As COVID-19 shines a spotlight on how companies manage risks and opportunities in a time of crisis, the market is recognizing how ESG permeates all reaches of value creation. Leaders are increasingly aware of the long-term implications of stakeholder capitalism and are doubling down on integrating their corporate purpose into tangible everyday activities. For many companies, these actions simply constitute good business. Investors, however, are delving into these behaviors as indications of resilient, industry-leading enterprises that will thrive well beyond this crisis and create “shared value”.
Amidst this change and adaptation, proxy season is marching forward, albeit in virtual meetings and at a different cadence than usual. In this Proxy Season 2020 Intermission Report, SGP highlights some of the latest trends as we head into the peak of the US proxy season. Please reach out to the team at SGP if you’d like to discuss any of these topics in more detail.
Communication with Investors: How do investors want to engage with issuers, and what options are available to issuers given the widespread dislocation of people and work settings?
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Engagement: Investors are still engaging with issuers; however, as you’d expect, investors are using their time selectively and dialogue is very focused. While investors understand that directors may not be available given the pressing issues they face in the boardroom, they still want to hear from someone who is well versed in board matters, and they may request an engagement with an independent director during the off-season. If investor engagement is a priority (and it should be), make sure your investors know it will remain one. And importantly, know your audience; each investor has unique areas of focus, and a firm-specific set of principles to uphold. This is particularly important given the time constraints all parties are operating under.
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Disclosure: Given the constraints imposed by the crisis, written disclosure may be a company’s best communication option. A comprehensive, well-organized proxy statement is always the first best option; we’ve seen many public companies use innovative ways to communicate through their proxy statement. Increasingly, investors are able to learn not just about traditional governance topics, but also about how a company’s ESG strategy supports its long-term business strategy. We are seeing this kind of decision useful proxy disclosure from mega cap companies like Coca-Cola to mid-cap companies like Regions Financial. Outside of the proxy, companies can provide more pointed updates by issuing an 8-K, and/or producing additional proxy materials. In addition, Glass Lewis has introduced a transparent recommendation review process called the “Report Feedback Statement (RFS)”, which is another communication opportunity for shareholder meetings. Whatever the format, enhanced disclosure can provide much-needed transparency, particularly in the absence of direct engagement.
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Quarterly calls: This year, quarterly earnings calls are increasingly a forum for discussing a company’s ESG strategy. In fact, the SEC recently issued guidance calling on companies to provide detailed information on the impacts of the COVID-19 crisis in their upcoming earnings calls, including information relating to their efforts to protect the health and well-being of their employees and customers. At a recent meeting of the SEC’s Investor Advisory Committee, one committee member noted that the pandemic has been a “wake-up call” as to why ESG disclosures are relevant, and a number of committee members pointed to the need for better human capital disclosure from companies. This is important: how issuers frame these ESG-related discussions today can set the stage for quarterly calls going forward. Consider this season an opportunity to refocus on the long term. Investors are paying attention.
Voting Trends and Expectations: In addition to typical topics like board composition, executive pay, and shareholder proposals, what ballot items are in focus for 2020, and will investors evaluate them differently this season?
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Compensation: While shareholder voting on 2020 executive compensation will technically take place in 2021, investors are interested right now in learning about how the compensation committee and management team are responding to the many dislocations created by this pandemic, particularly in instances where layoffs may be required. Companies should not expect investors to give them a ‘pass’ on this year’s Say-on-Pay vote if historical compensation concerns persist, or if the management team’s experience is not aligned with those of its shareholders and employees. Compensation committees should think as flexibly about remuneration as the board is thinking about the wide range of issues impacted by the crisis.
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Shareholder proposals: While shareholder proposals on environmental and social issues have seen growing shareholder support in recent years, what is perhaps most notable this year is how few proposals will actually go to a vote. There are a couple key drivers for this. For one, companies have been more willing to settle with proponents as they have heard from more and more large institutional shareholders that E&S issues are an investment consideration. At the same time, the SEC has exhibited an increased willingness to permit companies to exclude proposals that have gone to a vote in prior years, such as those seeking reports on whether a company’s strategy aligns with the climate goals of the Paris Agreement. Regardless of the total number of proposals that are voted upon this year, all companies should be mindful that investor focus on ESG is not going away, and is not limited to a handful of investors (as seen in the recent passage of a climate change-related proposal at J.B. Hunt Transport, despite Blackrock’s vote against the proposal).
