The AGM dilemma: Better late than never?


Published May 08, 2016

First published in Business Times on 6 May, 2016

By Mak Yuen Teen and Chew Yi Hong

LAST week was another exciting week in Singapore and we are not talking about the opening of the latest Captain America movie. We are of course talking about the busiest week of the year for annual general meetings (AGMs), a week that would have required almost superhuman qualities of shareholders (and some directors) to cope. Like the expected arrival of the latest superhero movie in the last week of April here in the coming years, this “hot April” meeting period is not going away anytime soon – if we do not seriously consider taking steps to address it.

In our second report on shareholder meetings in Singapore titled The Singapore Report on Shareholder Meetings: Shareholders Awaken? published last month, our first recommendation was that our regulators should consider having a public consultation with investors, issuers and other stakeholders on whether to allow AGMs to be held within five months after the financial year-end, rather than the current four months.

This follows our first report in 2015 where we examined clustering of AGMs in a number of Asia-Pacific and global markets and concluded that the clustering of year-ends together with the deadline for holding AGMs after the year-end are important contributors to the clustering of AGMs. Of the G-7 countries of Canada, France, Germany, Italy, Japan, the UK and the United States, only Japan with a three-month deadline has a shorter AGM deadline than Singapore.

Most Japanese companies have a March financial year-end and 75 per cent of Japanese companies reportedly hold their AGMs in the last week of June. Italy has a deadline of four months that can be extended to six months if shareholders approve, while all the other countries have a deadline of six months or more. For other Asia-Pacific countries, South Korea has a shorter deadline of three months, Thailand has the same deadline of four months, Australia allows five months, while China, Hong Kong and Malaysia allow six months. In South Korea and Thailand, where most companies have December financial year-ends, there is severe clustering of AGMs in March and April respectively.

Singapore moved from a six-month deadline to a four-month deadline for listed issuers for financial years commencing on or after Jan 1, 2003, following the recommendation of the Report of the Disclosure and Accounting Standards Committee (DASC) in 2001. Looking at the legislative history of the Companies Act, the initial amendment to the Act actually specified a five-month deadline, but this was changed to a four-month deadline in the final amendment in line with the DASC recommendation.

The DASC made many excellent recommendations that have significantly transformed disclosure and accounting standards here, including quarterly reporting, convergence with international financial reporting standards and auditor independence. However, it may be worthwhile revisiting the four-month AGM deadline in the light of how this may have aggravated the clustering of AGMs. We think there are good reasons to consider allowing issuers an extra month to hold the AGM.

To give a sense of when UK and US companies tend to hold their AGMs, we looked at the most recent AGM dates of 20 UK and 20 US companies. To get a mixture of large and smaller companies, we picked the 10 largest FTSE 100 and 10 smallest FTSE 250 companies in UK and the 10 largest and 10 smallest Fortune 500 companies in US. For the 20 UK companies, nine held their AGMs within four months, with seven being large companies and two being the smaller companies. For the 20 US companies, only five held their AGMs within four months, with two being large companies and three being the smaller ones. Well-known companies that held their AGMs in the fifth month after their year-end include Apple, ExxonMobil, Ford Motor, General Motors and Walmart.

THE SITUATION IN SINGAPORE

While the clustering of AGMs in Singapore in the last five business days in the peak months of April, July and October has improved slightly since 2012 or 2013, the improvement has been marginal. With a four-month AGM deadline, the situation is unlikely to improve significantly in the future.

Based on 2015 AGMs that were held in April, even if we were to spread out those AGMs evenly over the entire month of April, we are still talking about nearly 110 AGMs per week, or about 22 meetings a day. For an issuer with a December year-end, the full-year results have to be announced within 60 days (that is, by the last day of February or the first day of March). By that time, the audit is likely to be substantially but not necessarily fully completed for many issuers. If the issuer aims to hold the meeting at the beginning of April, the notice of meeting (and annual report) will have to be issued by mid-March – about two weeks after the results announcement. Even if some issuers can pull all that off, the problem of clustering is at best half-solved.

