At Tesco's annual general meeting (AGM) on Friday June 26, 2020, two-thirds of the shareholders voted against the resolution to approve the Directors' 2019 remuneration report. As mentioned in the previous article published by CGLytics earlier this month, this decision was mainly due to Tesco's remuneration committee inflating executive bonuses by removing Ocado's stock price from the peer group used to estimate its performance. In addition to this, Glass Lewis' decision to advise investors to vote against Tesco's remuneration report had substantial influence over the final results.

For the record, the exclusion of Ocado from Tesco's peer group, whose stock has increased dramatically in the recent years, led to an outperformance by 3.3% of Tesco's Total Shareholder Return (TSR) against its peer group instead of an underperformance by 4.2% in the case of Tesco keeping Ocado in the peer group.

If Tesco's TSR was below its peer group index, the TSR metric, which is weighted at 0.5 of the 2017 Performance Share Plan (PSP), would have been zero. As a result, this boosted the payments to the CEO and CFO by approximately GBP 1.6 million and GBP 0.87 million, respectively.

Click here for more details about Tesco's shareholder revolt prior to their AGM.

Tesco announced its AGM results1 stating that:

"we recognise, however, that a significant number of shareholders had concerns with the principle of the Committee's adjustment to the TSR comparator group".

Moreover Tesco added that:

"following recent engagement on our Remuneration Report with a number of our larger shareholders, we have been reassured that the majority agree that the overall outcome of the 2017 PSP award is proportionate given the outstanding turnaround delivered by management".

For now, the vote on directors' remuneration report was not legally binding, meaning it is only advisory. Bonuses paid to the executives will still be paid out. On the other hand, the huge percentage of votes against the directors' remuneration report (67.29%) is the largest pay revolt in Tesco's history in the last decade.

We have seen that shareholder activism was used through Say on Pay at Tesco's latest AGM, which means that in the future if the company is not transparent with its investors, investors will not hesitate to raise their voice against any decision they consider inappropriate or gullible.

Using data and analytics found in the CGLytics software platform, companies, investors, proxy advisors and service providers efficiently analyze and spot governance risks and red flags in seconds.

If Tesco understood how they were perceived by proxy advisor Glass Lewis prior to the proxy season and their AGM, they could have prepared adequately and avoided negative votes.

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Originally published by CGLytics, June 2020

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