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Comment: Corporate governance should not die from Covid-19

The promotion of ‘S’ factors is not an excuse to undermine governance

No-one is denying that the coronavirus outbreak is a societal test, albeit a temporary one.

It is also a test of governance too, about how our societies are run, and also how our companies are managed.

But some are talking up the ‘S’ factors in ESG at the expense of the ‘G’, governance.

Is this an attempt to use the outbreak as cover to undermine corporate governance as a concept? We should be alive to that possibility.

With the ‘S’ apparently now at the forefront (and once this is over, will it still be so?), there’s a sense that governance will have to be sacrificed for the greater good, as collateral damage, while all right-thinking capitalists focus on the ‘S’ like never before.

We are starting to see phrases entering the debate that would raise eyebrows in normal circumstances.

Take the assertion that shareholder rights aren’t “sacrosanct”.

This comment comes from UK business group the Institute of Directors (IoD). It was made in a LinkedIn post by Head of Corporate Governance Roger Barker.

Here is the context: “Finally, we should not view existing shareholder rights as sacrosanct during the crisis. Shareholder rights are not the same thing as human rights, which should never be seen as negotiable. Rather, they are pragmatic arrangements that have been established in order to underpin the prosperity of the economy as a whole.”

In another post, Barker observed that the crisis is “providing a stark demonstration that shareholders are no longer the stakeholders that matter most”.

This sort of language echoes the US Business Roundtable’s talk about the ‘purpose of the corporation’ – which we at RI take with a pinch of salt.

Of course wider stakeholders are important. To us, it is implicit and fundamental. What is notable here is the denigration of shareholders. Who are shareholders if not pensioners and beneficiaries? 

Barker does admit that these “emergency measures” are temporary but adds: “We have received a stark demonstration of which stakeholders really matter in our economy, and this may exert a long-lasting impact on their relative importance within our overall corporate governance system.”

Surely the fund management trade bodies are standing up for governance?

European fund management umbrella body EFAMA responded to the EU sustainable finance consultation by questioning whether “now is the right time” to dedicate efforts to the ‘G’ factor.

We are indeed living in strange times and it’s almost surreal to see EFAMA, which represents 28 national associations, instead calling for a “focus on the ‘S’ factor”.

Channeling its inner NGO, it says the outbreak has “exposed the flaws in our societal systems”. But EFAMA has a history as a governance sceptic. For example board member Fabio Galli has said in the past that: “I’m not sure about the intrinsic value of corporate governance for investors.”

The latest statement from EFAMA even makes this startling comment: “While asset managers play an important role in providing investors with the information they need to make informed decisions, ultimately it is the investor who makes investment decisions.”

It is against this backdrop that a group of European trade bodies has quietly asked the European Commission to postpone the implementation date of the revised Shareholder Rights Directive, by a year, to September 3 2021.

The bodies believe it “will be difficult, or nearly impossible” to meet the current deadline.

It is due to be implemented in 140 days time (Broadridge has a countdown here).

The groups, which include the European Banking Federation (EBF), the Association for Financial Markets in Europe (AFME), the International Securities Lending Association (ISLA), the Association of Global Custodians and others, have written to the Commission to say their staff are “at full capacity to ensure market and business continuity” and that “run-the-institution” activities have gained priority over “change-the-institution” activities.

“In essence, we are requesting a 12-month delay in order to ensure that the SRD II implementation does not coincide (with further adverse impacts on all stakeholders) with the highly active period of Annual General Meetings (AGM) and dividend distributions.”

It is worth stressing here that the Shareholder Rights Directive is actually more about shareholder obligations and duties; it obliges institutional investors and asset managers to be more transparent about their investment strategies and their engagement policies.

And with investors “standing with” business – in the words of the Investment Association – is there a risk that the simple notion of shareholders holding corporates to account will diminish? 

Even diehards like Boston Trust Walden are saying that some company dialogues are “paused”; it is pinning its hopes on its “longstanding relationships” with companies.

It is to be hoped that these relationships survive the outbreak but we must not let governance be another victim of the virus.