Stockholm (NordSIP) – As the Coronavirus outbreak continues to lay waste to lives and financial markets across the world, it is easy to overlook the effects of the pandemic on governance.
Following two previous forays into the consequences of the pandemic on the environmental and social aspects of ESG, we conclude our COVID19 ESG series with a review of reactions on the governance front.
Shareholder Inclusion at AGMs
Carlo Funk, Head of EMEA ESG Investment Strategy State Street Global Advisors (SSGA), puts the finger on what is perhaps the most immediate problem facing investors during the crisis: the pandemic hinders companies’ ability to hold in-person annual general shareholder meetings (AGMs)
AGMs are crucial venues where investors – particularly minority investors – to raise their voice. As Funk suggests, “companies will have to shift to a virtual model. When conducting an annual meeting virtually, companies will be expected to preserve all the rights and opportunities afforded to shareholders through a physical meeting. Most importantly, shareholders should be able to have active and robust interactions with management and the board at appropriate times.”
For example, March 10th, Santander announced that “the best way to ensure that shareholders can fully exercise their rights safely in the upcoming AGM, scheduled for 3rd April, is through participating remotely instead of attending in person, or voting in advance either themselves or through nominated proxies.”
“The board’s intention is that all our shareholders participate in the AGM of 3rd April remotely. We are, therefore, asking all our shareholders to plan their participation through remote channels and to contact the shareholder support line for any assistance required. This decision is consistent with our goal of protecting the wellbeing of our stakeholders while also ensuring that shareholders can continue to exercise their rights fully,” Group Executive Chairman Ana Botín added.
Beyond environmental and social concerns, Funk concedes that urgent matters will take precedence over long term ESG considerations. However, he warns against giving companies a “carte blanche” to ignore ESG issues. Instead, he argues that shareholders should encourage companies to focus on maintaining clear communication, informing investors about the short- and medium-term potential impact of COVID19 on the business, including management preparedness and scenario-planning and analysis.
At Federated Hermes, Dr Christine Chow, Head of Asia and Global Emerging Markets, began by advising board members take a proactive role in crisis management. According to Dr Chow, “the board should ensure that the company has established a 24/7 communication platform so that key personnel can be kept informed. The company should provide regular updates on its corporate social media account to maintain engagement with stakeholders.”
She also suggests that boards should manage the complexity of the crisis as it unfolds. “The board should maintain close communication with the executive management team to understand and anticipate the impact of a crisis,” she explains. “Companies should anticipate the chain of impacts,” including an interruption of supply chains, running down of inventories or the impact of school closures affect working parents.”
Documenting Crisis Management Lessons
SSGA’s Funk also highlights some of the critical governance implications of COVID19, such as the importance of critical incident management. “This refers to a company’s use of management systems and scenario planning to identify, understand, and prevent or minimise the occurrence of low-probability, high-impact accidents and emergencies with significant potential environmental and social externalities.”
According to Dr Chow, the lessons learned by the board during the crisis should be documented to enhance innovation and crisis resilience. “A crisis also enables companies to review their revenue resilience, plus that of their operations and supply chain. Industries that rely on in-person attendance and a flow of travellers, such as events hosts, venue hire, hospitality and airlines, should be diligently reviewing their options for revenue diversification.”
SSGA’s Funk also warns companies against undertaking undue risks that are beneficial in the short-term but harm longer-term financial stability and the sustainability of the business model. Indeed, he advises companies to inform investors as to how COVID-19 might impact or influence their approach to material ESG issues as part of their long-term business strategy.
Federated Hermes’ specialist stewardship services team, EOS, went further and sent an open letter to its investees detailing voting policies for the duration of the crisis. Regarding dividends, it urged companies to “strengthen their balance sheets and act in their long-term interest when making capital allocation decisions, including dividend pay-outs,” in what appeared to be an endorsement of the European Banking Federation’s recommendation that companies refrain from carrying out dividend payouts.
Regarding board elections, EOS’ letter suggested it would prioritise stability over activism, noting that “in certain cases, we will, therefore, be more flexible around the re-election of key directors to avoid unplanned disruption to board composition at this critical time.” It also clarified it expected companies to be sensitive to the plight of the wider workforce and society and large so that management’s remuneration should be “adjusted taking a company’s circumstances into consideration.”
The Way Forward
Looking ahead, Dr Hans-Christoph Hirt, Executive Director, Head of EOS, Federated Hermes, concluded that he would expect companies to prepare sustainability-focused risk management procedures to be ready for similar disruptions in the future. “Pandemics should not be unforeseen events”, he says. He also expects companies to focus on operational and financial resilience going forward.