Earlier this month, Peter Swabey, our Policy and Research Director chaired two webinars on investor concerns during the crisis, one with Sacha Sadan, Director of Corporate Governance at Legal & General Investment Management on investor responses in the age of COVID-19 and the other with Andrew Ninian, Director of Stewardship and Corporate Governance at the Investment Association and Alison Kay, Group General Counsel & Company Secretary at National Grid.
Both webinars provided food for thought. Shareholders have extended a certain amount of goodwill to companies, accepting the cancellation of dividends and other emergency measures so that companies can try to survive what looks set to be the biggest contraction of the UK economy for three centuries. While investors recognise that COVID has impacted different companies in different ways and no one size fits all, it is clear that certain minimum expectations will need to be met if investors are to continue to give their support.
As Peter commented in his article last month in Governance and Compliance, “although investors believe that investee companies should put their stakeholders first during the COVID-19 crisis, they are watching keenly to see how companies behave. And behaviours will have consequences. Investors will support companies during this difficult time, but also hold them to account, and companies will, rightly, be judged on how they respond to the conflicting challenges facing them.”
Investors believe that a company taking additional government support through the furlough scheme or seeking additional capital from their shareholders should reflect this in executive pay. Shareholders recognise that executives are working exceptionally hard in very difficult circumstances, but there will be pressure on remuneration committees to balance the significant work and effort which is going in against the external environment. Key workers have been the subject of the nation’s attention recently and they do not get anywhere near the same levels of reward as executives. There will be acute reputational risk if directors receive huge bonuses or share awards.
Adjusting performance conditions or changing bonus targets to reflect the impact of COVID are frowned on as investors feel that executives should not be immune from the impact of COVID. If companies feel that the performance/remuneration outcomes are not reflective of overall company performance, shareholder experience and stakeholder experience, shareholders believe that companies should use their discretion to alter the outcomes. Of course, as always any exercise of discretion needs to be carefully explained, especially if upward, as investors are always sensitive to such changes.
Dividends and LTIP grants are two more sensitive areas. Shareholders want to know that bonuses are still relevant and appropriate if the dividend has been cancelled. Most believe that a cancellation of the dividend needs to be reflected in executive pay in some way, either by considering whether deferred bonuses should be scaled back for a 2019 bonus or by making a clear commitment to reflect it in 2020 bonuses. Many investors question whether companies should be granting LTIPs at the moment and, if they do, what the right grant size is. Most think LTIP grants should be scaled back to ensure that there are not windfall gains in three years’ time. If companies are unsure about future LTIP grants, they should delay setting performance conditions for six months to allow remuneration committees more flexibility to set meaningful and appropriately stretching performance conditions. Many companies have already adopted this approach.
It is clear that pay across the organisation is an issue that more remuneration committees are taking seriously, which is as it should be. Many will be acutely aware of the reputational issue with key workers and I’m sure that aligning executive pay with the general workforce has been key for many companies this year.
Restricted shares, pension contributions and post-employment holding periods are all current areas of concern for investors, and they were covered in detail in the webinars. There were also some really interesting questions from listeners around whether or not remuneration committees will have to consider more factor based targets in the future; the difficulty of attracting talent if too many restrictions are placed on pay; the Remuneration Committee’s response to COVID windfalls; and the impact of changing the performance period on audit.
If you missed the webinars and want to learn more, you can listen to the recordings and view the accompanying slides here.
Sara Drake, Chief Executive of The Chartered Governance Institute