Welcome to our RBC Global Equity's Podcast. We're speaking on the 30th of April 2018 and I'm your host, Jeremy Richardson, today I'm joined from the team by Habib Subjally, and Ben Yeoh. Gents, thanks for taking the time. (Good afternoon.) So here we are in spring, it doesn't really feel like it I guess, cause it's rain and wind outside. But leaves are coming on the trees, the flowers are coming and getting into bud and that must mean that we're getting close or at proxy season. What is proxy season? Perhaps you could share with us what it's all about?
So, proxy season is, every year, a company asks its shareholders to vote on certain proposals. These proposals, some of them are prescribed by law, that the company proposes, and some of these proposals are proposed by the shareholders and they cover things like receiving reporting accounts, long-time executive pay, reporting transparency and the like.
And how often is it the case that shareholders agree with everything that's being proposed to them? Is it a controversial process?
So, it's something, which has been increasingly controversial over the last few years, and in fact, there's been a kind of movement, which has caught up there has been more controversy. But in general, the vast majority of votes, so over 90-95% of votes all voted in favor and they all pass through. Usually by these sorts of margins as well, 90-95% of votes are cast in favor.
So, it's a bit of a box-ticking exercise really then, 90-95% of things are agreed. And the majority, by far and away, the majority of voters, of shareholders approve. Quite emphatically it seems to me, then it's not actually that controversial at all, surely?
Well, so, this is one of the things, which has been going on that there's some of those voting numbers have been going down. But one of the criticisms of the investment industry is that it has somewhat blindly accepted what management have proposed year after year and hasn't necessarily say, examine the proposals in enough detail. So, if I might add one of the things I think is very strong about this team is that, the portfolio managers themselves read these proxy votes, alongside stewardship and governance teams. And we try and assess some of the nuances, a lot of these things when they're controversial are not black and white.
And we engage with the companies to understand the company's position and maybe the shareholders' position if it's a shareholder proposal, to try and then vote in the best interest of the people who we're looking after and their money, and I think that is the proper and highest standard way of doing things.
Right, so, Habib, you've been doing this a long time...
So, what changes have you seen when it comes to proxies and how shareholders have been interacting with these proposals?
To be honest, when I first started in this industry, no one even looked at these things. No one... if a proxy happened to land on a portfolio manager's desk, it went straight in the bin probably. Most portfolio managers didn't vote on it. They didn't vote, it was all these things, any conversations, anything that portfolio managers might be uncomfortable about was discussed behind closed doors in sort of quiet, subtle meetings. And over the years, as shareholders had become much more global, companies have got larger. Pay packets had become more controversial and just got bigger. The impact of multinationals and other large corporations had gone bigger on society. People had started taking more and more financial interest in this.
So, what are the things that you're looking out for in this proxy season? So, for example, executive pay, executive pay, right, has been an issue, she's been making headlines for a long time in the fat cats and these types of headlines. Should we expect to see that again this season? I mean, is it something that never goes out of fashion?
It's currently not going out of fashion, it's becoming in fashion. So, yeah, a lot of that... there's a lot of argument about the quantum, so, the level of pay, there's also a lot of argument about the structure of pay. There's some adults who believe that generally you don't get a quantum level problem unless you've also got a structure problem. But they're all going hand in hand. And then there's also these geographic differences because the quantum and the level of pay in the U.S. on average is actually a whole league above the UK on average for a UK company. But a UK CEO say of a global or globalizing business could arguably uptick and go work in a U.S. company, so this kind of global marketplace.
So, how do you put it into context? We often hear from companies that they need to offer big awards in order to be able to attract the best talent. But of course, if everybody offers highest awards, then you end up with this pay inflation that goes on forever, surely just... it wouldn't stop.
