27 April 2020

ICGN: Social factors ‘now key to good corporate governance’ s

The Covid-19 pandemic has revealed social failings and inequalities that has prompted the elevation of “social factors” to a new level of importance in corporate governance, according to a group representing investors with $54m under management.

The statement was made in guidance on corporate responsibilities issued by the International Corporate Governance Network (ICGN) which emphasises the need for companies to “prioritise” employee health and welfare.

It also called on companies to pursue “a long-term view on social responsibility, fairness and sustainable value creation”.

A letter from ICGN’s chief executive and chair, Kerry Waring and Robert Walker, said: “The Covid-19 pandemic presents the most significant public health and economic crisis of our time and calls for new forms of co-operation on a global scale.

“It has ignited an acute recognition of social failures and deep gender, racial and income inequality.”

Pay restraint

The ICGN’s guidance follows public statements by a number of well-known investors and corporate governance specialists on adjusted expectations of companies as they grapple with the Covid-19 crisis.

A number of asset managers have issued warnings on executive pay, suggesting top managers share the same restraints as their employees.

Recently Hermes EOS, the governance advisory arm of asset managers Federated Hermes, wrote a letter to business leaders setting out their expectations, among them that corporates pursue a “purpose” centred on long-term value.

“All businesses are likely, directly or indirectly, to benefit from government action to support the economy,” said the letter.

“The Covid-19 crisis therefore highlights that all businesses need to have, and maintain, a social licence to operate which is underpinned by a corporate purpose centred on being sustainable and creating long-term value for its stakeholders, including shareholders.”

Defined purpose

Purpose is a theme pursued by the ICGN. Indeed, the network calls on companies to go public with their defined purpose as part of adjusting to a “new reality”.

The ICGN sets out its guidance across six categories: social responsibility, executive pay, dividend payments, capital raising, AGMs and director elections, and corporate reporting.

The ICGN calls on companies to avoid redundancies where possible, offer paid sick leave and be particularly sensitive to the plight of female workers who frequently work part-time and in low income roles often considered first for cost cutting.

“In many cases, people serving in these position have been on the front line against Covid-19,” the guidance says.

Like others, the ICGN has concerns about pay. It warns long-term financial health should have priority over bonuses and executive pay should “reflect the experience of the overall workforce”.

Dividends, the ICGN stresses, may need reducing or suspension.

Many companies have already suspended dividends though in small number of examples some have gone ahead.

Human rights

Meanwhile, investors elsewhere have piled pressure on governments to introduce mandatory human rights due diligence. Many argue a mandatory approach is needed because voluntary measures have failed.

However, some have observed that the pandemic has also emphasised the need for corporates to reform their due diligence of supply chains.

In a recent statement for the Investor Alliance for Human Rights, Phil Bloomer, executive director of the Business & Human Rights Resource Centre, said due diligence could help companies avoid doing harm.

“The current pandemic has exposed the harm and suffering created by companies’ lack of human rights due diligence. The harm is felt especially by the millions of women and migrant workers dismissed and abandoned at the bottom of supply chains,” he said.

© ICGN - International Corporate Governance Network