As managers and boards navigate unprecedented strategic and operational challenges related to the Covid-19 pandemic, compensation committees are tasked with a daunting dilemma of their own: keeping talented managers on board while avoiding actions perceived as shielding them from the same fallout endured by shareholders and workers.

Salary cuts for executives make headlines but mean little if the more opaque aspects of their compensation plans still result in excessive take-home pay. That is why in the coming months, institutional investors, proxy advisors and workers will be closely scrutinizing the changes compensation committees make to executive compensation plans. Memos from law firms and compensation consultants suggest that these actions are likely to include:

These changes ultimately may lead compensation committees to confront more fundamental questions, such as:

Those compensation committees that make Covid-19-associated adjustments to executive compensation to sustain historical quantum should prepare for blowback. Conversely, committees are likely to find surprising levels of support if they approach the adjustment question with a commitment to moderation (including zero tolerance for windfall scenarios) and a laser-focused awareness of how the company's shareholders and other stakeholders are faring in this crisis.

A growing number of companies are suspending or postponing dividend payments as they continue to grapple with the economic repercussions of the Covid-19 pandemic, and the suspension is resulting in generally reliable "dividend investment" funds that are dependent on these payments to plummet.

Widespread stay-at-home and social distancing orders have affected every sector of the U.S. economy, disrupting revenue streams and depleting cash reserves. Both financial and political influences have pushed companies to amend their capital allocation policies, often resulting in a suspension of dividend payments to investors.

In the retail sector, Macy's and Nordstrom are discontinuing dividend payments while Kohl's announced it is re-evaluating future payments. With companies in the energy sector also facing a steep decline in the price of oil, Royal Dutch Shell and Total SA suspended these payments indefinitely.

The airline industry, which was one of those hit hardest by the pandemic, quickly announced changes to dividend distributions. The CEOs of Alaska Air, Atlas, American Airlines, FedEx, Hawaiian, JetBlue, Southwest, United Airlines, and UPS pledged to halt dividend payments after receiving relief through government-subsidized loans. Boeing and Delta already had shelved dividend payments indefinitely to conserve cash.

The widespread interruption in the flow of dividends is causing typically reliable bear market investments to falter. Vanguard's Dividend Growth Funds (VDIGX), which normally would be expect to provide a degree of protection to investors in a down market, is performing worse than its equivalent S&P 500 fund. 

The International Corporate Governance Network (ICGN), in a recent Viewpoint  laid out specific considerations for corporate boards to bear in mind when making decisions about capital allocation during the Covid-19 pandemic.

 

Dividends  - ICGN warns that capital allocation decisions that have disproportionately positive or negative impacts on any one component of the ecosystem of companies and their executives, investors and stakeholders will be scrutinized by investors and must be weighed carefully by boards. Along this line of thinking, cuts to dividend payments will affect not only a few wealthy investors, but ordinary savers and pensioners as well. "This is a broad base of society, for whom a basic retirement income represents a social good," ICGN explains. "Particularly as end beneficiaries the needs of the ordinary shareholder must be considered in the capital allocation process," it warns.

 

Shareholder Rights  - While investors may grant companies greater flexibility during the pandemic to conduct virtual annual meetings and make capital allocation decisions, among other actions, traditional shareholder rights and standards should be reinstated when more normal market conditions are established, asserts ICGN. "Company abuse of shareholder rights will be tracked by investors and can damage investor trust," it warns.

 

Long-Term Focus  - Prescriptive capital allocation solutions such as bans on buybacks or dividends will not be relevant for all companies in all sectors, nor likely to stand the test of time, ICGN cautions in its Viewpoint. "It is ultimately a matter for the company and its board to develop a bespoke and balanced response that meets the company's immediate needs during the crisis, but also positions it for long term sustainability and positive outcomes for investors and stakeholders," the group explains.

AT&T appears to be using its move to a virtual-only format for its April 24 annual meeting to prohibit proponents from presenting their shareholder proposals during the meeting. In correspondence to shareholder John Chevedden, AT&T indicated that in lieu of presenting his proposal during the meeting by phone, he must provide the company with a pre-written statement not to exceed 100 words. AT&T will read that statement aloud if it passes the company's test for appropriateness. Also of note, AT&T is encouraging all of its shareholders to submit questions in advance, with unanswered questions to be addressed by individual emails rather than appearing publicly on the company's investor relations site.