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Poison pills: Popularity of shareholder rights plans, or “poison pills”, has waned significantly in recent years. In light of the recent market dislocation, however, we’ve seen many companies either enact or ’put on the shelf’ some version of a rights plan. We expect proxy advisors and investors will be understanding of measures to protect a company against opportunistic attempts for control, within reason. Existing ISS guidelines provide the flexibility to greenlight a rights plan that is reasonable, taking a case-by-case approach to plans with under one year’s duration. Similarly, the voting guidelines of major institutional investors – including the “Big Three” of Blackrock, Vanguard, and State Street Global Advisors (SSGA) – provide some leniency to support reasonable, context-driven pills even while generally viewing pills through a skeptical lens. While these perspectives make room for companies to address the potential threats of the market pullback, we recommend that boards contemplating a rights plan consider the plan as situational. The crisis does not automatically provide cover for an opportunistic poison pill without further explanation, as evidenced by ISS’s recent recommendation against The Williams Companies’ rights plan proposal.
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Director overboarding: Directors’ time commitments have garnered considerable attention in recent years, and the crisis has brought forth many examples in which board service quickly demands a significant amount of a director’s time. We expect investors will generally stand by their ‘overboarding’ policies, and some (such as SSGA, Alliance Bernstein, and T. Rowe Price) have recently tightened their standards to further restrict the number of boards a director should sit upon. However, we also expect investors and proxy advisors will have interest in the continuity of the board given the important role directors play. In fact, ISS has made clear in COVID-19 policy guidance that its existing overboarding policy provides flexibility for additional board discretion under these unique circumstances, and Vanguard’s updated guidelines this year suggest flexibility to consider company-specific circumstances.
Post-season: We’re hearing that investors remain focused on long-term ESG issues, but have their priorities evolved as a result of this crisis?
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Human Capital: Amidst the crisis, workforce issues are very much in the spotlight, and we provide greater detail on this important topic in our separate insight “Human Capital, Front & Center”. Whereas the “S” issues under the ESG umbrella had often focused on culture and diversity, today we are seeing much more emphasis on employee safety, the handling of layoffs, and employee engagement during and post this dislocation. Investors are asking issuers questions on a wide range of “HCM” topics, such as: where layoffs are concerned, how are companies working to ensure the remaining workforce remains engaged, and the supply of labor can be replenished and re-trained when revenues are restored? Where workers are onsite, how is their health and safety being managed and monitored? Where workers are offsite, what types of support programs are in place to ensure that they are able to deliver work product safely and effectively? Going forward, we expect the human capital management agenda will broaden to encompass these items while continuing to focus on diversity and culture.
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Capital allocation in a post-crisis environment: While capital allocation has historically been an important topic for investors to explore with directors and management teams, the COVID-19 crisis is a balance sheet risk management case study in real time. Investors are looking to understand how companies are managing liquidity and financial risk, and whether the crisis will impact process and objectives over the long term. They are also interested in learning how the company will be positioned to thrive in a post-crisis supply-demand paradigm. While these topics are technically financial and corporate strategy concerns, their integration with stakeholder concerns has never been more pronounced, given the array of potential tradeoffs to consider: employee layoffs vs. reductions to working capital, investments in relief efforts vs. higher short-term profit margins, and more.
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Climate: While there has been much discussion of the “S” issues unearthed by the crisis, investor interest in the “E” remains a priority. In fact, some have suggested that this is an abrupt and extreme test case for longer-term adaptation to climate change. At a minimum, many investors are interested in hearing about how companies are thinking about changes made to support social distancing – curtailing travel significantly, embedding newfound flexibility in communications frameworks – and to what extent some of those environmentally friendly practices might be harnessed longer-term in order to reduce carbon footprints. More broadly, companies should expect that investors will double-down on their prior commitments to climate oversight, seeing the post-crisis world as, in the recent words of Larry Fink of Blackrock, “an opportunity to accelerate into a more sustainable world.”
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Cybersecurity: Investors want to know how boards and management teams are overseeing the risks introduced by a widespread shift to an employee base that is working from home. From confidential video calls to assuring that transactions are secure, companies are having to manage new and different cybersecurity risks, at scale. Audit committee and broader board oversight of these risks is imperative.
Events of 2020 to-date have been described using terms like “black swan” and “six sigma.” These are fitting descriptors for the historic health and economic crisis underway, although perhaps what is most interesting about the proxy voting and ESG space is that not that much has changed. While investor focus has shifted to lean into some of the front-and-center issues outlined above, investors nonetheless remain focused on the material ESG risks and opportunities that will drive long-term value creation. We will continue to provide perspectives and insights on these issues as the proxy season and year rolls on.
SGP is an independent, practitioner-driven team of leading investor experts on corporate governance and ESG (environmental, social, and governance) strategy. Established in 2020, SGP brings over 50 years of experience at the largest passive and active asset management firms in the world, including expertise in proxy voting, company engagement, activism, company disclosure, and portfolio management. The firm’s partners bring multi-disciplinary backgrounds and a client-centric mindset, which enables them to create bespoke solutions for their clients.
To learn more about SGP, please visit our website at sgpgoverance.com or contact us directly by phone (215-273-9731) or email contact@sgpgovernance.com.
