European shareholders are challenging executive pay reports more

Investors who are dissatisfied with companies' approaches to environmental and social issues are casting their votes against director remuneration.

During the 2023 annual general meeting season, the percentage of remuneration reports disputed by investors across seven countries reached 42.9%. This represents the highest level in at least five years, according to an annual review conducted by the shareholder engagement firm Georgeson.

Daniele Vitale, who serves as Georgeson's Head of Governance UK & Europe, noted that the limited number of environmental and social resolutions has led shareholders to utilize pay reports as a means to express their dissent. Georgeson defines a vote as contested if at least 10% of votes are cast against it.

Vitale told Reuters, "There is also a perception that some companies have incorporated ESG metrics into executive pay to facilitate easier attainment of payouts."

Investors are increasingly urging companies to integrate environmental and social factors, such as commitments to reducing greenhouse gas emissions, into their business strategies.

Switzerland witnessed the highest proportion of contested resolutions regarding remuneration reporting, standing at 68.4%.

In contrast, the United Kingdom had the lowest proportion at 20.2%. However, it is worth noting that this percentage has been steadily rising, up from 16.2% in 2021, as per Georgeson's findings.

Opposition to executive pay is likely to continue growing as major asset managers, including BlackRock and State Street, adopt devolved proxy voting rights, allowing individual investors to vote independently from institutional shareholders, said Domenic Brancati, Georgeson's Global Chief Operating Officer.

The data also revealed that the percentage of disputed resolutions regarding remuneration policy decreased from 34.8% in 2022 to 29.2%.

Remuneration reporting votes typically differ from remuneration policy votes in that they are advisory rather than binding. Additionally, pay reporting votes are generally offered on an annual basis.

The proportion of contested resolutions related to director elections increased to 11.7%, up from 11.2% in 2022, as indicated in the review.

Vitale explained that European shareholders have been hesitant to vote against directors, considering it a confrontational move. However, he anticipates that this attitude will change as environmental and social concerns among investors continue to grow.

According to Georgeson, the number of "Say on Climate" resolutions, allowing shareholders to express their opinions on firms' climate strategies, decreased to 24 from 36 last year but was still higher than the 12 recorded in 2021.