Royal Dutch Shell will follow the strict UK social distancing rule (no more than two people in one meeting at a time), and the two individuals attending the May annual meeting in Amsterdam will be board members. The rules in the Netherlands are not as restrictive. An emergency Dutch law is anticipated that will permit virtual-only annual meetings through the end of this year, and will require companies to provide opportunities for shareholders to ask questions in advance and during the meetings, and all questions must receive responses.

New York City Comptroller Scott Stringer and the New York City Retirement Systems (NYCRS) negotiated with 13 companies convincing them to adopt diversity search policies that extend beyond directors to CEOs. The policies were adopted in response to shareholder proposals submitted as part of their Boardroom Accountability 3.0.project. While many companies already have diversity policies governing director searches, the comptroller's office believes these are the first public companies to extend the policies to external searches for CEOs.

The boards at each of the following companies approved, and publicly disclosed, policies requiring the consideration of qualified women and racially/ethnically diverse candidates for director and external CEO searches:

Many of the policies adopted by these firms include explicit provisions that the boards will instruct any search firms they retain to include such individuals in their initial list or pool of candidates. These policies build on the "Rooney Rule" pioneered by the National Football League, which requires teams to interview minority candidates for head coaching, general manager jobs and equivalent front office positions. The policies do not dictate who should be hired, but instead widen the talent pool and require a diverse set of candidates for consideration.

Regions Financial was one of the first companies to respond to the comptroller's initiative. The company enacted a CEO diversity search policy, extending its existing Rooney Rule policy for director searches to also apply to searches for certain executive officers, including the CEO.

The boards at two focus companies - A. J. Gallagher and PACCAR - took half steps, adopting a policy governing only director searches, but not external CEO searches, which was a condition for any withdrawals of the shareholder proposals. The SEC permitted PACCAR to omit NYCRS' shareholder proposal from its proxy statement, while the proposal at A.J. Gallagher will go to a vote at the company's May 12 annual meeting. Proposals will also go to votes at Berkshire Hathaway (May 2) and Expeditors International of Washington (May 5).

Hong Kong Exchanges and Clearing Limited (HKEX) is seeking comment on a proposal that would allow corporate holders to have dual-class shares with super voting stock in companies listed on its exchange. In 2018, HKEX began allowing companies listed on its exchange to issue super voting stock, but this was limited to individual holders. The consultation paper aims to allow startups to issue super voting stock to corporate investors that are leaders of the listed company's business "ecosystem" and significantly influence the listed company's strategy.

The exchange says it " believes that the 'one-share, one-vote' principle continues to be the optimum method of empowering shareholders and aligning their interests in a company." However, it contends that the proposal could attract more innovative companies mainly in the technology sector. Their addition would diversify the Hong Kong market and help it compete with U.S. exchanges where many Chinese dual-class companies with corporate shareholders currently list, HKEX argues.

The proposal would allow corporate shareholders to have weighted voting rights at "innovative companies" as long as the corporate holders have:

 

In addition, the proposal would create a 10-year sunset for the corporate dual-class shares. However, after 10 years, the corporate dual-class shares would be subject to a renewal vote through which independent shareholders can vote to maintain the corporate weighted voting rights for up to five years at a time. The proposal does not limit the number of renewal votes and thus could allow the corporate dual-class shares to be renewed indefinitely. The consultation does not define independent shareholders.

CII wrote to HKEX in 2018 opposing its listing of dual-class companies. In the letter, CII stated that if HKEX were to allow dual-class listings it should create rules including reasonable time-based sunsets, market capitalization and revenue thresholds, minimum collective economic interest requirements and caps on voting power per share. CII will also be expressing similar views on this proposal before the May 1 deadline for receipt of comments.

The 2nd U.S. Court of Appeals in Manhattan ruled April 7 that a shareholder class action against Goldman Sachs related to the financial crisis should proceed. In the case, which dates from the 2008 financial crisis, three pension fund litigants accuse Goldman of hiding conflicts of interest in creating risky subprime securities, including those involving dealings with hedge fund manager John Paulson.

