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Oil company worried that global recession could extend to 2023. Royal Dutch Shell cut its dividend for the first time since the Second World War on Thursday, in a drastic step to preserve cash as it prepares for a protracted slump in demand for oil because of the coronavirus pandemic. The Anglo-Dutch energy company also suspended share buybacks and said it would reduce oil and gas output by about a quarter after its net profit almost halved in the first three months of 2020 to $2.9 billion US. The new measures combined with cuts in capital spending and planned cost reductions announced last month could save Shell almost $30 billion this year to help it weather the crisis and prepare for the transition to low-carbon energy. "We are living through a crisis of uncertainty," CEO Ben van Beurden said. "If we had not cut the dividend ... we would have been left without options to reposition the company for the recovery and the future."
As COVID-19 has continued to spread globally, U.S. and foreign markets have been dramatically impacted, leading to the largest declines in stock prices since the 2008 credit crisis. Given the extreme market volatility associated with the ongoing COVID-19 pandemic, a significant rise in stock-drop securities litigation seems likely. [...] Finally, the SEC’s Division of Corporation Finance has identified several key questions to consider with respect to a company’s present and future operations in the context of COVID-19 disclosures, including:
“How has COVID-19 impacted your financial condition and results of operations?”
“In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?”
“Do you expect that COVID-19 will impact future operations differently than how it affected the current period?”
“Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?”
“Do you expect COVID-19 to materially affect the demand for your products or services?”
“Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services?”
“Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?”
“Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?”
“Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?”
Companies—public and private—have suffered steep declines in value in the wake of the COVID-19 pandemic. The declines have caused many employee stock options to become “underwater”—in some cases, significantly so. As a result, companies are forced to take accounting charges and deplete equity plan reserves for underwater stock options that no longer incentivize or retain employees. As in the Great Recession, companies are encouraged to consider mitigating these undesirable consequences through stock option repricings. [...] This post briefly highlights some of these issues and considerations. Companies are encouraged to contact us with questions or for more guidance.
Over the past several years, large institutional investors have addressed their growing concerns about the demands of board service by adopting or strengthening policies on a director’s total number of board commitments. This trend has resulted in significant declines in vote support for some directors considered “overboarded” according to these new or tightened guidelines. In many instances, these investor policies are stricter than those of the major proxy advisors. Heading into the 2020 proxy season, three institutional investors, State Street Global Advisors (SSGA), T. Rowe Price and AllianceBernstein, have tightened their director commitment policies. This follows similar actions by BlackRock in 2018 and Vanguard which adopted its first overboarding policy in April 2019. Vanguard subsequently modified its policy in early 2020 to allow some flexibility to consider company-specific facts and circumstances. As a result of these strengthened investor policies, non-executive directors who serve on more than four boards and CEOs (as well as NEOs for certain investors) who sit on more than one outside board can expect to see a decrease in support as compared to prior years.
As many businesses discharge, furlough, or drastically reduce pay to large shares of their workforces, some compensation committees are announcing their decision to cut base salaries and annual bonuses for C-suite executives as well as board cash retainers. The Conference Board, in collaboration with Semler Brossy’s research team and ESGAUGE Analytics, is keeping track of SEC Form 8-K filings by Russell 3000 companies announcing these reductions. For the live database and some helpful visualizations of key trends across business sectors and company size groups, click here. The following are some key observations from disclosures made since March 1, 2020. (Note: The commentary below refers to disclosure made as of April 24, but the database is updated weekly; please review the database and visualizations for the most current information).
Over the last two years, direct listings – in which companies list their stock on an exchange to enable insiders and early investors to sell their holdings to the public without issuing new shares – have received considerable attention as an alternative to traditional initial public offerings.[1] Until now it has been assumed that claims under Section 11 of the Securities Act, which generally require plaintiffs to “trace” their purchases to a registration statement, would be difficult to pursue because many shares in a direct listing may be sold without using a registration statement.
