The Investment Association (IA) has written to the chairs of FTSE 350 companies setting out the position of the IA in relation to certain issues which have arisen due to the COVID-19 pandemic. The letter emphasises the IA’s position as a representative of long-term investors and clarifies the views of its members as regards the need to support businesses which, although impacted by the current situation, remain fundamentally capable of delivering “sustainable long-term value for savers and investors”.
This follows guidance from the Financial Reporting Council on Friday about what companies should expect from legislation being drafted to help them hold their AGMs whilst taking into account travel and social distancing restrictions. But, companies should not forget that for many shareholders the AGM is the only opportunity to ask questions. Stakeholder engagement throughout this time is very important, particularly if a company is intending to go to the market to raise cash anytime soon.
The letter, written by Andrew Ninian, Director of Stewardship and Corporate Governance, focuses on a number of key areas:
Engagement and Communication
The letter notes the “significant” pressure facing boards and management teams, and suggests that shareholders should allow boards to focus on the most “significant” issues facing their businesses. In return, the IA asks managers to maintain an “open dialogue” with shareholders and other stakeholders.
The letter reiterates the FCA’s request that companies observe a moratorium on the publication of preliminary financial statements in order to allow them and their auditors to properly consider and make disclosures in respect of the events which they are facing as a result of the pandemic.
As covered in a recent post, there have been rapid changes to the issue of AGM notices in the current crisis. Changes are also anticipated relating to quorum requirements, holding “hybrid” meetings and extending the period within which to hold an AGM. In particular, the guidance and supplementary guidance from ICSA is welcomed and the IA encourages companies to consider other means of effectively engaging with stakeholders besides the AGM.
The IA acknowledges in its letter that companies must consider their financial position (including with respect to current uncertainties) both when declaring and when paying dividends. That said, the letter warns that shareholders would be “concerned” if there were unnecessary reductions in dividend payments. Above all, the letter urges transparency regarding the approach companies take to dividend payments.
The letter refers chairs to the existing IA Principles of Remuneration, and reiterates that in line with those principles, executive pay should take into account “shareholder experience” of the company’s performance, not simply its financial performance. To the extent that companies cancel dividends or make changes to employees’ pay, the IA expresses its support for companies which consider how this should be reflected in executive pay.
Long Term Capital Raising
Unsurprisingly, the IA accepts that some companies are likely to require additional capital in the near future. However, in some recent share issues small shareholders were excluded from the opportunity to buy cheap shares and saw their shareholding diluted. For this reason the letter confirms that, notwithstanding the current situation, IA members believe that the Pre-Emption Group guidelines should continue to be followed. The IA confirms its commitment to work with regulators, lawyers and others to explore means of shortening the usual timetables which apply in relation to pre-emptive fundraisings. The IA accepts that in “exceptional” circumstances, a cashbox placing may be the only suitable option, but the IA expresses its position that such placings should be offered to long-term shareholders and will be subject to shareholder scrutiny at the next AGM.
The IA accepts that “difficult decisions” will need to be made. An interesting piece on the accute boardroom dilemmas facing directors (by colleague Matthew Kirk) is available here. However, the IA also reiterates that it will continue to support companies which take a long-term, sustainable approach, as reflected in the positions set out in the letter.