AGMs in 2020: learning lessons and an opportunity for change

©2020 Thomson Reuters (Professional) UK Limited. This article first appeared in the November 2020 issue of PLC Magazine, published by Practical Law, part of Thomson Reuters (Professional) UK Limited, and is reproduced by agreement with the publishers.

On 6 October 2020, the Financial Reporting Council (FRC) issued a review of 2020 AGM practice in the face of the 2019 novel coronavirus disease (COVID-19) pandemic (the review). It aims to open up further debate between stakeholders to determine how future AGMs can be conducted to ensure that the maximum number of shareholders can engage if they choose to do so, and to encourage companies to consider a mixture of approaches in line with their size and shareholder base.

Should companies choose to pursue some of the suggestions, for example as regards increased use of technology, they will need to take action well ahead of normal AGM preparation time.

Practice in 2020

The review’s sample of 202 AGMs included 163 companies that held closed meetings and 30 that held open meetings. The FRC applauds companies for achieving what they did in the 2020 AGM season under very trying circumstances. Nevertheless, it notes that the differing approaches taken by companies drew both support and criticism from investors and other stakeholders.

On the positive side, for example, the review discusses the increase in engagement with shareholders at the fully virtual AGM for Marks & Spencer Group plc where significantly more shareholders engaged with the digital platform, either to vote, submit questions or view the broadcast, than in 2019. It also highlights the AGM of Man Group plc, at which all directors were present in person or virtually, and where shareholders could submit written questions and receive answers in real time, even though they could not speak at the meeting and had to vote by proxy in advance.

In terms of poor practice, the review notes that of the 163 closed meetings, 30 companies made no mention of Q&A arrangements or shareholder engagement at all. The FRC reminds readers that principle D and provisions 3 and 4 of the 2018 UK Corporate Governance Code (the Code) set out good practice for engagement with all stakeholders, including shareholders. It considers that, while the use of closed meetings without any additional opportunities for shareholders to engage is legal, it effectively disenfranchises retail shareholders from their right to hold boards to account, and such an approach is not aligned with the importance of shareholder engagement set out in the Code. The FRC believes that 2021 should see the end of AGMs where retail shareholders are unable to ask questions of the board.

Legal concerns

The review discusses a number of legal issues that need clarification and notes that the FRC will work with the government to consider how clarity can be achieved on the interpretation of sections 311 (which requires notices of meeting to state the place of the meeting) and 360A (electronic meetings and voting) of the Companies Act 2006.

On articles of association, the FRC notes that companies that have succeeded in amending their articles have engaged in constructive dialogue with all shareholders and proxy advisors and reached agreement which offered reassurance that all shareholders would continue to be effectively engaged in meetings.

It notes that limiting amendments to provide for only hybrid meetings, rather than fully electronic meetings, is likely to garner support. This is a nod to the continued dislike of electronic meetings by some parties, including the Investment Association and Institutional Shareholder Services. The review also encourages proxy advisors and investors to support appropriate changes to articles, which is a likely nod to the Standard Life Aberdeen plc 2020 AGM that saw the company’s resolution to amend its articles for hybrid meetings voted down.

A new approach

As well as looking at fully electronic meetings, the review looks at hybrid meetings. It states that maintaining a physical presence, at least in the immediate future, may allow both companies and shareholders an opportunity to familiarise themselves with the technological options.

The review contains a number of suggestions that will require further thought and which will not suit all companies. For example, in a significant departure from how AGMs are currently conducted, it suggests the possibility of splitting the traditional AGM into two events: one for presentations, Q&A and consideration of matters in the annual report, and the second for voting on resolutions. This is consistent with various suggestions that companies hold shareholder days separately from the AGM.

The review also suggests that engagement between companies and shareholders would improve if shareholders buying new shares were asked for an email address which, if they were happy to give one, should be passed on to the company.

The review also contains practical advice for companies to consider by way of best practice guidance (see box “Best practice guidance for AGMs”).

Next steps

The FRC wishes to see a significant increase in the use of technology to facilitate robust virtual interaction during an AGM, provide greater access for all shareholders and ensure that there is an opportunity to hold the board to account. That said, it also acknowledges that the size of the company and its shareholder register will determine the extent to which companies embrace digital technology for their AGMs and undertake live voting.

The FRC proposes to bring together a stakeholder group on this matter, which includes the government, companies, and investors and their representatives, to consider whether there is a need for legislative change and to propose alternative means of achieving some of the desired flexibilities while maintaining the integrity and objective of the AGM.