Glass Lewis released a COVID-19 a sober and pragmatic response detailing how they expect the pandemic to impact governance and broader ESG issues.
Main elements are below.
- Executive Compensation
To ensure support for compensation adjustments, Glass Lewis considers that a proportional approach that factors in the impacts faced by both shareholders and employees is required. Do not expect much support for remuneration resolutions where executive pay has increased, or even just maintained.
And Glass Lewis suggests icompanies not invite shareholder fury by arguing that they need to conserve capital by reducing shareholder returns even further than the crisis already has, while simultaneously arguing for paying large bonuses, repricing grants, adjusting hurdles and increasing the cost and dilution of future compensation.
However, should the company be able to demonstrate that directors and executives have shared in the pain inflicted on employees, customers and shareholders, then it is more likely to be given a fair hearing for the many changes likely to be sought in incentive pay measures, targets, performance periods, vesting periods, allocation methods and discretion.
Glass Lewis suggests that companies who project a “business as usual” approach to executive pay will face opposition if employees and shareholders see their own “paychecks” cut. Companies would be wise to avoid this.
- Board Composition and Effectiveness
The lack of age and gender diversity is a systematic risk for company directors with males over 65 being the highest risk group for COVID-19. Over-boarding (sitting on too many boards) means that when one director falls ill or is deceased, the lost capacity will infect the multiple boards that they sat on and the boards that the other directors sit on. Due to the increased demand of NEDs’ capacity, it is expected that some NEDs will reduce their board seats. This will put board renewal and succession planning programs to the test.
Expect some pushback on directors not able to keep up with the increased number of meetings, and those on companies not able to meet the challenge.
- Activism and M&A
What we learned from the GFC is that avoidable poor governance and shareholder returns leads to a wave of shareholder activism, M&A and lawsuits. With inexpensive debt and record high dry powder in private equity, companies are circling the hardest hit sectors. As a result of COVID-19, current activist campaigns could see disruption.
Glass Lewis, like other proxy advisers, have been listening more to the activists in recent years. Nevertheless, they will be circumspect during COVID 19 in considering activist proposals.
- ESG and Shareholder Proposals
While environmental and social shareholder proposals are important for the long-term, it is important not to lose sight of how a company will be able to operate in the short to medium-term. Companies should reconsider proposals to undertake resource-intensive actions which appeared reasonable in the context of a strong market. For shareholders, they should not have their ability to put forward resolutions, to speak at virtual meetings or to have votes on such matters hampered, unless the company is seeking free activist attention.
It appears from this that Glass Lewis is prioritising short term survival and, beyond that, reserves to get back to health quickly over some ESG matters that have a longer term perspective.
The Glass Lewis approach is well worth a read. See HERE .
And for a contrast, see the perspective of a UK based proxy adviser HERE .
Also worth a read is ISS’s newly released Guidance Note on how its advice will respond to COVID 19 ESG issues HERE.© Guerdon Associates 2022 Back to all articles