Alberta’s public pension manager has estimated losses from a bad bet on market volatility at $2.1-billion and said its board of directors has launched a review of the strategy that led to the costly rout. In a letter posted online, chief executive Kevin Uebelein said that Alberta Investment Management Corp. takes responsibility for the losses and has worked to limit the eventual damage. Last week, The Globe and Mail, quoting sources at AIMCo’s pension-fund clients, reported that it incurred up to $4-billion in realized and unrealized losses, and that some could be recouped. On Thursday, AIMCo said the loss was less significant. The final tally is expected by June. Nonetheless, Mr. Uebelein, in his first public comments about the situation, called the recent performance of the volatility-linked investment strategy “not acceptable.”
One thing I tell people who are considering joining a board is to ask for and review a summary of the D&O liability insurance policy. After all, legal liability is arguably the biggest risk you are taking when you sign up to be a director of a public company. (Think class action and shareholder derivative suits.) Of course, actually being held liable rarely happens because it's incredibly difficult to be found liable under state law for your actions as a corporate director. Still, that doesn't protect you from getting sued and having to lawyer up until the company agrees to a settlement with the plaintiffs. So, you'll want to know the insurance is there and that the company will cover your legal bills in advance rather than leaving it up to you to front the costs of your defense attorneys and then ask for reimbursement on the back end.
When Vancouver-based Silvercorp Metals Inc. earlier this week announced it would buy Toronto-based Guyana Goldfields for $105 million, it marked one of the first major corporate acquisitions in Canada in months. In large part that’s due to the uncertainty brought upon by the COVID-19 crisis, rock-bottom oil prices and Canada’s weak economic outlook that has forced many companies to set aside any expansionary plans. Social distancing policies and grounded planes have also made it nearly impossible to travel overseas, severely limiting any prospective buyer’s ability to conduct due diligence. And yet, Silvercorp, in what could be the “new normal” as one advisor put it, conducted its due diligence entirely online — potentially setting a new paradigm for how mergers can be consummated during a health pandemic. [...]
“Oftentimes, it’s the boards that have a more difficult time, but they were able to do a virtual due diligence process that was unique.” Typically, mine acquisitions involve site visits, and buyers like to talk to people on the ground, look at the mining licenses, and inspect the geology of the mine.
As many organisations adjust their business operations as a result of the COVID-19 pandemic, network and data security are in the spotlight. The significant increase in remote working, brings unique challenges and organisations must remain mindful of their legal obligations to keep personal data secure. In particular, the EU General Data Protection Regulation (“GDPR”) imposes a general obligation upon data controllers and processors to ensure the security of data processing against accidental or unlawful loss, damage, destruction, alteration or disclosure. [....] Set out below is a summary of important considerations from a data security standpoint, taking into account the GDPR’s requirements as well as guidance from data protection supervisory authorities in the UK, France, Belgium, Germany and Italy.
More remote work and better crisis communications. Less dependence on a single supplier and fewer in-person board meetings. Those are just some of the ways companies and their boards are likely to change how they operate as the coronavirus pandemic puts pressure on crisis planning. Crisis preparedness is getting more attention among directors, who say they hadn’t done enough contingency planning before the Covid-19 virus outbreak. “What this has taught a number of board members is that they need to stress their plans and test them more severely in the future,” said Steve Klemash, who leads a board center for the Americas at auditing firm EY. “As they do post-mortems on this crisis, you’ll see that playing out.”
Bill Steiner would have seen the 2020 proxy season as a busy and exciting for individual shareholder activists. While the SEC considers changes (your comments can still have impact, even if submitted late) to reduce the influence of shareholders, so called “gadflies” continue to demonstrate leadership, effectiveness and ability to score victories; prompting many companies to make positive change before the proceedings even begin. [...] Indeed it is widely acknowledged that he can at least in part be fairly credited with helping to bring about the following changes in corporate governance over the years:
Eliminating retirement plans for outside directors
Eliminating the staggered system of electing directors
Eliminating the use of poison pills as an entrenchment device
Requiring at least 50 percent of directors pay to be in the form of stock
Requiring that auditors be truly independent and not consulting at the same company simultaneously
Requiring that the majority of the board be truly independent, with strict guidelines and criteria
In early 2020, State Street Global Advisors, BlackRock, and other investment firms announced their plans for persuading companies to address financially-material environmental, social, and governance (ESG) issues. The high-profile announcements followed moves in recent years by Wellington Management, CalPERS, and other institutional investors to integrate climate-related data into their processes and increase the pressure on companies to more deeply consider climate change risks and disclose how they are accounting for those risks in their operations. Companies have responded with a steady stream of climate-related goals, commitments to disclose in line with the Financial Stability Board’s Task-Force on Climate-Related Financial Disclosures (TCFD) recommendations, and climate reports in addition to sustainability and annual reports.
