Challenges for listed companies in 2023 proxy season

Georgeson and Cuatrecasas have published what is now the now twelfth edition of Corporate Governance and Institutional Investors: Preparing for the 2023 Proxy Season to help Spanish listed companies to prepare for their next general meeting of shareholders. The guide contains a detailed and exhaustive analysis of the behavior, during the last proxy season, of foreign institutional investors and proxy advisors in relation to the IBEX 35 companies and the top 40 companies in the Spanish continuous market (“Top 40 companies”).

Participation in the IBEX 35 shareholders meetings has not recovered to pre-pandemic levels (the average quorum was 71.13% in 2022 and 72.48% in 2019) while there is an upward trend in the Top 40 companies (the average quorum was 70.34% in 2022 and 69.39% in 2019). One of the reasons for this difference is the different capital structure of the companies listed on these markets. Foreign investment is greater in the IBEX 35 companies, which have also seen an increase in the participation of sovereign funds; the latter do not usually vote in proxy sessions. These figures contrast with the increased voting activity of the domestic—mainly institutional—investors in the 2022 proxy season.

Generally speaking, opposition has declined proportionately in all proxy sessions of IBEX 35 and Top 40 companies. In particular, in IBEX 35 a total of 65 proposals obtained over 10% opposition in 2022, a decrease compared to the previous year (75 proposals in 2021). In the Top 40 companies, the numbers have remained steady, with a total of 70 proposals that they received in 2022 over 10% opposition, compared to the 71 proposals of the previous year.

Again this year, the proposals involving executive compensation were those that received the most dissenting votes (39% of them obtained over 10% of votes against). The main reasons that have led institutional investors not to support the compensation proposals are: (a) a lack of alignment with the shareholders’ long-term interests; (b) a lack of coherence between corporate results and executive compensation; (c) the existence of long-term incentive plans that are not aligned with market demand; (d) a lack of transparency in disclosing weighted metrics and compliance levels; (e) a lack of response by the board to the high levels of dissent over compensation matters in previous fiscal years; and (f) a lack of clarity with executive contract conditions (e.g., reimbursement clauses, payments for contract termination, and shareholding policies).

The number of proposals on this subject with over 10% dissenting votes increases compared to the previous year in IBEX 35: 23 proposals in 2022 compared to 18 in 2021. They do however represent 14% over the total of proposals presented in 2022, lower than the 15% obtained in 2021.

The increase in the number of proposals with over 10% dissenting votes is greater in the Top 40 companies: 29 proposals in 2022 compared to 8 in 2021, which represents 23% over the total of proposals presented in 2022 compared to the 10% in 2021.

The average percentage of dissenting votes in capital increase proposals has dropped considerably in both IBEX 35 and Top 40 companies. While in the Top 40 companies only 3 out of a total of 26 presented proposals obtained a dissenting vote of over 10%, in IBEX 35 it was 6 proposals from a total of 38.

With regard to the structure of the board of directors, the key aspects for institutional investors and proxy advisors are still traditional matters of corporate governance, with an ever more demanding approach to independence, responsibility and diversity.

The most independent boards of directors have: (a) separate positions of chair and CEO, (b) an independent chair, (c) a lead independent director, and (d) complete independence in the key areas of auditing, appointments and compensation.

In September 2022, 8 of the IBEX 35 companies studied had unified the positions of chair and CEO compared to 6 of the previous year. In IBEX 35, over half of company chairs are CEOs (53%) and only 12% of the chairs are independent directors. In the Top 40 companies—as revealed in previous years—the number of companies with a joint position of chair and CEO totals 11, more than in the IBEX 35 companies.

During the 2022 proxy season, independent directors obtained the highest level of votes in favor in both the IBEX 35 companies (a 96.39% average support level) and in Top 40 companies (a 98.01% average support level). In the IBEX 35 companies, the number of independent directors has remained stable compared to 2021, moving from 239 independent directors in 2021 to 235 in 2002. The situation in the Top 40 companies is similar: the number of independent directors went from 171 in 2021 to 175 in 2022.

Institutional investors and proxy advisors are ever more demanding about the diversity of board composition—understood in the widest sense of the term—to include diversity of gender, ethnicity, range of knowledge and experience, age and geographical environment. According to the Seventh Study conducted by WomenCEO on Gender Diversity in Boards of Directors and Management Committees (December 2022), 16 IBEX 35 companies reached the threshold of 40% of women on the board of directors, as recommended by the Spanish Corporate Governance Code for listed companies.

As for senior management, the same study states that—although the trend is slightly increasing in recent years—companies need to make greater effort, bearing in mind that as of December 2022, only five IBEX 35 companies had over 40% women on their management committees.

2023 challenges: the growing importance of ESG and correct attention to shareholders’ demands

The upcoming proxy season brings up questions again such as: (a) the remuneration of directors; (b) promotion of gender diversity, drawing attention to the recently approved EU directive that imposes mandatory quotas for the first time to increase the numbers of women on the boards of directors of listed companies, before June 30, 2026 [Cuatrecasas Legal Update]; (c) the importance of preparing and publishing a competency matrix for the board of directors; and (d) a board succession plan. The following new challenges are particularly important:

(a) The importance of companies responding and reacting to the demands and concerns raised by shareholders, which should result in the board of directors preparing a plan of action. 

(b) The drive for sustainability in general, and transparency in ESG matters in particular. The quality of ESG information is fundamental to promote sustainable finance, develop sustainable corporate governance, and mitigate the risk of greenwashing and social washing.

Aimed at providing access to reliable and comparable ESG information, the European Union approved the Corporate Sustainability Reporting Directive (CSRD), of December 2022 [Cuatrecasas Legal Update]. This directive, together with the process to homogenize and coordinate the disclosure standards (in the EU and internationally), is enabling progress to be made in matching the disclosure of non-financial information with financial information.

Juan Aguayo, Cuatrecasas partner specializing in Corporate and M&A, notes that “the CSRD—as well as aiming to match financial information and sustainability information over time—imposes common disclosure standards and a single access point where the information will be available. The principle of sustainability is already one of the most important items on the agenda for boards of directors as it has implications that will mark an important change for companies, far beyond reporting obligations. We are seeing that access to financing is conditioned by sustainability, and that the M&A market is led by players—both fund managers and industries—whose investment strategy includes monitoring ESG criteria, which has been incorporated naturally into the due diligence processes. And we can foresee legal disputes over non-compliance with mandatory ESG regulations, including cases of shareholder activism. Companies are adjusting to this reality.”

Lawyer Roger Freixes, specializing in Corporate and Capital Markets, underlines that “the CSRD and the homogenization of disclosure standards on sustainability information are key for the transition to a more sustainable economy. Clearer, more objective and comparable information makes it easier for investors to identify sustainable projects, correctly assess them and channel funds reasonably. It also makes it harder to get away with greenwashing and facilitates the control of business conduct in the supply chains. Finally, we recommend that companies analyze their strategies in this area and implement monitoring and non-financial risk mitigation measures to avoid possible liabilities and legal claims.”