CEO pay and Environmental Social Governance (ESG) practices. Although companies (all UK companies): have been improving their disclosure, the need for transparency continued to be an important theme. The season also saw a higher dissent from 2017 2018 shareholders on director re-elections than previous years. Shareholders were sending a strong message to directors that they will be held directly 38 80 accountable for their individual actions. The public register, which is compiled by the Investment Source: Investment Association Public Register Association in light of growing revolt in corporate governance and general culture, showed that the number of resolutions opposing individual director re-elections increased from 38 in 2017 to 80 in 2018 in the United Kingdom. The FTSE 100, however, Insight: showed a growth of 20% relative to the number of resolutions in 2017. Specifically, in the FTSE 100, 6 Shareholders are looking closely at companies in the index recorded more than 20% in the number of appointments held dissenting votes to re-elect their director(s) to the by directors and whether directors board compared to 5 in 2017. These companies could be “overboarded”. are The Berkeley Group Holdings plc, AstraZeneca plc, Barratt Developments plc, Sky plc, Royal Mail plc, and British American Tobacco plc. The main Overboarding and having the right board reason for the shareholder revolts is the number composition, which includes diversity, continued to of directorships held by individual members of the hold shareholders’ interest. Investors were looking board. Shareholders questioned whether a director closely at the number of appointments held by with several board appointments can really fulfil his directors, in addition to the mix of skill sets, tenure or her duties. and gender diversity at the board level. cglytics.com 1 Getting ReadyRead for for the the next Next Proxy Proxy Season Season 2018 Proxy Season Highlights Last season brought some interesting highlights as Companies with Greatest Misalignment in 2017: the executive remuneration policies were due for renewal and up for voting. CEO pay continued to be 1. WPP plc an area of concern for shareholders as pay equity, 2. CRH plc transparency, executive pay levels, and pay for performance continued to ratchet higher. 3. Sky plc • The average votes in favour of the remuneration report fell slightly lower than the Companies with Greatest Misalignment previous year with corporations experiencing on a Three-Year Basis (2015-2017): significant push back on remuneration policies 1. Shire plc that investors felt lacked clarity and enough disclosures. 2. Lloyds Banking Group plc 3. WPP plc • Investors paid more attention in setting a ceiling for total realised pay that directors could earn and engaged actively on the performance metrics of company remuneration plans. code also added that, as a measure, formulaic calculations of performance-related pay should • A study performed by CGLytics showed that almost be rejected. To reinforce the role of directors in a third of the FTSE 100 companies have significant protecting shareholder interests, directors were also misalignment between pay and performance encouraged to exercise independent judgement on a one and three year basis. Please refer to and discretion when authorising remuneration the Appendix for CGLytics’ annual FTSE 100 Pay outcomes, taking account of company and individual for Performance Overview. It outlines the total performance, along with wider circumstances. CEO realised compensation and company Total Shareholder Return (TSR) performance for all FTSE Thirty-three companies of the FTSE 100 100 constituents against their peers in the index. index sought a binding shareholder approval for their remuneration policies, valid for at most three The Say on Pay Landscape years. Investors generally questioned the earning The United Kingdom has been at the forefront potentials in short-term incentive plans presented of shareholders’ concern over excessive pay in some of the remuneration policies for as investors over the years have voted against approvals. For example, at Rentokil Initial plc, issuers’ advisory remuneration reports. To the board’s decision to increase the annual address these concerns, the Financial Reporting bonus stretch or maximum from 100% to 150% Council (FRC) earlier in July 2018 issued a revised cost the board a dissent of around 25% on their Corporate Governance Code, which stressed remuneration policy. Other companies that faced that remuneration committees should consider more than a 20% vote against their remuneration workforce remuneration and related policies when policy were Informa plc and Unilever plc. designing director