General Meeting Season Review - Europe 2019

The metamorphosis from shareholder relations to stakeholder relations

We are currently in the middle of a sea change in investor relations. A mixture of global corporate governance developments and a surge of interest in ethical behaviour from consumer and regulator alike has led to a metamorphosis from shareholder relations to stakeholder relations. Our latest report delves into the key themes of 2019 and the expectations for 2020 and beyond.

The rise of ESG

2019 will be remembered as the year that environmental, social, and governance (ESG) investing went mainstream. With the likes of Extinction Rebellion hitting headlines, Greta Thunberg encouraging activism on a global level, and half of pension schemes adding ESG to their default investment strategies, there’s no denying that citizens’ interests are changing.

But it’s not just consumers. This increased interest has been reflected in the C-suite, with more and more companies implementing a corporate purpose whose scope spans beyond increased profits. Investors expect more than just superior investment returns; they want their investment to make a meaningful contribution to the company’s other stakeholders, including its customers, its employees, and its community.

The double-push of top down and bottom up demand has led to a tangible shift in corporate governance.  Shareholders now want to understand in detail a company’s ESG strategy, and having a purpose beyond core profitability is an element up for formal approval. This featured heavily in the UK’s updated Corporate Governance Code, the PACTE law in France, and was threaded through BlackRock CEO Larry Fink’s annual letter. It has even made its way to the US, where the influential Business Roundtable (an association of CEOs of America’s largest companies) released a statement about the purpose of business being tied to stakeholder value.

Activists are seen as savvy investors by the wider investment community. They are able to make change not only on ESG topics, but can implement change at underperforming companies and effectively challenge boards around poor governance choices that may hinder value creation. Essentially, activist investors leave very little room for corporate governance practices that are not aligned to the interests of all.

The homogenisation of regulation

For a number of years, the EMEA region has experienced regular and significant changes in local governance and stewardship. The GDPR is an example of radical reform with the goal of transparency and integrity around data.

In the world of corporate governance, we’ve seen the likes of the EU Shareholder Rights Directive ‘EU SRD2’. While the UK and France had some of these requirements in place already, Germany and Belgium have seen seismic reforms take place with the publication of new corporate governance codes. The UK has moved a step closer to releasing an updated stewardship code, and France has brought in new laws in relation to employee representation, corporate purpose, and M&A law.

Other regulatory concerns include a focus on the issue of overboarding; 2019 saw several large institutional investors tighten their guidelines on this topic, and two major proxy advisory agencies used it as supporting rationale for recommending against Director elections.

The need for companies to respond to minority opposition is also creeping up the agenda across Europe, as investors are increasingly expecting to see a company pay heed to votes which fail to cross the 80% mark.

The corporate governance expectations of international investors have led to greater convergence between global best practice and local norms. This trend will accelerate given the increased concentration of investment with index funds and sovereign wealth, as well as a market wide dependence on proxy advisory firms.

2020 Vision

We expect the 2020 AGM proxy season to be an exciting one across the region. Participation remained largely stable in 2019, with France showing a notable increase and Switzerland seeing a recovery from previous dips. The UK continues to enjoy the highest level of average shareholder participation in the markets. 2020 will be the year we see the trends from 2019 become entrenched, with strengthened relationships between regulators, boards, and investors alike.

The wave of shareholder activism in Europe has remained robust in 2019. We predict that activism will grow further in 2020.