A time of opportunity as share plans take stock of the COVID-19 impact on sustainability activities
The substitution of share awards for cash
There have been two areas in which we have seen relevant change. One is, it could be argued, crude and operational – the substitution of share awards for cash in order to protect the cashflow of the business.
One of the most surprising developments of the early part of the 2020 AGM season was around dividends – the resolution which almost invariably gets 99.something per cent in favour at the AGM. We have seen companies and investors broadly aligned to a view that, in these special times, cutting or even cancelling the dividend, is not only tolerated but welcomed. In some cases even demanded. This for an act which at almost any other time I can remember would result in the immediate award of the Black Spot (Treasure Island fans will know what I mean) to the CEO, if not the rest of the board. It is such an unusual situation that our members’ helpline received a number of queries on how to do it and we developed new guidance on the withdrawal or amendment of dividend resolutions.
But one element of concern that was raised as we saw dividends cut or cancelled and employees placed on furlough, was a perception that the pain was not being equally shared, with executives felt to be immune from such cuts. Some have taken pay cuts but others have helped their companies’ cashflow by taking shares, or incentives such as LTIPs or SIPs instead of cash. This may help companies but, as some commentators have noted, it tends to be through such schemes that more significant pay outcomes arise and, at the moment, where many companies’ share prices are depressed, for those who can afford to forego the cash, this may well be highly advantageous in the medium to long term.
The other main area in which we have seen a COVID-19 response from share plans is in terms of the performance conditions. One of the changes that we have all seen in recent years is the rise of the board’s focus on sustainability. This is the result of both internal and external factors.
To some degree it is a function of changes in boardroom composition, with many boards having younger members, with different social interests and, in particular, with experience in different corporate cultures. But it is also a function of changes outside the boardroom. The impact of the press and social media commentary on ESG issues, coupled with the activities of activist investors has been unmissable, and even the least aware directors cannot have been ignorant of the breath of the winds of change.
Consequently, one of the changes in the role of the reward professional has been to ensure that the board’s desire to remain on the front foot in these areas, increasingly the subject of legislation and regulation, remains on the agenda of the executive team and, in particular, those in the one or two levels immediately below ExCo. For the share plan professional, this has increasingly manifested itself through the inclusion of sustainability metrics in corporate KPIs and, in particular, in share plan performance triggers.
The challenge of sustainability metrics
This is a great way of getting management engagement, but the challenge is to develop appropriate metrics. One of the consistent issues in the executive pay debate has been around the relevance of metrics and the degree to which they ensure that pay outcomes reflect investor experience. This is not easy with non-financial measures, particularly those around sustainability where targets are often longer-term and individual year performance can only be considered as progress towards, rather than achievement of, a goal.
And these do not always reflect investment manager’s own targets, which can be heavily driven by portfolio performance over the previous period, rather than the promise of ‘jam tomorrow’. Investors want measurable results, not fluffy words but although some are interested in good sustainability metrics, there are others who are only really concerned by Total Shareholder Return and/or Earnings Per Share. These are relatively easy to calculate, harder to ‘game’ and contrast sharply with many sustainability KPIs, which can all too easily be woolly and overly subjective. The only way to try to overcome this is with clear explanations of why these measures are critical to the company and how they are assessed.
I keep telling company secretarial colleagues that COVID has created a huge opportunity for them to demonstrate their commercial acumen. The same is true of share plan professionals and advisers.
The author is Peter Swabey, executive director at ProShare.