Hope you are doing well and staying safe. Welcome back to our brief thoughts on ESG. This week I would like to comment on what investors across the globe are saying about executive compensation in the new normal (some info on this topic can be found here, here, here, here, or here).
First, executive compensation has been subject to scrutiny for quite some time now. Investors who have done some degree of ESG integration in their analysis process are well versed on this subject. Every year there is more pressure to link executive compensation to ESG performance. Even those that don’t necessarily want to see it linked to ESG, at least want to make sure it reflects the reality of the company.
Now, this year this is particularly tricky for this subject as the pandemic and its impact on the economy has made everyone even more sensitive to how fairly are companies treating all their stakeholders. Are companies taking similar measures with their shareholders vs their management team? Are companies being fair with their employees across different levels? Are companies being fair with their suppliers? And the question list goes on.
Executive compensation becomes very visible because for socially responsible investors (and remember more and more funds are adding SRI goals to their mandates) this year it is not only about pre-set compensation packages or the results the company was able to deliver last year. This year it is also about forward looking strategies for companies’ new realities, all while stakeholder capitalism has taken the front seat. What does all this mean? In a nutshell, it means that if companies act tone deaf and pay their CEOs bonuses that are uncoupled from what the company is living, or what any other stakeholder is going through, investors won’t be happy. If a company lowers the salary for its employees, but still pays top management similar bonuses, or if a company retains cash from shareholders (dividend-paying stocks) but still pays related parties the same fees, all of it will be heavily criticized.
So, what should companies do? We think companies need to think about all stakeholders before acting on liquidity preservation measures. Is there a way to share the pain that is more fair to everyone? We don’t think the solution is to pretend nothing is happening and do nothing (that clearly would be naïve). But we don’t think the solution is sacrificing one stakeholder group’s interests over others either. Thus, as companies start to adjust their strategies to the likely industry outlook post-COVID, we think in the long run they will be better off if they make sure their actions are not being more benevolent to control groups vs minorities.
In Mexico executive compensation is not transparent, nor we think it ever will be. But there are certain things that are difficult to hide. This is particularly true for companies that have structures with external advisors that get fees (like FIBRAs). As AFOREs (local pension funds) become more vocal, we think that if companies stop payments to one stakeholder group (employees, or shareholders, or even debtholders – which to date hasn’t happened really), but leaves their advisor untouched, they should expect their access to the local capital markets in the future will be affected. Some Mexican companies, such as Alsea, have already announced that senior executives will be foregoing bonuses due to the crisis.
Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly.
Partner, Miranda ESG
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