Investor Stewardship During the Covid-19 Crisis
The Covid-19 pandemic represents an unprecedented challenge to the global economy. The public health crisis has brought to the fore the inextricable links between the long-term viability of companies and the health and welfare of their employees, suppliers, customers and the communities in which they operate. The pandemic response has resulted in mass business shutdowns and historic unemployment, creating significant disruptions to society, and disproportionately impacting workers in low-wage sectors and vulnerable communities. Workers who are on the front lines providing essential services in health, retail and logistics make low wages, lack adequate health insurance and paid leave and are facing a dearth of personal protective equipment.
SEC Guidance on COVID-19 Disclosure
On April 8, 2020, the SEC’s Chairman and the Director of its Division of Corporate Finance issued a public statement on corporate COVID-19 disclosure and mitigation efforts, requesting companies provide as much information as is practicable regarding their current operating status and future operating plans under various COVID-19-related mitigation conditions in their earnings releases, analyst calls and communications. The statement said that “efforts to protect the health and well-being” of their workforces, “may be of material interest to investors” and encouraged disclosure on the subject.
On June 23, 2020, the staff of the SEC’s Division of Corporate Finance updated an initial guidance of March 25, 2020 addressing COVID-19 disclosure to specify that disclosure on operational alterations to address COVID-19 challenges includes implementing health and safety policies for employees, contractors, and customers, and challenges related to employees returning to the workplace.
The Investor Response
On June 16, 2020 a group of 98 investors, State Treasurers, public interest groups, labor unions, asset managers and securities law experts wrote a letter to SEC Chairman Clayton urging the SEC to institute new disclosure requirements to allow investors and the public to analyze how companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal pandemic recovery aid they receive. This disclosure should include:
A workplace COVID-19 prevention and control plan
Virus identification contact tracing and isolation policies for employees
Compliance with quarantine orders and phased reopening orders
Financial implications
Executive compensation
Employee leave
Health insurance
Benefits and protections for contingent workers
Three hundred thirty-five (335) investors managing over $9.5 trillion in assets have signed a statement listing key steps companies should take in terms of human capital management and their broader responsibility to society in addressing the pandemic. These include steps to:
Provide paid leave
Prioritize health and safety
Maintain employment
Maintain supplier and customer relationships
Re-assess share buybacks and executive compensation
Investors are focused both on the short-term corporate response to the pandemic and the potential impact on the viability of the company’s business model and capital allocation strategy. The COVID-19 crisis has highlighted the subterfuge of low wage, independent contractor and part-time employment models in which necessary capital investment in essential labor assets in the form of health care and other benefits has been persistently outsourced by companies to workers who lack an adequate safety net even under more normal conditions. Capital allocation decisions favoring share buybacks and excessive executive compensation over reinvestment in the business, particularly when coupled with higher amounts of debt, have increasingly been of concern to investors, and the crisis has deepened worries of the financial imprudence of such actions.
In a COVID-19 Bulletin, the PRI has urged responsible investors to ensure that social issues such as emerging labor practices receive attention as a priority issue, and as an integral part of business models, not as isolated risk management considerations. The PRI recommends investors not only engage companies that are failing in their crisis management, but also examine where other harm is being hidden behind, or worsened by, the crisis. Investors should maintain a long-term focus in investment decision-making in response to the COVID-19 crisis, and be open to supporting companies, debtors and governments with flexibility in financial arrangements and with more direct support where feasible.
Guidance co-developed by the PRI, Business & Human Rights Resource Centre, California State Teachers’ Retirement System (Cal STRS) and APG provides investors with ESG-related questions to ask portfolio companies’ – at annual general meetings and in follow-up engagements – about their responses to COVID-19. A number of suggested questions build upon existing guidance from Human Capital Management Coalition, State Street Global Advisors, UN Global Compact, Domini Impact Investments, Interfaith Center on Corporate Responsibility and International Corporate Governance Network. The questions address three themes:
Business continuity – for employers, suppliers and communities
Employee health and wellbeing – to ensure an engaged workforce
Alignment with long-term value creation
CalSTRS and APG are mobilizing PRI Investor Members via the PRI Collaboration Platform to engage portfolio companies on their response to the current pandemic.
The International Corporate Governance Association has provided its viewpoint on the coronavirus as a new systemic risk and its implications for corporate governance and investor stewardship here. Its views on COVID-19 and capital allocation can be found here.
Investor members of the Interfaith Center on Corporate Responsibility (ICCR) have sent letters to:
Fourteen pharmaceutical company CEOs, calling for a collaborative approach in the development of health technologies, including diagnostics, treatments and a vaccine in the global fight against COVID-19
Forty-three apparel and footwear brands named in a December 2018 report of KnowTheChain on forced labor risk, urging them to safeguard workers during the pandemic
Fifteen food and beverage companies and retailers, asking them to address short-term demands on the food supply chain
ICCR has also released a joint statement endorsed by 129 institutions with $2.4 trillion in combined assets that highlights risks to workers in the meat sector due to the COVID-19 pandemic, and contains specific recommendations to help safeguard all stakeholders, workers, and their families and communities.
