Key Governance Developments - May 2020

Institutional investors see Covid-19 pandemic as litmus test for companies

Many large institutions concerned about the attention to social responsibility and corporate governance of the companies in which they invest are focusing close attention closely on the way businesses are responding to the coronavirus pandemic. They believe that corporate action today in areas such as assisting employees and the wider community, remuneration structures, dividends and other shareholder pay-outs and taxation, as well as whether and how companies use public bailout funding, will play a role in ESG-related investment decisions in the future. Institutional investors have also warned companies not to use the difficult economic climate as an excuse to backslide on long-term commitments to reduce pollution and carbon emissions, although they recognise that in the short-term survival and job preservation are the overriding priorities for many businesses.

Fund managers concerned about listed company executive pay plans

Asset management groups including EdenTree, Schroders and Merian Global Investors are concerned that executive remuneration schemes decided during the coronavirus lockdown could lead to excessive pay-outs when the economy recovers. According to boutique bank Gleacher Shacklock, 50 companies that are part of the UK's FTSE 350 share index have changed their executive pay structures in response to the outbreak, mostly by lowering base salaries or annual bonuses. Institutional adviser Pensions & Investment Research Consultants has urged companies to suspend all remuneration, apart from basic salaries, from April 1 until the end of the financial year.

Best source: Financial Times (subscription required)


Coronavirus response likely to alter governance approach for ESG investors

Morgan Stanley, Barclays and Bank of America analysts argue that ESG investors will change their approach to social responsibility and governance issues as a result of the coronavirus pandemic. They believe that the way in which companies have responded, in areas such as staff and community goodwill, remuneration structures, dividend pay-outs and taxation, will play a bigger role in ESG-related investment decisions in the future.

Best source: Financial Times (subscription required)


Investment managers urge companies to stick to climate change targets

Eight fund management firms, including BNP Paribas Asset Management, DWS and Comgest, have told companies they invest in not to abandon or water down plans to reduce their carbon emissions despite the impact of the coronavirus pandemic. The institutions say they may be willing to allow some flexibility this year because of national lockdowns, but insist that companies do not use the pandemic to avoid fulfilment of long-term commitments.

Best source: Financial Times (subscription required)

US banks set to maintain dividends as European authorities push institutions to retain capital

US banks are likely to maintain dividend payments although European regulators and political authorities are pressuring institutions to suspend pay-outs in order to conserve capital for lending. Leading US banks, which are counting on approval from the Federal Reserve when they submit capital plans this week, argue that suspending dividends would destabilise investors and undermine confidence in the sector. They say the point of capital requirements set up after the global financial crash was to ensure that dividends did not collapse in the event of a fresh crisis arising.

Best source: Financial Times (subscription required)

See also: Wall Street Journal (subscription required)


Neuberger Berman to disclose proxy voting intentions to boost governance transparency

US asset manager Neuberger Berman is to increase its transparency regarding governance policy by giving advance notification of its proxy voting intentions at the annual shareholders' meetings of more than 25 large companies. The fund manager says disclosures could be made public when it intends to vote against directors with too many other positions, or where compensation plans may not foster sound long-term capital allocation. CEO George Walker says shareholders need to engage as owners because, for instance, companies with sustainable practices will be more resilient.

Best source: Funds Europe


Shareholders mobilise against remuneration package for AstraZeneca CEO

The Investment Association's voting advisory service IVIS has placed a high alert on the remuneration policy of AstraZeneca, which will hold its annual shareholders' meeting on April 29. The pharmaceutical company has announced proposals to reduce its pension contributions for CEO Pascal Soriot from 30% of his £1.288m salary to 20%, but not cut it down as far as the average for the group's staff, a priority announced by the fund managers' association last year. Institutional shareholders are also unhappy with the company's proposal to increase the maximum award on Soriot's long-term incentive plan to 550% of salary as well as allowing the board discretion to set his annual bonus.

Best source: Sky News

Corporate management teams revise succession plans

The number of CEOs reporting they have contracted the Covid-19 coronavirus is increasing, including the heads of British Telecom, NBC Universal and Madison Square Garden, prompting companies to revise their succession plans should senior managers fall ill. New measures implemented include increased technical reporting by key staff in case others have to take over their posts, and a rise in duplicate decision making.

Best source: Wall Street Journal (subscription required)

Shareholder group says 557 AGMs cancelled or postponed by end-March

Institutional Shareholder Services says that by the end of March it had recorded the postponement or cancellation of 557 annual general meetings of shareholders around the world, while 560 meetings were due to be held in virtual-only or proxy-only format. ISS has published a guide to regulatory and supervisory changes to AGM rules and reporting for listed companies decided in response to the coronavirus pandemic. Plans for virtual AGMs were concentrated in the US, Canada and Saudi Arabia, while the largest clusters of postponed or cancelled meetings were in western Europe and south-east Asia.

Best source: Institutional Shareholder Services


UK regulator calls on fund managers to address shortfalls in governance and liquidity controls

The UK's Financial Conduct Authority has written to asset management executives with a litany of complaints, claiming that standards of governance are falling below expectations, that funds often do not offer investors good value, and they frequently fail to identify and manage conflicts of interest. The regulator says fund managers must ensure they have controls in place to prevent liquidity mismatches in which a fund cannot sell assets fast enough to meet investor redemption requests, as happened last year with the Woodford Equity Income Fund.

Best source: Financial Times (subscription required)

See also: Financial Conduct Authority