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In July 2019 ICGN published a Viewpoint report on capital allocation, focusing on this issue from a corporate governance and investor stewardship perspective. [1] The report provided a framework to guide investors on what to look for and engage upon to promote responsible capital allocation practices supporting a company’s sustainable value creation. Clearly this 2019 Viewpoint did not anticipate the COVID-19 crisis or its subsequent impact on societies, economies and individual businesses. However, COVID-19 has since heightened the visibility of capital allocation as a critical governance issue, particularly as it is creating severe pressures on companies and forcing important and difficult capital-related decisions. Some of these pressures were identified in a March 2020 ICGN Viewpoint looking at the COVID-19 as a systemic risk for investors. [2] The report spoke to the need for companies to strike an acceptable balance between the needs and sustainability of the company itself, its providers of capital (both shareholders and creditors) and other key stakeholders. This raises important questions of capital allocation.
As companies brace for a “new normal” shaped by the global coronavirus pandemic, the 2020 proxy season is anything but routine. Large institutional investors continue to uphold high expectations with respect to corporate governance and stewardship, as many companies shift to virtual annual meetings and other accommodations to meet stakeholder needs. However, companies may in some instances receive welcome reprieve, as updated engagement priorities and voting expectations released by Vanguard, State Street and other large institutional investors may signal heightened flexibility in voting decisions. Overall, 2020 guidance provided by large institutional investors suggests a continued trend of stringent standards coupled with an expanded willingness to make informed voting decisions on a case-by-case basis and diverge from proxy advisory firm recommendations if companies appropriately explain their rationale and other relevant factors for their actions.
As the COVID-19 pandemic continues to unfold, U.S. public company compensation committees face unique challenges as they focus on retaining and appropriately incentivizing employees while evaluating the impact of the pandemic on the company. This post provides a high-level overview of some key issues that compensation committees should be focusing on in this environment. [...] Given the uncertainty in the market as a result of the COVID-19 pandemic, many companies are reevaluating their operating plans and business projections. This can make it challenging for some companies to set reasonable performance metrics for compensation purposes. Many calendar year-end companies have already set performance metrics and targets for 2020. For any companies that have not, compensation committees should consider whether it would be preferable to delay setting performance metrics until later in the year, or at least until after the company has determined the likely impact of the pandemic on the company’s business.
[...] Virtual meetings, in my experience, have been more problematic when hosted by Computershare than Broadridge but I have had issues at both. I hope everyone is documenting these issues and sending them to the company, host and the SEC. Here is the excerpt. [...] With most corporate annual meetings pivoting to a virtual format this year as a result of Covid-19 social distancing requirements, many shareholders are struggling to log in and have their questions answered by management during many meetings. While some problems appear to be related to the particular meeting platform, others are due to company practices at the meetings.
The Covid-19 outbreak demonstrates how vulnerable our elaborate cross-border supply chains are to disruption. It isn’t the first time in recent memory that contemporary supply chains have been upended – the 2011 earthquake off the coast of eastern Japan is one of many examples. But Covid-19 has taken supply chain disruption to a new level of severity as well as scale. Failure is no longer measured solely in economic terms; rather, the unavailability of key inputs, from reagents to ventilator parts to personal protective equipment, means the difference between life and death. How do we begin rebuilding our supply chains in the wake of Covid-19? The starting point, easily overlooked, is a commonplace transactional tool: the preliminary agreement.