remuneration. The revised Royal Mail plc received the highest shareholder 2 cgyltics.com 2 Getting Ready for the Next Proxy Season Support Level: Advisory Votes for Remuneration Report 100 90 79 80 75 70 60 50 40 30 20 20 16 10 2 3 3 2 0 Support Level Support Level Support Level Support Level > 90% > 89 - 70% > 69 - 60% < 60% Performance Year: 2016 2017 revolt on their remuneration report for the 2017 performance year compared to other FTSE 100 Insight: companies. With over 70% of the votes against the advisory resolution for the Directors’ Remuneration Shareholders cited alignment Report, the shareholders voiced their concern between compensation and saying the company has not been clear enough performance as their main concern about contractual entitlements of Moya Greene, for voting against remuneration the retiring CEO, and the remuneration of Rico related resolutions. Back, the new Group CEO. Persimmon plc is the company that received the second highest shareholder revolt with almost 49% regarding the directors’ remuneration and advocated for: of votes against the Directors’ Remuneration Report. lower increase for directors’ remuneration, preference for The shareholders were concerned about the level of part of the increase to be delivered through long-term pay remuneration that resulted from the vesting of 2012 and tougher executive shareholding guidelines. Several awards, saying that there was no cap. shareholders asked about the mix of performance metrics The other companies which received shareholder revolts for the Performance Share Plan, as CRH uses KPIs other of more than 30% on their remuneration reports were than TSR. The company argued that they always strive Astra Zeneca plc, BT Group plc, Unilever plc and CRH plc. to balance the external shareholder metric (TSR) and an Shareholders of CRH plc communicated their concerns internal metric that is more within management’s control. cglytics.com 3 Getting ReadyRead for for the the next Next Proxy Proxy Season Season Overview of Pay vs. Total Shareholder Return The graphs below illustrate the alignment between TSR demonstrates a high volatility and a decrease the average realised pay and TSR of the FTSE 100 while the average realised pay fluctuates along the companies from 2009 until 2017. The absolute value years but with less volatility and an increase from graph shows the average value of realised pay and 2009 to 2017. The average TSR for the FTSE 100 TSR each year, while the relative growth graph decreased to 8% in 2017 while the average total illustrates the year over year change. The average realised pay increased by 5.5% to GBP 4.9 million. Pay vs. TSR: Absolute Growth 25 6,000,000 20 5,000,000 15 4,000,000 % 10 GBP 5 3,000,000 0 2,000,000 -5 1,000,000 -10 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Pay TSR000 Pay vs. TSR: Relative Growth 25 20 15 10 TRC 5 Growth % 0 TSR Delta -5 -10 -15 -20 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2010 2011 2012 2013 2014 2015 2016 2017 4 cglytics.com 4 Getting Ready for the Next Proxy Season Compensation Mix Design: Fixed vs. Variable The FTSE 100 CEO compensation structure against the previous year. However, there is still continues to evolve. We saw a strong emphasis on further work to be done. The charts below show rebalancing CEO pay structure to be more long- that when reviewing changes in compensation term oriented in the 2017 performance year. Base structure over a longer period (from 2009 to 2017), salary fell from 20.1% in 2016 to 18.6% in 2017, there actually has been a shift from long-term and short-term incentives fell from 23% to 22.9% incentives to fixed and short-term incentives. 18% 19% 2009 2017 21% 23% 61% 58% Salary Realised STI Realised LTI Salary Realised STI Realised LTI Average CEO Realised Pay Breakdown 100% 80% 60% 40% 20% 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Base Salary Realised STI Realised LTI cglytics.com 5 Getting ReadyRead for for the the next Next Proxy Proxy Season Season Compensation Mix Design: Pay for Performance Fixed vs. Variable The annual pay for performance study performed by Conservative Aligned Misaligned CGLytics demonstrates that there is still a material misalignment between pay and performance in the FTSE 100 companies. Pay for Performance Review: 2017 • 33% of the companies still display a pay for performance misalignment. 33% 34% • 34% of the companies display a good alignment. 2017 • 32% of the companies show a conservative pay level for the performance generated when 32% HSBC compared to the other FTSE 100 companies. Lloyds British Imperial Tobacco % Randgold Pay for Performance Review: Three-Year Basis Experian • On a three-year basis, 29% of the companies display misalignment.