The Advisors' Blog

– Lynn Jokela

Over on the “Proxy Season Blog” for TheCorporateCounsel.net members, I blogged about Legal & General’s 2020 “Active Ownership Report“.  The report summarizes the asset manager’s 2020 engagement and voting actions.  It’s clear from the report that Legal & General has a strong focus on climate (it was the asset manager’s most frequent engagement topic) but among other topics, the report also touches on human capital and executive pay.

Human capital: Legal & General likely wants the SEC to make the rule more prescriptive.  In the report, Legal & General said the new Regulation S-K rule requiring human capital disclosures is a “first step in transforming corporate disclosure to recognize the critical role of human capital in corporate value creation. However, there is still too much room for cherry-picking data and metrics.”

Executive Pay: In 2020 Legal & General increased executive pay engagements by 51%.  With that, Legal & General still voted against 54% of say on pay management resolutions at North American companies, which seems like a lot!  The report cites the primary driver of these “against” votes being related to either performance conditions not being measured over a three-year period or at least 50% of long-term incentives not being linked to any performance conditions at all.

This excerpt from the report provides further information about the asset manager’s view on retrospective changes to performance targets, which it generally doesn’t support:

A number of companies fell short of our expectations when they retrospectively changed metrics or targets that did not yield the performance needed for awards to vest.

For example, a retail company received shareholder dissent on the adoption of its remuneration report from 67.29% of votes cast. The investor backlash followed the company’s retrospective amendment of its Long-Term Incentive Plan by removing a strongly performing peer from the total shareholder return peer group, citing a change in the peer company business strategy that made it no longer comparable. We disagreed with the company’s decision and voted against the resolution.

Many other companies used the pandemic as justification for poorer-than-expected performance, applying discretion to allow for director bonuses to vest despite pre-set targets not having been met or providing for additional payouts after the fact to compensate for lost remuneration. Another company received investor pushback on a substantial discretionary one-off bonus to its CFO for work that led to securing approvals from the Israeli tax authority on certain advantageous tax treatments. We engaged with both companies prior to their AGM to communicate our concerns clearly, and in the case of latter company the resolution to ratify the additional bonus was withdrawn.