Let’s first consider the arguments against moving to a five-month deadline in Singapore.

Reduced timeliness of AGMs

The clearest argument against a longer AGM deadline is that this will reduce the timeliness of AGMs. But how much is a one-month difference going to make to timeliness and, more importantly, to how shareholder-friendly our market is perceived to be?

Ten years ago, the Asian Corporate Governance Association (ACGA) published a proxy voting survey covering 11 Asian markets (including Singapore) and three other benchmark markets of Australia, UK and US.

The survey identified 10 impediments to proxy voting from the institutional investors’ viewpoint. Lack of timeliness of AGMs did not emerge as an impediment even though, of the 11 Asian markets covered, only Japan, South Korea and Thailand have AGM deadlines that are the same or shorter than Singapore, while the other Asian markets and the three benchmark markets all have longer AGM deadlines. Hong Kong emerged as the “clear leader” in terms of having fewer impediments to proxy voting, even though it has a six-month AGM deadline.

At least three of the impediments identified in the survey are at least partly a function of a shorter AGM deadline – notice of meeting, time to vote before meeting, and clustering of meeting dates. In 2015, average days’ of notice for Singapore AGMs was 17.4 days, compared to the global best practice of 28 days cited in the ACGA report. If issuers want to send their full notice together with the annual report and any necessary circular 28 days before the four-month AGM deadline, they will have to do so by around the end of the third month. This will create considerable pressure on other upstream activities such as audit, review of the annual report by the audit committee and board, and printing of the annual report and circular.

Although Singapore still came out second (to Hong Kong) on the first two factors of notice of meeting and time to vote in the ACGA survey, it came eighth on clustering of meeting dates. Japan and South Korea came out at or near the bottom for all three factors – and they have a three-month deadline.

Of course, the cynic may argue that institutional investors generally do not depend on timely AGMs to engage with companies as they can have private meetings. In Singapore, retail investors constitute an important group of investors. But what’s the point of more timely AGMs if few shareholders, including retail shareholders, can attend?

On April 28 this year, the first author attended one AGM that had no more than about 30 shareholders present. In fact, one of the directors at that AGM also sit on the board of two other issuers that were holding their AGMs the same day. Meanwhile, the second author had several AGMs to choose from for April 28 and decided to attend the DBS AGM so that he could stay for an hour and then leave early to attend the AGM of Jardine Cycle & Carriage that was being held nearby.

There are of course other ways to ease the clustering of AGMs without extending the AGM deadline. For example, issuers can change their financial year-ends or regulators can require new listings to have a financial year-end other than December. How many issuers will be prepared to change their financial year-ends? Regulators will be hard-pressed to justify compelling issuers to change year-ends or select particular year-ends.

Another possibility is for regulators to impose quotas on number of AGMs per day. Even if they are prepared to do so, how much can regulators realistically compel issuers to hold their AGMs earlier with a four-month deadline? As mentioned earlier, even if we spread out the April AGMs evenly over the entire month of April, we are still talking about nearly 110 AGMs per week.

With the audit crunch in the first couple of months of the year for issuers with December year-ends, the time needed for the audit committee and board to review and approve the annual report and for the printing of the report, and the need to send out the notice of meeting and annual report at least 14 days ahead of the AGM, some issuers will face genuine difficulty in holding their AGMs before the last two weeks of April. Therefore, we can expect that most April AGMs will continue to be held in those two weeks with the four-month deadline.

Some retail investors are against delaying AGMs because this may delay the payment of dividends. In 2015, about 40 per cent of issuers that revealed their detailed poll voting results in our study had a resolution for shareholders to approve a final dividend. We know some retail investors do rely on dividends so we do not want to trivialise a delay in dividends but how critical is a one-month delay in this regard? One mitigating factor is that Reits, which is a common class of investment for those seeking regular income from dividends, conduct their AGMs relatively early and pay out semi-annually and/or quarterly.

