We are living in extraordinary circumstances. And people are reacting in extraordinary ways. From the good – the daily tales of altruism in our communities, the continued hard work and resilience of NHS staff, cleaners, postal workers and many others – to the less good. Policy Lead for Investment & Stewardship Caroline Escott examines workplace practices under virus lockdown.
Companies are no exception to the variety of behaviours shown. There have been tales of great generosity and kindness from senior executives to their staff, with leaders who are genuinely interested in ensuring that their employees come out of the crisis as mentally fit and financially stable as possible. There are others who have taken more time – sometimes after more media and public pressure – to do likewise.
Investors should be paying attention. The post-crisis memories of the public and policymakers tend to be long – as Mark Carney has recently noted, companies will be judged by “how they treated their employees, suppliers and customers, by who shared and who hoarded”; so how companies behave now towards their workforces will likely have a material impact on their future revenue, operating costs and even the post-Covid-19 regulatory environment. This in turn has consequences for scheme investors’ risk-adjusted-returns and ultimately for the value of beneficiaries’ savings.
Although the benefits of incorporating environmental, social and governance (ESG) factors into financial analysis and investment decision-making are increasingly understood, the ‘S’ of ESG has been relatively neglected. But a company which has a motivated, fairly treated and engaged workforce is, evidence suggests, likely to perform better over the long-term. This is an issue the PLSA has brought to the fore in our Hidden Talent and Understanding the Worth of the Workforce programme of work.
Coronavirus is putting companies’ employee models and practices to the test. It is one thing for a company to discuss its pioneering approach towards flexible working, health and safety or mental health in its Annual Report, but quite another to put this successfully into practice under immense financial stress and uncertainty.
It is therefore more vital than ever that equity- and corporate bond- holders understand and assess the attitude and behaviour of investee companies towards their workforces. The PLSA offers practical advice in our 2020 Stewardship Guidance and Voting Guidelines. We would encourage investors to consider the following issues as an initial step:
- Fair pay practices. Although leaders who successfully and safely steer their companies and workforces through this crisis will continue to be valuable, it is important that senior management and Boards take a balanced approach to executive pay – particularly at a time when they are likely to be seeking more capital from investors, cutting dividends, or seeking support from the government. Remuneration Committees should think carefully about how they structure LTIPs so that the awards in future years reflect the experiences of shareholders during this time.
- Capital structure and allocation. A misjudged approach to distributing a company’s financial resources – particularly during times of crisis – can contribute to corporate collapse. At a time when companies are looking for further support from government and investors and when many are laying off or furloughing staff, long-term investors should ensure that companies are taking the approach to capital allocation (including dividends, buybacks and how companies raise capital) that will best ensure the company’s long-term success or, indeed, survival as well as protecting shareholder rights. Pension scheme investors have a unique perspective, with TPR’s Covid-19 guidance on DRC waivers stating that “trustees should ensure…no dividends or other distributions are being made from the employer.”
- Health and safety. Investors should be paying close attention in case of companies unfairly restricting paid sick leave, or failing to provide a safe working environment for their employees. Companies which have taken a proactive approach to safeguarding employee health, including mental health, are playing an important role not only in terms of individual human safety but also in ensuring the future strength of the company itself.
Once an assessment has been undertaken, or provided by and discussed with an asset manager, schemes should then consider whether, on which issues and how they want to make their expectations and views clear to companies. The PLSA explained in our 2020 Stewardship Guidance and Voting Guidelines the mechanisms available for investors to do so, whether it be engaging directly with companies, working with other investors to maximise your influence, or using your voice at the forthcoming (probably virtual) AGM to challenge senior decision-makers directly.
Every crisis brings out both the best and the worst in companies, as it does in individuals. Although investors must be pragmatic and flexible, we would encourage investors to pay close attention to corporate behaviour – engaging where necessary and acting as good stewards of the assets which beneficiaries and clients have entrusted to their care.
The PLSA will continue to work with its members to ensure that companies make the best possible long-term decisions in the interests of the millions of savers who rely on corporate success for their retirement income. If you would like to hear more about our work, please contact [email protected].