In its 2-1 decision, the appeals court rejected Goldman's arguments seeking to overcome a presumption that shareholders relied on company statements that client interests "always come first" and "integrity and honesty are at the heart of our business." Goldman argued that permitting class actions on "general" claims like these would turn securities fraud claims into "a form of investor insurance."

The court said Goldman raised legitimate policy concerns, including "that class certification can pressure defendants into settling large claims, meritorious or not, because of the financial risk of going to trial." But, the court said, "our law already beats back this parade of horribles." The law permits materiality challenges at an early stage and a "do-over" opportunity to try a second time on materiality in seeking lower court summary judgment; and in presenting evidence at a later stage to disprove share price impact.

The case has been brought by the Arkansas Teacher Retirement System, the West Virginia Investment Management Board and Plumbers and Pipefitters Pension Group. It involves several collateralized debt obligations, including an "Abacus" vehicle that the SEC investigated. That investigation led to a $550 million settlement in 2010.

Glass Lewis will now include unedited company feedback on its research with the proxy research papers it provides to clients, the proxy advisor announced earlier this month.

 

For a bundled fee, companies that purchase a Glass Lewis report will have up to seven days after the report has been published, and no later than 14 days before the company's meeting, to submit a response to the proxy advisor's research and voting recommendations. Glass Lewis will then republish the report with the company's' feedback included and accessible from a link on the report's cover page. Clients will be notified immediately when feedback is available and investors can make or change their voting decisions based on this information. Shareholder proposal proponents can also access this service and respond to Glass Lewis's recommendations.

 

"For investors, the ability to continue to receive timely and accurate research, alongside company feedback, without introducing unnecessarily complex mechanisms that take away investors' precious time and resources, or compromising their proxy advisor's independence, adds substantial value to the research and voting services they receive from us," said Glass Lewis' SVP and General Counsel Nichol Garzon.

 

For a full description of the new service, please visit Glass Lewis' Report Feedback Statement webpage .

Each proxy season, CII highlights upcoming annual meetings at which shareholder proposals filed by CII members will come to votes.

Ameren - The Nathan Cummings Foundation is asking (p. 85) the company's board to adopt a policy that the board chair be an independent director. The board opposes the proposal. Similar proposals received 26.3% of the votes cast 2014 and 22.5% in 2015.

Duke Energy - The New York City Pension Funds are asking (p. 70) the company to take any necessary actions to require that the chair of the board be an independent director. The board opposes the proposal, citing its current governance practices, notably its lead independent director role, which it feels provide effective independent oversight.

The New York State Common Retirement Fund is asking (p. 75) the company to prepare a semiannual report on its political contributions and spending, including payments to organizations that are used for election-related purposes. The board opposes the proposal, saying that it already discloses its political contributions. In 2019, a similar proposal garnered 35.8% support from Duke shareholders.

AbbVie - The Employees' Retirement System of Rhode Island and the Vermont Pension Investment Committee are asking the company's board to adopt as policy and amend the bylaws to require that the board chair be an independent director. A similar proposal on the ballot at AbbVie's 2018 annual meeting received support from 39% of the votes cast in 2019 and 38.6% in 2018.

Marriott International - The AFL-CIO is asking (p. 9) the company to take the steps necessary to remove the supermajority vote requirements in its charter and bylaws and replace them with a simple majority vote requirement. In 2019, a set of management proposals to remove the company's supermajority vote provisions received support from almost 78% of votes cast and 62% of outstanding shares, but failed to meet the existing threshold of two-thirds of outstanding shares needed to amend the governing documents. The proponent asks that Marriott try again to remove these requirements. The board opposes the proposal, saying that limited supermajority requirements ensure broad consensus for fundamental corporate changes and that previous attempts to remove these requirements failed. Before the 2019 management proposal, Marriott investors voted on similar shareholder proposals a handful of times. In 2018, a proposal to adopt a simple majority vote garnered 65.3% of votes cast, up from the 43.7% of votes cast this kind of proposal received in 2016, the 42% it received in 2015 and the 47.1% it received in 2014.