From a legal standpoint, who approves the final dividend is a matter for the articles of association, so it is possible for issuers to provide in their articles that the directors approve the final dividend (as they already do for interim dividends). Some issuers declare more than one interim dividend without any final dividend, removing the need for shareholders’ approval. The delay in dividend payments can also be partly addressed if issuer start paying interim dividends, or if they already do so, balance out the interim and final dividends more evenly.

A retrograde step

Another argument against extending the AGM deadline is that this would be seen as a retrograde step and would reflect negatively on Singapore. We think that stakeholders should be prepared to reconsider prior decisions in the light of new information and developments. As long as the rationale for doing so is sound and the benefits and disadvantages that will come from relaxing the AGM deadline are considered and debated, we do not think a resulting decision to extend the AGM deadline by a month will be seen as a retrograde step. This is especially so given that we will still have AGMs which are just as timely or timelier than most other markets. The international community can hardly criticise us if we still have AGMs that are just as timely as them after the change. If this allows issuers to give longer notice of meetings and global institutional investors more time to vote, they may even welcome it.

Let’s now consider the arguments for extending the AGM deadline.

Reducing the clustering

First, while it may be unreasonable for regulators to impose quotas on number of AGMs per day with the current four-month deadline – and as mentioned earlier, this is unlikely to make much of a dent on the clustering anyway – it is likely to be more palatable to issuers if regulators impose quotas and give issuers more time to hold AGMs. For instance, with a five-month deadline, they can impose a quota of say no more than 70 AGMs a week and no more than 15 per day, which would be a considerable improvement over the current situation.

Improving the quality of financial reporting and audit

Second, with financial reporting standards today being far more complex than when the AGM deadline was shortened from six to four months, there is a possibility that financial reporting and audit quality may have been compromised. The International Auditing and Assurance Standards Board sees tight financial reporting deadlines as a factor impacting the exercise of professional scepticism by external auditors and, therefore, a threat to audit quality. Extending the AGM deadline can also reduce the audit crunch and better smooth out the utilisation of audit resources over the year (including for issuers with March and June year ends, which are the next most common year ends) . . . and perhaps (one can at least hope) ease pressure on audit fees.

Preventive measure against a further increase in clustering

Third, with the introduction of the expanded auditor’s report and the inclusion of the section on key audit matters, more time may be spent on the audit and in discussions between the auditors, audit committee and management before the publication of the report. This may cause even more companies to push their AGM to the very last week, worsening clustering with a four-month deadline. Extending to a five-month deadline can reduce this concern.

Longer notice period

Fourth, with a longer AGM deadline, investors can be given longer notice of the AGM and more time to vote, thereby removing or improving two potential impediments faced by institutional investors. Regulators can even consider imposing a longer notice period on issuers, such as 18 or 21 days, something that would be difficult to do with a tight four-month deadline.

Alignment with sustainability reporting

Fifth, Singapore Exchange, which is introducing sustainability reporting on a “comply or explain” basis, has proposed that such reports be published within five months of the end of the financial year. This is to give issuers more time to prepare their sustainability reports, presumably to avoid putting additional pressure on issuers that may already be struggling with the four-month deadline to prepare their annual report and hold their AGM. Extending the AGM deadline to five months may allow more issuers to issue their sustainability reports together with their annual reports, therefore aligning the timing of the two reports, and give shareholders the opportunity to ask questions about both reports at the same AGM.

Improved shareholder participation

Finally, with a longer AGM deadline and limits on number of AGMs per day, shareholders will have better opportunities to attend AGMs and hold directors accountable. This, to us, is the best thing that can come out of extending the AGM deadline.

Mak Yuen Teen is an associate professor at the NUS Business School where he teaches corporate governance and ethics. Chew Yi Hong is an active investor and has been involved as project manager and researcher in several corporate governance projects in Singapore and the region.

 

 

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