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COVID-19 Proxy Governance Update 3

9 April 2020

COVID-19 and its Impact on Proxy Voting, Stewardship and Corporate Governance

As we all establish an operational rhythm within the UK Government’s ‘Stay at Home Measures’ over these truly unprecedented times, we wish to share Boudicca’s latest observations and assessments of the shareholder engagement and proxy voting landscape.

The Boudicca team is in the fortunate position of continuing our work without disruption. Indeed, we are busier than ever on live proxy advisory and solicitation mandates, with company secretarial and IR teams coming to us for specialist ‘on the ground’ advice. Our commitment to our clients is unwavering, and our insights are up-to-date. If you require any assistance, please contact us any time.

In this update, we look at:

  • Actions companies are taking in relation to their AGMs, annual results and dividends based on our diligent daily analysis of RNS announcements
  • The latest from ISS, Glass Lewis, the IA and PIRC – Are they changing their policies on key AGM resolutions?
  • Shareholders latest – Statements from institutional investors and our review of their voting processes to date
  • Latest thoughts on director remuneration from Boudicca’s Corporate Governance team

Actions companies are taking in relation to their AGMs, annual results and dividends

Following the initial confusion and questions regarding release of annual reports and convening of AGMs, we have seen these alleviated by the joint regulatory update from the FCA, PRA and FRC, and the ‘definitive’ AGM guidance from the Chartered Governance Institute (CGI). In addition, the London Stock Exchange’s RNS service is serving as a good tool for tracking trends of actions that companies are taking.

Since Boudicca’s last update on 25 March, we have tracked RNS announcements that relate to AGMs, annual results, capital management / dividends, remuneration and board directors. In the 13 days between 26 March and 7 April inclusive, this is what we have observed:

  • A total of 365 RNS announcements have been made during the period in question, referencing the term ‘AGM’. Over the same period in 2019, only 164 RNS announcements were made to this effect. The more than doubling of AGM-related announcements is demonstrative of companies releasing further guidance on logistical matters, such as attendance, venue and/or meeting postponement.
  • In contrast to AGM-related announcements, we have seen a slight decrease in announcements related to annual results. Over the period in question, 354 RNS announcements have been released that reference the term ‘annual report’. This is 28 lower than the 382 released over the same period in 2019, which signals that some companies may be either 1) delaying release of their annual reports by a few days, or 2) are taking advantage of the permission from the FCA, FRC and PRA for to delay the publication of audited annual financial reports from 4 to 6 months from the end of the financial year, although Boudicca’s assessment is that it’s likely those companies with 31 March year ends that would be taking advantage of this.
  • Dividends – A total of 541 RNS announcements have been made referencing ‘dividends’. When combined with the terms ‘cancel’ or ‘withdraw’, this returned 151 announcements, clearly denoting that numerous companies are indeed cancelling dividends.

From our ‘line by line’ analysis of 99 AGM-related RNS announcements over the period of 26 March to 7 April, we make the following observations:

  • 35 companies are proceeding with their AGMs, but have explicitly banned or discouraged shareholders from attending the AGM
  • 14 companies have postponed or adjourned their AGMs
  • Five companies have announced that they will be holding a virtual AGM, with FTSE 250 company, Clarkson plc, being the most high-profile of the lot

In brief, Companies with 31 December year-ends appear largely to be proceeding with their original timetables for releasing their annual results and holding their AGMs. Those that are proceeding with their AGMs are actively discouraging shareholder attendance (citing contraband of the Stay at Home Measures), but are encouraging advanced proxy voting and lodging of questions via electronic means.

AGM season 2020 was meant to be an active one with companies expecting scrutiny from investors, proxy advisers and the media alike on their remuneration policies and practices. Because of coronavirus, we can now expect that companies will have ‘low key’ AGMs. This, however, is on the understanding that 1) careful monitoring and soliciting of votes from investors is more important than ever, and 2) the low-key nature of AGMs this year will likely be balanced by shareholder events to come later on in the year (per CGI’s guidance) and much ‘livelier’ AGMs in 2021.

