In a comprehensive study, hkp/// group and Ipreo have analyzed the ownership structure of DAX-listed companies and worked out how different investors and proxy advisors act in relation to management board remuneration and what kind of basic patterns can be identified. Michael H. Kramarsch, Managing Partner hkp/// group, and Andreas Posavac, Managing Director Ipreo, give a glimpse of the key findings.
Mr. Kramarsch, in your view, what are the most surprising results of your analysis?
Michael H. Kramarsch: Our analysis shows that investor behavior has become much more unpredictable with regard to management board pay. Companies can no longer expect the remuneration policy for their top executives to be simply nodded through in say-on-pay vote at the annual meeting. And it does not make any difference whether the policy is identical to the previous year, or whether there is an anchor investor etc. Uncertainty is the only thing that is certain these days.
Mr. Posavac, what has surprised you regarding the investor landscape in Germany’s top listed companies?
Andreas Posavac: We constantly keep an eye on investor activity and have noticed a significant global shift towards passively managed investments for some time, towards ever shorter engagement periods in investments, as well as towards heightened levels of sensitivity in matters of corporate governance and corporate social responsibility, the so-called ESG criteria.
Is this trend also noticeable among DAX companies?
Andreas Posavac: The top 30 global investors own large shares of DAX companies – and these investors are mainly engaged in passive investments, in particular Norges Bank, BlackRock (as a group) and Vanguard. Generally, German investors are also showing signs of heightened ESG sensitivity.
But passive investment does not mean passivity when it comes to communicating with issuers?
Andreas Posavac: No, the contrary seems to be true. The major investors are more active than ever. This is ultimately due to the character of passive investments. Investors are technically tied down to an index and cannot simply exit. If they want to assert themselves, they have to proactively engage with the company. Our study shows that they do just that.
Michael H. Kramarsch: The trend towards passive investment means that companies need to change their investor relations. The key target group within the investment houses is not anymore exclusively the investment team but rather the Corporate Governance or ESG team – or whoever wears the respective hat.
During the last AGM season, this was particularly felt by those companies who put their management board remuneration policies to a say-on-pay vote.
Michael H. Kramarsch: A total of eight DAX companies presented their remuneration policies during the 2017 annual meeting season, and three of those say-on-pay proposals were rejected, namely Merck, Munich Re and ProSiebenSat.1 Group. If you exclude anchor investors and only look at the free float, more than half of the compensation votes would have been rejected.
Does that mean that remuneration policies have gotten worse?
Michael H. Kramarsch: No, we are seeing the opposite. Often these arguments are also about other issues. Investors have discovered that they can use the “say-on-pay” vote as a gateway to exert massive influence on decisions in completely different and unrelated areas, such as the composition of the supervisory board. This lever should not be underestimated.
Andreas Posavac: You also need to take into consideration the fact that more attention is paid to issues of remuneration, impartiality etc. in Germany, unlike in countries such as the UK or the Netherlands. This is reflected in the activities of investors and proxy advisors.
Which part do proxy advisors have in this development?
Michael H. Kramarsch: They are basically key players in the market, and they have been acting more critically over the past years. We do need competent and high performing proxy advisors, but in a significantly different form than today.
... as has been seen in the example of Munich Re.
Michael H. Kramarsch: They are the only company that has voluntarily presented their unchanged management board remuneration policy to the annual meeting for a vote every single year since 2011. The leading proxy advisors, ISS and Glass Lewis, gave them positive feedback in 2016. One year later, both proxy firms voted against the identical policy – with the argument that guidelines had changed and instructions had been already issued.
To what extent do investors follow the recommendations of proxy advisors?
Andreas Posavac: Our study shows that 44% of the 30 top investors actually follow the recommendations of proxy advisors in their voting behavior. That means ISS and Glass Lewis determine the mainstream in voting behavior, with the effect being even stronger among smaller investors.
That sounds like a lot.
Andreas Posavac: Yes and no. Nowadays, major investors have set up their own governance teams to consider the relevant issues critically and in detail, and pay specific attention to local conditions. These investors will take note of proxy advisors’ recommendations but will ultimately make their own decisions, which may or may not be the same as those of the proxy advisors.
Did your study reveal how each of the major investors voted?
Michael H. Kramarsch: Unfortunately, there is no way this can be done systematically, neither for the companies themselves. There are considerable transparency gaps about actual voting behavior. We need a “Stewardship Code” for investors and proxy advisors which includes clear transparency rules on voting behavior.
Do smaller investors simply not have the capacity to look at the relevant ESG issues in depth?
Michael H. Kramarsch: That is a major reason. However, our study has shown that proxy advisors cannot reflect local factors because of their global approach. To be fair, there has been some movement in the market in this respect. But with the current resources at the disposal of the leading proxy advisors in the German market, their research and engagement processes cannot adequately cover the DAX, let alone smaller companies, when it comes to detailed qualitative decisions like those on remuneration policies.
What should companies do to get both investors and proxy advisors on board with their remuneration policies?
Andreas Posavac: Not only get in touch with the relevant representatives of the investors and with proxy advisors, but ideally establish a constant dialog. If you only knock on the door a month before the AGM, you are unlikely to get hold of anyone and will certainly not be able to change people’s minds to your advantage.
Michael H. Kramarsch: Remuneration must also be much better presented in annual reports, especially the correlation between board pay and company performance. This implies that we have to move away from an auditor or accountant perspective, which is currently dominant in Germany, when communicating information about management board pay. Only the information required by law is mandatory. But that should not stop anyone from presenting meaningful information in an appropriate logical structure and in such a way that it can also be understood by everybody. (Grinning) Some very audacious souls even try diagrams...

Mr. Posavac, Mr. Kramarsch, thank you very much!
* Photo by Floriane Vita on Unsplash