May 1, 2020 – Preliminary data suggest Canada entered a recession in the first quarter of 2020 with a February peak, says the C.D. Howe Institute’s Business Cycle Council. The Council, comprised of Canada’s preeminent economists in the field and co-chaired by Steve Ambler and Jeremy Kronick, is an arbiter of business cycle dates in Canada. The Council typically meets annually, but also when economic conditions indicate the possibility of entry to, or exit from, a recession.
Teck Resources Ltd. has been targeted by a hedge fund shareholder that’s pushing the underperforming Canadian miner to divest its energy and coal businesses and consider replacing long-standing Chief Executive Officer Don Lindsay. Tribeca Investment Partners said making those changes and pivoting to a pure base metals miner would improve Teck’s environmental credentials and could lead to a six-fold share gain over the next year. The company should also scrap its dual-class shares to boost returns, the Australian fund with US$1.6 billion in assets said in a letter to the board. “There’s been a very steady de-rating of the company versus its peers over the last five years and if they continue to do nothing they can only see that continue,” said Tribeca partner Ben Cleary, citing overhauls at Teck rivals Rio Tinto Group and BHP Group as examples of a better way forward.
The coronavirus pandemic continues to have profound effects on the U.S. and global economies. Investor concerns about the impact of COVID-19 and government-imposed restrictions on individuals and businesses have led to unprecedented market volatility. Further material volatility is anticipated. The resultant precipitous decline in stock prices has made many companies vulnerable to opportunistic takeover bids, creeping accumulations or activist strategies of parties seeking either to take control of a company without paying an appropriate control premium to all stockholders or to influence companies to take actions in the particular interests of such parties and not the companies’ stockholders’ best interest. In this environment, publicly traded companies may want to evaluate the adequacy of their corporate defenses to protect their stockholders from such predatory activities.
The economic news has been terrible. Never mind Wednesday’s G.D.P. report for the first quarter. An economy contracting at an annual rate of almost 5 percent would have been considered very bad in normal times, but this report only captured the first few drops of a torrential downpour. More timely data show an economy falling off a cliff. The Congressional Budget Office is projecting an unemployment rate of 16 percent later this year, and that may well be an underestimate. Yet stock prices, which fell in the first few weeks of the Covid-19 crisis, have made up much of those losses. They’re currently more or less back to where they were last fall, when all the talk was about how well the economy was doing. What’s going on?
Which emerging markets are in most financial peril?
Our ranking of 66 countries shows which are in distress, and which are relatively safe.The grubbiest garments are found elsewhere—among the world’s emerging markets. They collectively owe $17trn of government debt, 24% of the global total. Eighteen of them have had their credit ratings cut in 2020 so far by Fitch, more than in the whole of any previous year. Argentina has missed a $500m payment on its foreign bonds. If it cannot persuade creditors to swap their securities for less generous ones by May 22nd, it will be in default for the ninth time in its history. The laundry pile also includes Ecuador, which has postponed $800m of bond payments for four months to help it cope with the pandemic; Lebanon, which defaulted on a $1.2bn bond in March; and Venezuela, which owes barrelfuls of cash (and crude oil) to its bondholders, bankers and geopolitical benefactors in China and Russia.
In a recent Op-Ed in Barron’s , four current state treasurers argue that the SEC’s proposed rules for proxy advisory firms are a harmful overstep by the agency tasked with protecting investors and promoting the creation of wealth in this country. As the former State Treasurer of Connecticut, I strongly disagree with their position. The proposed regulations by the SEC will correct the unintended consequences of a 2003 SEC rule that required investment advisors to adopt policies and procedures to vote on all proxy proposals as a way of improving the function of the capital markets.
The Covid-19 pandemic has revealed social failings and inequalities that has prompted the elevation of “social factors” to a new level of importance in corporate governance, according to a group representing investors with $54m under management. The statement was made in guidance on corporate responsibilities issued by the International Corporate Governance Network (ICGN) which emphasises the need for companies to “prioritise” employee health and welfare. It also called on companies to pursue “a long-term view on social responsibility, fairness and sustainable value creation”.
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