Shifting investment landscape fuels added focus on governance

In recent years, the responsibility for assessing AGM agenda items has shifted. While proxy advisors continue to play a critical role, investors are increasingly taking the lead in analysing governance and pay-related topics. This shift is driven by heightened stewardship responsibilities, sustainability monitoring and rising expectations from end investors.

The rise of passive investing further underscores the importance of clear and transparent corporate governance reporting. With passive investors often controlling significant voting rights but rarely engaging directly with issuers, the clarity of remuneration and governance disclosure becomes paramount.

Key trends in remuneration reporting

In the 2024 AGM season across major Continental European markets, 29% of votes on remuneration reports received less than 90% approval, with nearly 14% garnering less than 80% support. While outright rejections remain rare (just 2% in 2024), dissent in voting can often trigger negative media attention and erode investor confidence.

The two main proxy advisories recommended against approving remuneration reports in nearly one-third of cases in 2024, with 15% of reports rejected by both ISS and Glass Lewis. While excessive CEO pay is often cited as a primary concern, our analysis reveals that lack of transparency – rather than pay levels alone – is a recurring driver of investor dissent.

Case study: The AMX mid-cap index

To illustrate this point, we examined the AMX mid-cap index in the Netherlands. Of the 25 companies on the index, five received less than 90% support for their remuneration reports in 2024. One report was rejected outright due to a significant increase in base pay for board members, including the CEO, which appeared disproportionate to that company’s market capitalisation.

However, in the remaining four cases, the primary issue was not excessive pay but rather a lack of clarity in explaining increases in pay and/or bonus opportunities. CEO pay levels at these issuers were within the mid-to-lower range of the AMX index and total remuneration opportunities – including base pay, short-term incentives (STIs) and long-term incentives (LTIs) – were not demonstrably excessive. The common thread was insufficient transparency in remuneration policies.

The role of peer group benchmarking

A critical factor in remuneration assessments is the use of peer benchmarks on CEO pay. Proxy advisors and research-intensive investors typically compile peer groups based on industry, market or index alignment. However, these groups often differ significantly from the benchmarks used by the issuers themselves to set executive remuneration.

While European issuers are increasingly disclosing their peer groups in annual reports or directly to proxy advisors, it remains non-standard and only eight of the 25 AMX issuers currently publish this information. Public disclosure of peer groups not only enhances transparency but also provides a counterpoint to the narratives constructed by proxy advisors, encouraging them to reconsider their own peer comparisons.

Executive share ownership: A missed opportunity

Another area where issuers often fall short is in disclosing executive share ownership policies. While performance shares are a standard component of STI and LTI plans, only eight AMX issuers explicitly state shareholding requirements for executives. In some markets, corporate governance codes strongly recommend or require executives to hold shares equivalent to one or more times their annual base salary. Demonstrating that executives have “skin in the game” is a powerful way of signalling alignment with shareholder interests.

Driving investor support through engagement

Understanding investor motivations is critical to securing support for remuneration, particularly in the face of changes or challenges. Proactive engagement with investors, analysts and proxy advisors throughout the year – especially ahead of the AGM – can help align issuer policies with investor expectations. This extends beyond addressing concerns in the remuneration report to fostering ongoing dialogue on governance and pay-related topics.

Recommendations for Issuers

To enhance transparency and avoid misinterpretation, issuers should focus on the following areas in their remuneration reporting:

• Rationale for changes: Clearly explain any adjustments to forward-looking remuneration policies.
• Pay level justification: Provide detailed reasoning for increases in executive pay.
• Peer group disclosure: Share the process for selecting remuneration benchmarks and the peers used.
• Executive share ownership policies: Outline requirements for executives to hold shares, demonstrating alignment with shareholder interests.
• Pay-for-performance alignment: Emphasise the link between base pay, STI and LTI plans and performance outcomes.
• Proactive engagement: Maintain regular communication with key investors and proxy advisors on remuneration and governance priorities.

Get In Touch

We work with senior leaders, in partnership and in confidence.

Contact Us