AIM & remuneration disclosure: still room for improvement

Unlike their main market peers, AIM companies are not obliged to follow the detailed legislation surrounding executive pay practice. After AIM Rule 26 was changed in March 2018, they now just have to disclose which governance code they follow. For many, that will be the QCA Governance Code. While cynics often suggest that increased levels of disclosure are simply evidence of a tick-box culture, QCA’s CEO, Tim Ward, points out: “it is important to recognise that shareholders need to be able to see what you are doing.  It is not enough to do it, it’s the way that you disclose actions that matters….box-ticking is a good thing if you do it at the right time”

Benchmark Holdings (LON:BMK), which holds its 2019 AGM on 12 March 2019, is a useful example of the AIM reporting gap and serves to illustrate how far AIM companies have to travel on their transparency journey. The company is proposing significant changes to its remuneration strategy; unfortunately for shareholders, it’s not as clear as it could be to see what is going on.

Members of the Operational Board (including the executive directors) and managers are set to be granted market value share options in 2019 after no awards were granted in 2018. The grants are one-off awards ahead of a new scheme which will be implemented from 2020. The committee states the awards will be made at “levels comparable to peers” and their purpose is “retention and focus on increasing shareholder value”. The awards will vest after three years subject only to continued employment with no formal performance conditions attached.

Although the share schemes have an individual aggregate cap of 200% of salary per annum, disappointingly for shareholders, the Committee has not disclosed the value of the awards in the annual report.

So, what do we know? Shortly after the publication of the 2018 annual results, incoming Chief Scientific officer Alex Raeber was granted 400,000 market value share options as consideration for forfeited pay from his previous employer. Raeber is also set to receive a one-off option grant in 2019 in addition to the buyout award.

The annual bonus is capped at 100% of salary and was measured 50/50 on financial and non-financial performance metrics during the year. For 2019 the Remuneration Committee tells us that there will be a re-balancing of the performance measures to a 60/40 split, with an increased focus on financial performance in order to “create greater alignment with the Company’s new five-year strategic plan”.

Disappointingly, shareholders are in the dark about the operation of the bonus due to a lack of expected disclosures. The Committee exercises discretion to evaluate performance and has determined that bonuses of 64.5% of salary would be payable to the executives for the year. However, no individual targets or outcomes have been disclosed, just that for financial metrics, a target range is considered, while the non-financial metrics are assessed on a qualitative basis. The company also leaves shareholders wondering about whether there are any claw-back or shareholding provisions in place.

In terms of better governance structures, institutional investors generally prefer to see key committees comprised solely of demonstrably independent NEDs. However, Susan Searle, who is affiliated to 12.45% shareholder Woodford Investment Management, sits on both the Audit and Remuneration Committees. The Board does not have an internal audit function and did not conduct a formal board evaluation, although an explanation has been offered. Lastly, but no means by least the company has not fully disclosed the voting results for previous shareholder meetings.

Non-disclosure of voting results is a systemic problem for AIM companies. Simply telling everyone that “all resolutions were passed on a show of hands” can easily hide a rebellion up to 49.99%. Which is not to suggest that this is the case at Benchmark – although without attending the meeting, which many investors are not able to do we just don’t know. Many AIM shareholders are retail investors locked in pooled nominee accounts and are effectively disenfranchised, which seems to be the case with Benchmark. In the absence of voting results disclosure, perhaps the time has come to abolish show of hands voting and move all votes to fully electronic voting and bypass the proxy system entirely.

The importance of regular and informed dialogue with shareholders can often be overlooked, however better disclosure as a backdrop to dialogue would be a good place to start. Disclosure is not expensive, nor is advice to remuneration committees – the QCA’s Remuneration Guidelines are modestly priced at £55 for non-members. What is expensive is losing the trust of shareholders and unnecessary regulatory intervention.

Minerva has been covering AIM companies since their first AGMs in 1996. Find out more: hello@minerva.info

Last Updated: 11 March 2019