The latest from ISS, Glass Lewis, the IA and PIRC – Are they changing their policies on key AGM resolutions?

Proxy Advisers – Boudicca continues to engage daily with each of ISS, Glass Lewis, the Investment Association (IA) and PIRC. The general view is that institutional investors will be spread even more thinly this AGM season as they juggle proxy voting responsibilities with pressing COVID-19 related commitments. As a result, institutional investors’ dependencies on proxy adviser recommendations will deepen, thereby further increasing the proxy advisers’ already significant influence. In addition to the paper we released on 25 March, entitled ‘COVID-19 and the Proxy Agencies’, in which we report on each of the proxy advisers’ operational status during the pandemic, we have been tracking their updates to understand how their policies, and in turn, their reporting, will evolve in response to developments associated with the coronavirus pandemic.

Key Developments since 25 March 2020

In the 14 days since 25 March, proxy advisers have drafted additional guidance, releasing the following updates thus far.

  • 8 April: ISS releases its Policy Guidance, entitled ‘Impacts of the COVID-19 Pandemic in which they lay out their views on AGM issues, shareholder rights, board directors, remuneration and capital structure.
  • 8 April: The Investment Association writes a ‘letter of support’ to FTSE Chairs’ ‘to set out the ways in which shareholders will look to keep corporate Britain working and support companies’. This includes through engagement and communication, AGMs, dividends, executive pay, financial reporting and additional capital.
  • 3 April: Glass Lewis announces that company opinions are now included with their research and voting recommendations. Any company or shareholder proponent who purchases a Glass Lewis report will have the right to respond to the report within 7 days of receipt and submit a Report Feedback Statement (RFS). This submission will be published unedited and will be delivered to all investors who subscribe to Glass Lewis with enough time for them to change their voting decisions. Although Glass Lewis says that there is no extra cost to the purchaser of a report, in practice, this may increase the purchase price that the company or proponent pays.
  • 27 March: Glass Lewis releases blog post entitled: ‘Everything in Governance is Affected by the Coronavirus Pandemic. This is Glass Lewis’ Approach. The blog covers Glass Lewis views on remuneration and balance sheets, board composition and effectiveness, activism and M&A, oil and gas, shareholder proposals and ESG, disclosure and explanation, timing and certainty, and voting.
  • PIRC: No new material update since their letter to issuing companies on 20 March

Our next update will include a detailed assessment of how these policy updates will be applied in practice to companies’ resolutions and how these are affecting AGMs now and will continue to affect voting at the forthcoming AGMs.

Shareholders Latest – Statements from institutional investors and our review of their voting processes to date

Shareholder Engagement – Corporate Governance and Stewardship: Since 25 March, at least five major institutional investors have sent or published letters stating their views of key corporate matters, including workforce, environmental, social, governance, remuneration and AGM logistics. The overarching theme is that they are standing by companies, but require these to continue to be responsible corporate citizens.

Key Developments since 25 March 2020

  • 3 April: Schroders writes an open letter to UK issuers, calling on these companies ‘to prioritise their key stakeholders, in particular employees but also customers and suppliers’.
  • 31 March: State Street Global Advisors sends letter to board members on Covid-19. Key advice includes: refraining from undertaking undue risks.
  • 30 March: BMO Global Asset Management releases ‘ESG implications of the COVID-19 pandemicin which they consider the impact of the COVID-19 pandemic on environmental, social and governance issues.
  • 27 March: Legal & General Investment Management (LGIM) issues a statement to issuers setting out their stance on topics such as executive remuneration and AGMs during the coronavirus pandemic. LGIM encourages companies to focus on all of their stakeholders, and not just shareholders, most importantly employees and suppliers to ensure that supply chains remain in force. LGIM are in favour of companies holding virtual AGMs although they would not be in normal circumstances.

