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Shareholder activity, like any activity today, has been impacted by the COVID-19 pandemic: the 2020 proxy season has been riddled with slowdowns, postponements, and virtual annual general meetings (AGM).
Related activism has therefore decreased, and aligned itself with the voting activity. But, as soon as we start to recover from this crisis, activism will likely rise again as well. This has important consequences for companies, particularly if these have been seriously weakened by the lockdowns and become comparatively cheap. It could consequently lead to takeover opportunities. Lawyers, experts in corporate governance, and major proxy advisors have warned about this risk. They advise (especially US-based) companies, depending on their respective national regulation, to consider adopting so-called poison pills or other defensive measures to protect against the threat of opportunistic bidders.
Companies could temporarily adopt right plans or shareholders’ rights plans(1) to give companies some breathing space as they transition back to normality.
These unprecedented times have led to unprecedented interventions by governments and central banks. Should they also lead to unprecedented actions, including flexibility on fundamental corporate governance principles?
It will be interesting to see the shareholders’ reactions to these proposals. While some might agree with the idea of temporary protection measures to defend companies against takeovers, others are likely to strictly oppose these mechanisms, as they limit the shareholders’ rights, especially those of minority shareholders. One option would be to analyse on a case-by-case basis whether it is worthwhile to provide some flexibility to companies in the form of a temporary grace period on a their usual financial obligations.
Except for such temporary exceptions to rules and key principles, engagement should remain the preferred option. As a responsible and committed investor, our main role and responsibility revolve around supporting the sustainable growth of the companies in our portfolios. As a result, we focus on active engagement above all else. Firstly, it allows us to better understand companies that are failing in their crisis management. As such, we engage to ensure our companies focus sufficiently on their employees’ health and safety. Secondly, it pushes us to be receptive to companies’ answers and gives us the necessary context to understand them accordingly. This simultaneously influences the long-term vision in our investment decision making process. Long-term investment decisions should also be aligned to the long term view in shareholder expression. Thirdly, active engagement also means that we continue to vote and express our voice in AGMs (even in virtual ones). These principles are in line with the recently-formulated PRI recommendations following the COVID crisis.
These endorsements seem to impact the so-called shareholder primacy. The latter refers to the belief that that companies should solely seek to maximize profits, within the bands of the law, for shareholder gains.
This trend to reduce shareholder primacy has already emerged before the COVID. Several initiatives and acts have advocated for greater emphasis on a company’s other stakeholders (e.g. the shareholder action towards oil majors regarding climate responsibility, challenging a company regarding excessive tax optimization, etc.). The New Paradigm(2) is a notable example of such initiatives. It promotes transparency and engagement to ensure fair treatment of all stakeholders. In addition, it curtails an excessive focus on the short-term by fighting against activist pressure that solely focuses on short-term gains.
The theory of stakeholder governance has emerged from the foundations of corporate governance. Stakeholder governance highlights a company’s moral obligation to be committed to a singular purpose. Indeed, it furthers the promotion of the economy and the facilitation opportunities for society at large. The company’s main purpose should consequently be focused on generating long-term corporate value. It is worth mentioning that this moral obligation has progressively become a requirement for some certifications (e.g. the B-Corp label). These require companies to clearly formulate their societal purpose and to write it down in their acts and formal charter corporations(3).
The Covid-19 crisis has further reinforced this trend. In addition, recent initiatives that focus on other stakeholders are popping up left and right. These deem that investors should act to reduce the harmful impacts of the virus. As investors, they are responsible shareholders and could have a role to play as well.
The shift from shareholders to stakeholders could lead to passionate debates and challenging decision-making issues. A recent example is a company’s call to shareholders to offer a percentage of their dividend to a solidarity fund for the company’s employees that have been impacted by the pandemic. The voting decision on this matter is not as clear-cut as one would expect. First of all, we could look at the support (or lack thereof) from the other stakeholders of the company. We have seen one- or two year wage reductions from several leaders and senior managers to support the consequences of Covid-19. Secondly, the dividend payment in question was from the year 2019, before the global outbreak of the virus. Thirdly, what about collective financial instruments like investment funds and pooled funds? How can we assess the voting intentions of all individual shareholders of these investment instruments? When faced with this challenge, should the fund’s first aim not be to defend the rights of its shareholders? The situation is not particularly straightforward. Still, the wider responsibility of companies to the Society is confirmed. Regulatory authorities might elaborate on how to achieve the right balance between a company’s stakeholders and shareholders’ influence and goals. Some examples of regulatory initiatives or best practices are, among others, the revised Governance Code in the United Kingdom or the Business Roundtable Statement on a corporation’s purpose. The latter initiative brought together 180 US CEO’s, who subsequently committed to leading their companies in a way that would benefit all stakeholders (i.e. customers, employees, suppliers, communities and shareholders).
If we successfully manage to shift away from shareholder primacy, companies would increasingly have to prioritise stakeholders, even at the expense of shareholder value. But likely on the short term. Indeed, there is high chance that a dilution of shareholder primacy would increase the relevance of ESG across the corporate and investment landscape. It is important to remind ourselves that ESG integration is based on a win-win concept of shared value (i.e. both stakeholders and shareholders benefit from a company’s commitments to ESG). When one efficiently manages their energy/resources consumption, it benefits the environment, and leads to cost reductions. It is simply common sense.
In conclusion, COVID-19 will have potential implications for stewardship and investor activism. This could challenge the paradigm of long-term value creation and short-term pressure. It would simultaneously ensure sustainable growth. The “tragedy of the horizon” as quoted by Mark Carney, former Bank of England Governor. The on-going integration of ESG should therefore kick-start a virtuous circle, allowing for longer investment time horizons and better ESG practices.
(1)A shareholders’ rights plan is a defensive strategy adopted by the company to oppose hostile takeovers. By giving the right to its shareholders to purchase additional shares at a discount, the company aims to dilute its ownership interest that is planning a hostile takeover. This strategy is used mainly when one shareholder gets a certain percentage of ownership that is larger than the other shareholders’.
(2)Harvard Law School, Forum on Corporate Governance and financial regulation – February 2019
(3)This requirement could vary from a country to another.