Sure, and this is one of the reasons that you have to examine carefully. Are you aligning pay with some notion of performance? And this is where I think you come and get company and industry specific, so, return on capital, important for some industries, maybe less important for others. Long-term pay, should you be thinking about restricted stock. How important a margin's over sales, how important are these other, say, extra financial intangible factors like customer service, the strength of your employees, your brand, your R&D and Innovation? If these are really important to you, surely, they should be in your incentive metrics, and if they're not, that's where I think the portfolio manager should be constructively challenging management teams and boards and I was going to pick up on something Habib said earlier, where he said our portfolio managers 20 years ago didn't read these proxies.
My challenge to you is that most portfolio manager peers that I come across in the city are still not reading actually these proxies and I would say that not as much has changed as people would perhaps suggest.
Yeah, I think, sadly, Ben, I think you're right. That people view investments made through the stock market as sort of short-term investments just because you can sell them within a few moments' notice doesn't mean that you will. And it's certainly not how we should be thinking about it, and I think if you think as an owner, then this is your chance to have a say in how the business is run. And so far, we've just talked about executive compensation. Well, these are the people in charge of your business, who are running your business. How do you want them paid, on what bases do you want them to be paid, to be incentivized? What does success look like? What does failure look like? What do you want them to focus on?
I think these things are very important things that we need to think about as owners. We do need to engage and talk to people about what we want to see in there. Voting is a blunt tool, it is yes or no, but it is still incredibly important.
Yeah, there has to be more than executive pay though, that's a very very topical issue, but if I just think about what's been making the news recently, things like quality of opportunity, gender diversity, there's so much more now, which is creeping into the discourse.
So, there are issues that, globally, things like gender equality and equality for minorities, things like carbon is coming up, but then, they're also regional and industry issues, so there are some industries where...
You know, just water, I mean carbon for the energy industry is critical. And also, once you get to the chemical refining business, you know what you're doing with water usage and recycling and things like that, so those are very specific points. It's disclosure, it's supply chain for the garments industry, for the food industry. And then, you're to have regional issues. You know, for Japan, governance is a big issue, independence of the board, medium-term plans, voting on the medium-term plans, returns on equity. So, we have to be aware of the issues that are industry-specific as well as region-specific.
So, there's lots of... a final question I wanted to ask you, cause I know that a proxy is typically a long-form and there's lots of proposals there that shareholders are asked for their opinion on, but, if you had to think more broadly about that form, what is... that you don't typically see on the form that you wish you could vote on if you got the chance?
Well, I'll pick up on something that Habib said earlier, which is, I think we're surprised that portfolio managers don't read these proxies. I think people would be surprised that also, there are only really two sets of proxy advisors in this whole market, who'd look at that long-form and then give advice. And that portfolio managers may or may not only rely on that one set, within the set of advice to your question, which comes through, a lot of it is written really in a Legal-Ease. And the thing, which I think is missing is often plain English, I guess you could say Warren Buffett style letter explaining things like the behaviors we want to incentivise, what our business is about and why the things we are putting in our proxy and the things all vote for, are meaningful for you as part owner or owner of this, for the long-term.
So, linking it back to the essence, whether that's a kind of business purpose for what you're doing, and that kind of, I guess, common sense or common English version of understanding that is often missing, and so you end up just voting on sort of Legal-Ease points about getting the longer-term...
Putting it into context...
Putting it into context and then, potentially, those aspects of the things, which are hard to measure, but you know important to the company, can then be woven into the narrative of saying, and we feel either by this metric or of this thing, we are then hinting at our larger purpose or this is how we please our customers, or this is our strength in innovation and brand.
Yeah, if you talk to the leaders of these businesses and ask them what's really important, a lot of them will tell you it's their strategy, it's their corporate culture, it's their human capital. You don't see that in the proxy statement. No, that's... I think that says it all, right?
Alright, we'll wrap it up, there, thanks for sharing your thoughts with us. Will you please come back and give us a post-mortem in a few weeks' time?
Brilliant. In the spirit of continuous improvement, we welcome all feedback. You can reach us with your thoughts at rbcgampodcasts, that's all one word, @rbc.com. Speak soon.