The Union Response
With many members working on the front lines of the pandemic response and essential services, COVID-19 is a critical issue for labor union members and affiliates. Labor organizations such as Service Employees International Union (SEIU), International Brotherhood of Teamsters, United Farm Workers, and Communications Workers of America are working to ensure that workplace standards, training and resources are sufficient to protect workers and communities, and working with members to expose unsafe working conditions. They are providing regular industry and policy updates to members and affiliates, and supporting them in engaging with management on these issues.
Impact on Annual General Meetings (AGM)
Participation in AGMs is an essential element of corporate engagement by investors. Under current public health guidelines and directives, the number of virtual meetings has proliferated. The Council of Institutional Investors (CII) considers that these should represent a “one-off, tailored for current circumstances” approach. Issuers should ensure that virtual meetings follow guidelines to ensure full shareholder participation, such as those recommended by CII, Broadridge, the Interfaith Center on Corporate Responsibility (ICCR), and Glass Lewis.
Investors should use the AGM as a unique opportunity to hear from management on COVID-19-related issues and to contribute to the discussion both as proponents of shareholders proposals, and during the question and answer sessions. The AGM is a timely and important forum to raise investor concerns, including any failures to adopt adequate safeguards to protect and support workers during the pandemic, procedures to ensure worker’s voices reach the board, and other measures to foster effective board oversight of workplace management during this critical time. In the current environment, investors should demand that boards show leadership by capping executive compensation and supporting business investment and liquidity rather than share buybacks.
Private Market Investments
The AGM provides a focal point for investors to engage public companies on the financial, operating and worker impacts from the pandemic as equity shareholders. In the case of private equity investments, companies are held in pooled funds that are managed on a fee and return- sharing basis by a controlling “general” partner. They present different investor risks due to the lack of transparency typically afforded investors as “limited” partners, and the potential for misalignment of economic interests between the general and limited partners inherent in their cost structure. While many of these private companies have been negatively impacted by the pandemic, investors have expressed concerns that government loans or relief assistance to private equity funds include appropriate safeguards and actions related to worker safety, employment and benefits, community impact, transparency and operating company financial benefit.
Resources for Investors
CII has created a COVID-19 resource center webpage on issues of particular concern to institutional investors and governance professionals, including U.S. regulatory and legislative developments and international market developments. CII is providing free access to this content.
ISS has published Policy Guidance on Impacts of the COVID-19 Pandemic with some specific guidance on a number of voting policy issues that are likely to be directly implicated over the coming months by the pandemic and the global response to it.
The Service Employees International Union (SEIU) conducted a nationwide online survey of 843 McDonald’s workers between March 31 and April 6, 2020 related to worker health and safety. SEIU and the CtW Investment Group presented the survey findings in a call with investors on April 8, 2020. They were joined by three current McDonald’s employees sharing their personal experiences of working conditions during the pandemic. For more, see the slide deck from the webinar. SEIU has also analyzed McDonald’s dividend policy in light of its lack of paid sick leave and quarantine pay for 95 percent of its employees.
Resources on COVID-19 workplace and investor risks at Amazon.com, Inc. can be found here, including:
Data from a nationwide online survey between April 29 and May 9, 2020 of over 4,000 workers across the Amazon system conducted by labor federation Change to Win
An editorial by the State Treasurers of Massachusetts, Wisconsin and Illinois calling on Amazon to disclose the COVID-19 impact on its workers
Suggested investor questions for Amazon’s Board of Directors
An overview of how investors such the New York City (NYC) Comptroller, the NYC pension funds and APG are engaging Amazon to urge transparency
A webinar addressing COVID-19 issues at Amazon with participation by Amazon workers, health and safety experts, the PRI and investors
The International Labour Organization and the United Nations Global Compact have statements of principles to guide good corporate practices in response to the COVID-19 pandemic.
Based on 5 years of public opinion research on what constitutes just business behavior, JUST Capital has identified 5 Principles to Help Guide Corporate America During the Coronavirus Crisis. JUST Capital’s COVID-19 Corporate Response Tracker looks at how the largest U.S. employers are treating stakeholders amid the coronavirus crisis through actions such as paid sick leave, furloughs, executive pay cuts, back-up dependent childcare, operational or service closings, hiring workers, bonuses or financial assistance, relaxed attendance policies and community relief funds. Originally covering the 100 largest U.S. public employers, the Corporate Response Tracker was expanded to cover the 301 largest U.S. employers as of June 9, 2020.
JUST Capital’s deep dive report on sick leave policies in the U.S. pre- and during the pandemic identifies “what good looks like” as a desired objective benchmark.
JUST Capital’s website highlights initial actions by individual companies that illustrate how leaders are navigating the crisis in inspiring ways and forging industry best practices. Its Daily Policy Blog includes ongoing updates, interviews and polling feedback regarding what Americans want most from companies in this time of crisis.
A New York Times editorial on the widespread lack of paid sick leave in restaurant, retail and other low-wage sectors in the U.S. examines the impact on workers, their customers and the broader public based on data collected by The Shift Project, a survey of the corporate benefits of workers at a group of 91 large restaurant and supermarket chains during 2018 and 2019. Research by The Shift Project also looks at the state of paid sick leave and COVID-19-related health and safety procedures for essential service-sector workers.
New America is tracking paid sick day policies announced by companies exempted from Families First Coronavirus Response Act (those with more than 500 employees).
New American Economy provides current estimates on how immigrants are part of America’s fight and response to the Covid-19 health crisis, both as frontline workers and in supply chains.