Protests in 2020 that swept across the US have cast a spotlight on levels of racial and ethnic diversity of corporate directors, C-suite executives and corporate workforces. Progress on racial and ethnic diversity on US corporate boards has been slow, and there is even less diversity in C-suites from which many director candidates are drawn. Shareholders, politicians, stock exchanges, activists, and rank-and-file employees are expected to apply pressure for increased diversity and inclusion. A variety of shareholder proposals addressing D&I concerns have been submitted at US companies. Similarly, there is a focus in the Canadian market to improve BIPOC diversity in both the public and private domains, while disclosure and regulatory challenges hamper measuring progress in Europe. Meanwhile, in many global markets, efforts to boost gender diversity levels in boardrooms and C-suites are expected to continue.
The continuing COVID-19 pandemic will necessitate holding many shareholder meetings via electronic means. Given ongoing health and safety concerns, a majority of US and a significant number of other companies around the world are expected to continue to hold virtual-only meetings for at least the first half of 2021. The pandemic outbreak on the eve of most 2020 proxy seasons created challenges for many companies as they scrambled to switch from traditional in-person AGMs to virtual-only formats via the Internet or other electronic means. The significant short-notice changes needed left many companies ill-prepared to provide shareholders with meaningful levels of participation on a variety of technology platforms, or even in meetings held behind closed doors. Some shareholders expressed concerns regarding the inability to ask questions or to vote at virtual meetings. While a number of industry participants appear to have addressed problems in providing access to meetings, shareholders may not be as forgiving as last season if companies experience technical mishaps or hold bare-bones, audio-only meetings with limited opportunities for shareholders’ questions and dialogue.
Changes to executive compensation programs in response to the impact of the COVID-19 pandemic will be top of mind for many investors. While many investors have shown an openness to mid-year changes to annual incentive programs that might be justified given the pandemic, they expect the rationale for the altered program to be clearly explained and the resulting awards to be reasonable. However, many investors are also likely to show a healthy skepticism over one-time awards or mid-cycle changes to long-term incentives. Boards, especially at companies with large numbers of at-risk or laidoff frontline employees, will also be expected to provide insights about how they considered the pandemic’s impact across their workforces in reconfiguring pay for senior executives. Also expect more calls for boards to address a wide range of human capital concerns, including health and safety, that were put in the spotlight by the pandemic. In addition to COVID-19-related pay changes, the impact and rollout of the second Shareholder Rights Directive (SRD II) continues to play an important role in Europe in 2021 as investors face an uptick in the number of pay votes they must assess.
Climate change risk is expected to remain a hot topic. Momentum on climate change is expected to escalate as some large investors have indicated their intention to support more shareholder proposals on the topic and to consider voting against directors who fail to provide meaningful oversight of climate change-related material risks. Shareholder proposals address a mix of concerns including GHG emission goal-setting, net-zero strategies and climate related lobbying expenditures. One new type of shareholder proposal that emerged in 2020 calls for annual advisory votes on climate strategies, which are modeled on the “say-on-pay” votes held in most major markets. The relative success of such “sayon-climate” proposals may set the future course of direction on the topic.
When will the SPAC bubble burst? The number of US SPAC IPOs ballooned in 2020, and the pace does not appear to be slowing down for 2021. There are also signs that this trend will catch on in Europe this year, with half a dozen transactions having been voted on in 2020 already. With more SPACs fighting among themselves and with private equity firms and other early-stage investors for a dwindling number of quality assets, the M&A scene appears ripe for a correction. When prevailing market prices are in excess of the IPO reference price, there is risk that such valuations cannot be sustained in the near term, especially when many of the targets are not profitable or have little to no revenue. SPACs often adopt poor governance structures at the behest of the founders of their acquisition targets that limit the avenues available to hold the board or management accountable should returns sour.
Is deal activism primed for a rebound? Hedge fund activism was undoubtedly dampened by the global pandemic. However, there were still more than 50 proxy contests that made it to ballots worldwide in 2020 despite the economic disruption. And there are already early indications that investors have begun to “un-pause” campaigns that were halted during the early stages of the pandemic, which could result in a more active proxy season in 2021. M&A and deal-driven activism are expected to see upticks, and we may also see some high-profile contests driven by a range of ESG concerns.