As societies and capital markets across the globe reel from the effects of the COVID-19 pandemic, normal views on some of the bedrocks of corporate governance are being stretched and tested. Many companies are facing unprecedented challenges on multiple fronts, and many institutional investors are quickly adapting their traditional approaches to view portfolio company actions through an altered lens to take account of the crisis. In the short-term, long-held views and expectations on matters ranging from virtual-only shareholder meetings to share buybacks to “poison pill” defenses are adapting to an environment of social distancing and market turmoil.
We at Institutional Shareholder Services (ISS) understand and recognize the many challenges and uncertainties now being faced by public companies and their investors, and we know that the current situation requires understanding and flexibility in many ways. Over the past three decades, ISS has regularly applied significant case-by-case discretion to deal with many company-specific situations, market disruptions, recessions, and natural disasters in a thoughtful and considerate way. We believe such case-by-case flexibility, combined at the macro level with the four pillars of our voting policies—the global principles of accountability, stewardship, independence and transparency—provide a strong foundation for our research and voting advice, and give an approach which investors may use to help them support and work with their portfolio companies to help protect in the short-term and then restore in the longer-term the strength and vitality of public companies and global markets.
While each asset owner and other institutional investors will of course do what is right for them and for their beneficiaries, allow me to share how ISS is currently adjusting the application of our benchmark and specialty voting policies in four key areas in response to the pandemic and economic uncertainties:
Shareholder Meetings. Given the need to protect health and the many restrictions in place, ISS understands the need for many companies to hold virtual-only shareholder meetings this year where they can. We are encouraging companies that decide to hold virtual-only meetings to clearly disclose their rationale and to strive to provide their shareholders with a meaningful opportunity to participate online.
Poison Pills. A number of companies have introduced new poison pill defenses (sometimes referred to as shareholder rights plans) to protect against the threat of opportunistic bidders in the wake of recent stock price shocks. ISS’s policy approach is already appropriately flexible to take account of the adoption of poison pills in the face of such genuine short-term potential threat situations. For poison pills/rights plans with a duration of less than a year, our policy is to consider the situation on a case-by-case basis, taking into account the company’s disclosed rationale for adopting the plan and other relevant factors— such as a commitment to put any future renewal of the pill to a shareholder vote, and whether directors appear to have sought to appropriately protect shareholders from abusive bidders without inappropriately entrenching the existing board and management team.
Share Buybacks. In more normal times, many boards and shareholders look at proposals related to setting share repurchase (or buyback) authorities as relatively routine voting items. In the current situation however, repurchases are anything but routine, and many companies have already decided to put buyback programs on hold to conserve cash. Given the many economic uncertainties, boards may open themselves and their companies up to intense criticism and reputational damage by undertaking repurchases at the current time, especially if the company’s workforce has been reduced or suffered other kind of cutbacks. While repurchase authorities usually go out a year or more, and therefore boards may consider it prudent to maintain some future flexibility by seeking buyback authorities at this time, companies will need to carefully consider the reputational, regulatory, and business risks that undertaking buybacks might create before going ahead with any repurchases, even if the authority has been approved by shareholders. In the absence of barring regulation or serious concerns related to the company, ISS will generally continue to recommend in favor of share repurchase authorities within customary limits for each market, but we will be evaluating 2020 repurchase activity in the run-up to next year’s annual general meetings (AGMs).
Dividends. ISS will support broad discretion for boards on dividend proposals this year, including those that may fall below historic payout ratios or customary market practice. In analyzing such proposals, we will also be looking at whether boards disclose plans to use any preserved cash from dividend reductions to support and protect their business and workforce.
For more, I invite you to download a copy of our ISS Policy Guidance, Impacts of the COVID-19 Pandemic here.
The 2008 global financial crisis laid bare many governance failings and radically altered the relationship between shareholders and companies, boosting the importance of the concept of good stewardship and the creation or strengthening of many corporate governance codes and standards across the world. Many governments in the wake of the financial crisis became new corporate governance power brokers, mandating governance reforms such as mandatory say-on-pay voting in the US. The COVID-19 pandemic and resulting social and economic turmoil are likely to also reshape the governance landscape, and the way that companies and their shareholders react to the crisis is likely to play no small role in determining the nature and scope of its lasting impacts on capital markets.
Georgina Marshall is global head of research at Institutional Shareholder Services (ISS). In this role, she leads the ISS global research teams based across Europe, North America, and Asia-Pacific that report on more than 40,000 public company shareholder meetings each year in over 100 markets around the world, providing institutional investors with informed independent research and voting recommendations, and producing studies and white papers on a wide variety of topics related to corporate governance and responsible ownership. She is also chair of the ISS Global Policy Board.