Investors are putting companies across sectors – and geographies – on notice when it comes to receiving state aid in the “presence of an ‘aggressive’ capital allocation strategy”, Responsible Investor can exclusively reveal.
Members of Shareholders for Change (SfC) – including Friends Provident Foundation, Bank für Kirche und Caritas, Meeschaert Asset Management, Forma Futura Invest and SANSO IS – are set to engage eight companies.
The firms targeted include Unicredit, Tui, Delta Air Lines and Unibail-Rodamco-Westfield.
The planned engagement follows research – financed by Etica Funds, fair-finance Gruppe and Friends Provident Foundation – assessing the behaviour of a sample of around 320 listed companies in Europe and North America.
Initially, a set of indicators were used to assess the behaviour of these companies with respect to employment trends, dividend payments, stock buyback programmes and share of subsidiaries in aggressive tax planning (ATP) countries.
Sectorial and geographical percentiles or thresholds were also defined to identify capital allocation behaviours that were considered relatively “aggressive” – for example, significant cuts in the workforce, very high payout ratios, high volume and frequency of share buyback programmes, high share of subsidiaries in ATP countries and/or hinting at possible income-shifting strategies.
Based on this methodology and using data from 2020 financial reports, 26 firms were identified as “aggressive” on more than one indicator.
For these firms, the analysis was then extended to the two previous financial years – 2018 and 2019 – to understand if the “aggressive” behaviours represented a trend or were limited to 2020.
Three additional aspects of corporate management were also investigated: the investment in research and development activities, executive remuneration and profits generated by subsidiaries located in ATP countries.
Finally, the researchers looked at whether the 26 “relatively aggressive” companies obtained state aid related to the covid-19 pandemic in 2020.
They found that 15 of the 26 obtained state aid, and of those, eight received government assistance directly attributable to the pandemic.
These final eight firms – which also include EssilorLuxottica, International Airlines Group, Compass Group and Coltene Holding – will be subject of the engagement launched during the 2022 AGM season.
“As responsible, long-term investors we consider that ‘aggressive’ capital allocation behaviour is not compatible with obtaining state aid,” the paper’s authors said. “This is particularly true in presence of a pandemic emergency where, more than ever, it would be more appropriate to invest in the sustainable, long-term development and resilience of companies and not in the creation of short-term value for shareholders.”
Alongside questioning the receipt of state aid in presence of an “aggressive” capital allocation strategy, SfC members aim to improve companies’ accountability and transparency relating to the acceptance and use of state aid, and question practices of “aggressive” capital allocation.
Different members of the network will lead the dialogues with companies in their country.
Colin Baines, investment engagement manager at Friends Provident, told Responsible Investor that the SfC members may decide to engage additional companies identified as “aggressive” in terms of capital allocation, focusing on those that received state aid not related to the pandemic.
At the time of publication only UniCredit had acknowledged Responsible Investor‘s request for comment and declined to provide one.
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