Tactically, safety concerns and travel restrictions caused many companies to employ remote working, where possible, and to experiment with virtual/digital shareholder meetings. These initiatives may shape the format of many future IR, governance and ESG engagements with investors.
Strategically, concerns about employee health and safety, global supply chain resilience, customer demand and other factors affected companies large and small. Most companies were negatively impacted operationally and financially, while others may be more resilient to these impacts.
Temporarily, uncertain valuations curtailed many activist and M&A activities—expect these to come back, particularly if share prices remain depressed. Some companies may become acquisition targets, while others may become opportunistic acquirers.
Life as we know it has changed, and what the “post-COVID” world will look like remains uncertain; however, what is clear is this experience will intensify investor interest in:
It is important to note, this interest is not just limited to investors, but may include other stakeholders, such as employees, customers, suppliers, communities and others.
There is a crisis in confidence from many of these stakeholders, and there are calls for credible and consistent disclosures to start to rebuild confidence about the future. Many companies are focused on short-term “survival,” rather than long-term “sustainability.” While investors understand this, they are not losing sight of longer-term priorities.
BlackRock, in discussing its Q1 2020 engagements with portfolio companies in the Q1 2020 BlackRock Investment Stewardship Global Quarterly Stewardship Report, stated:
“We have heard from some companies that certain non-financial reporting projects—like sustainability reporting—have been de-prioritized in the current environment due to COVID-19. We recognize that in the near-term companies may need to reallocate resources to address immediate priorities in these uncertain times. Given our long-term approach to stewardship, we will continue to monitor company disclosures and expect a return to companies focusing on material sustainability management and reporting in due course.”
On the positive side, we have observed over the past several years a marked improvement in the depth and quality of company disclosures about key topics, such as:
These recent trends in improved practices and disclosures will continue, fueled in large part by intensifying investor interest. Furthermore, we anticipate the following areas will receive greater attention:
Including disclosure, at the board and individual director levels, of tangible sustainability, supply chain, human capital management, philanthropy and related experiences and competencies, and board-level oversight of these issues.
“Pay for Performance” will continue to be evaluated, as will “pay alignment with company business strategy.” We are already seeing the inclusion of more non-financial metrics, including ESG objectives, particularly in annual performance plans. Depending on the industry and business model, supply chain diversification and disruption workarounds are likely to receive greater attention. As companies adjust pay metrics, weightings and vehicles, including possible re-pricings, they should carefully consider the impact, and optics, of these changes on employees, investors, proxy advisors, the media and others. Messaging matters.
Equilar’s Corporate Governance Outlook 2020 report documents that 86% of Equilar 100 companies (i.e., the largest companies by revenue) discussed engagement in their 2019 proxies, continuing a strong increasing trend in such disclosures over the past decade.
During this period, the more detailed disclosures of topics discussed and actions taken tended to be correlated with lower Say on Pay and other key votes. We expect these engagement discussion topics to continue to expand, and for companies to similarly expand their subsequent disclosures of these engagements. (Note: Be sure to update your “top holders” engagement list as stock price volatility may have led to significant ownership changes in the past half year.)
For examples of company ESG, HCM and other progressive proxy disclosures, please see DFIN’s “Guide to Effective Proxies.”
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Ron Schneider is the Director of Corporate Governance Services for DFIN. He can be reached at email@example.com.