Thought Leadership  •  September 11, 2020

Start the Conversation

Honeypot Field to Catch Bots
Honeypot Field to Catch Bots

Board Oversight of Risk

How COVID-19 May Catalyze Enhancement of Company Risk and ESG Practices and Disclosures

This article was originally posted on Equilar

The recent 2020 proxy season occurred during the expanding coronavirus (COVID-19) pandemic, the full outcomes and impacts of which aren’t fully known as of this writing.

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:

  • ESG issues and, more broadly, ongoing environmental concerns.
  • Sustainability of their portfolio companies.
  • Resilience of their portfolio companies in similar, potential, future events.

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 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 aren’t losing sight of longer term priorities.

Blackrock, in discussing their Q1 2020 engagements with portfolio companies, 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.

Source: Q1 2020 BlackRock Investment Stewardship Global Quarterly Stewardship Report April 2020

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:

  • Board oversight of an expanding array of risks. “Pandemic” will no longer be a throwaway or footnote term, nor will supply chains be treated as a largely operational issue.
  • Company ESG profiles, including the company’s impact on the environment, as well as resilience to potential regulatory, competitive and technological responses to environmental change. Here, investors expect companies to identify and disclose their major ESG risks and opportunities, including reporting on their progress in capitalizing upon or mitigating these and providing quantitative, material, decision-useful information.
  • Human Capital Management, including employee health and safety, remote work productivity, workforce nurturing, and the all-important “tone at the top” of company culture.

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:

Board diversity and skill sets
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.

Executive incentives
“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.

Engagement with investors and related responsiveness
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.