Furthermore, 195 long-term institutional investors representing over $4.7 trillion USD in assets under management have signed the Investor Statement on Coronavirus Response.

Boudicca Observations

The 2020 AGM season was forecasted to be a busy one, largely due to the high volume of remuneration policy renewals and the increased scrutiny from investors and proxy advisers on companies’ governance practices. Needless to say, given the additional concerns presented by the coronavirus pandemic, we are even busier at Boudicca, supporting company secretaries, IR teams and Boards through their shareholder engagement and proxy voting challenges.

Proxy Vote Process Impact

Based on our continued engagement with shareholders:

  • Major institutional investors – Contrary to initial fears, so far, we have had little indication of any major disruptions to the proxy voting process. Similar to many companies with strong, secure IT infrastructures, the corporate governance and proxy voting teams of the largest institutional investors are working from home and transmitting electronic voting instructions, in the same way as they have done from the office. With that said, we are not yet at the peak of proxy season, and Boudicca remains concerned about the ability of institutional investors and proxy voting agents (particularly Broadridge) to correct proxy voting errors in time for companies’ meeting deadlines. Requirements for these corrections (vote ‘flips’ as we call them at Boudicca) tend to increase at the peak AGM time of May.
  • Whist major institutions are largely unimpacted; it’s the private client brokers and smaller asset managers that are most vulnerable to maintaining their normal proxy voting practices.
  • Two Luxembourg-based asset managers continue to be in ‘critical work mode’ and are refraining from proxy voting as result. On the week of 30 March, one UK PCB and one US Institution reported being affected by coronavirus Rathbone Investment Management and Segall Bryant & Hamill were both unable to assist citing unavailability of proxy voting team members. We continue to stay in contact with these investors for updates.
  • PCBs – On the week of 30 March, we identified 17 PCBs as being impacted by the pandemic, with the proxy operations of 16 of these reporting to Boudicca that they have shut’ their standard proxy operations due to a lack of resources and/or priorities being placed elsewhere in the business. We are continuing to engage with these PCBs for updates on their operational status. Given that this constituent ordinarily does not participate in the vote process any way, we do not see their present status as majorly affecting wider proxy voting statistics. This is only really problematic in cases where 1) company directors and employees hold positions they want to vote via the affected PCBs, and 2) companies with large PCB representation that are intending on undertaking a proxy solicitation campaign targeting the PCB underlying holders.
  • More proactive – Walker Crips Stockbrokers have reported that all non-discretionary clients will be informed normally by post or via their online platform. Given current circumstances, notifications will also be made by email and by telephone.

Latest thoughts on director remuneration from Boudicca’s Corporate Governance team

Our clients are naturally asking us to tell them how institutional investors and proxy advisers are likely to vote on director remuneration resolutions. Now that each of ISS, Glass Lewis, IA and PIRC have all come out with policy updates in response to the coronavirus pandemic, the Boudicca Corporate Governance team will follow this update with a more fulsome forecast of institutional voting decisions on remuneration.

In the meantime, we note the following points:

  • Investor pressure – Shareholders and debt holders will expect companies to be ‘frugal’ with capital and not award it to management.
  • Base salaries are not expected to be increased in remuneration policies that have not yet been published.
  • Annual bonuses are unlikely to be supported by shareholders.
  • Capital allocation – Companies that have withdrawn resolutions to approve dividends and to not distribute capital to shareholders will be under increased internal and external pressure to ensure there is a reduction in distribution of funds to management as well.
  • Long-term incentives – Shareholders are unlikely to be supportive of any form of adjustment downwards to targets on the basis that if share prices have fallen and shareholders have suffered then the management should share in this.
  • Pension contributions for executives will come under even more pressure to bring them into alignment with the average workforce level of contributions.
  • Issuers in certain sectors will also need to be mindful of the ‘court of public opinion’ however justified their reasoning around remuneration / dividends may be.This includes issuers that have participated in government backed funding programme and / or who are furloughing large numbers of employees.